KENAN-FLAGLER FINANCE CLUB Finance Club Clarifications 1. Kenan-Flagler and the Finance Club divide the finance world into three distinct categories, and there are many divisions within each category (as described later): Industry Finance Investment Banking Sales & Trading (includes Private Client Services, Research and Portfolio Management) 2. What is an Investment Bank? In summary, investment banks (depending on their size) provide the following services to companies, institutions and individuals: Capital Raising Advisory (M&A) Merchant Banking Sales Trading Research Asset Management 3. Commercial Banks vs. Investment Banks vs. Merchant Banks Commercial Banks make loans to businesses, and they earn money from fees and interest payments. Investment Banks raise capital, sell businesses, and broker shares, and they are paid on commissions and fees. Merchant Banks lend and invest their own capital and their clients capital in businesses. 4. Investment Banking vs. Sales & Trading Investment Banking designs and structures deals. Sales & Trading sells and makes a market in the deals. Hours, work ethic, personality and skill set for Investment Banking is completely different from Sales & Trading 5. Sell Side vs. Buy Side The sell side are the investment banks who construct and sell deals to investors. The buy side are the investors (i.e., hedge funds, mutual funds, pension funds, large financial institutions and individuals) who buy the deals from investment banks. Industry Finance 1. Financial function within a corporation (i.e., Corporate, Group or Division). 2. Positions available in various areas: Treasury Financial Planning & Reporting Strategic Planning / Budgeting Business Development Finance Product Development Finance Sales and Marketing Finance Capital Markets Finance KENAN-FLAGLER FINANCE CLUB Relative to Investment Banking and Sales & Trading, the hours in Industry Finance are minimal (~40-55 hours/week). In other words, there is a great life style in Industry Finance. Investment Banking Investment Banking consists of three functional areas, all interrelated: 1. Corporate Finance Role in which the investment bank raises money for corporate clients and public institutions in the form of equity, debt convertible or other derivative securities through either a public issue or private placement. 2. Mergers and Acquisitions Role in which the investment bank acts as an advisor to a company that is in transactions involving the purchase or sale of a whole company, a division or certain assets. 3. Merchant Banking Role in which the investment bank acts as a principal in a transaction, either by buying or selling a stake in an M&A transaction or by purchasing newly issued securities of a firm. 4. Advisory/Financial Consulting This area is linked to all of the above activities. Advisory and consulting includes capital structure analysis, comparable analysis, industry research and various forms of fairness opinions. Investment Banking requires (in no particular order): Strong leadership skills and enjoy working in groups Hard working and willing to work long hours (and weekends) Analytical and detail oriented Comfortable with numbers and computers The greatest generalization in Investment Banking is the hours and the lifestyle. For the most part, bankers sacrifice much of their lifestyle – all-nighters and weekend work is common. Wall Street bankers work 80-100+ hours/week. However, hours vary by bank with regional banks working fewer hours than Wall Street banks. Sales & Trading S&T is the investment bank’s distribution arm. It is responsible for selling and making a market of all the financial products (equity, fixed income, convertibles and derivatives) developed by the investment banking department. On an institutional level, customers include pension funds, mutual funds, hedge funds, insurance companies and high net-worth individuals. Under the KFBS Sales & Trading umbrella include Institutional Sales & Trading, Private Client Services, Research and Portfolio Management. 1. Institutional Sales & Trading Sales professionals develop strong relationships with institutional investors (buy side) and serve as a quarterback of the firm’s investment bankers and research analysts to their institutional clients. Traders are responsible for taking positions and making markets in stocks that the firm may cover. They not only advise salespeople, clients, and research analysts on individuals stocks and market activity but they also manage the firm’s risk vs. the market. KENAN-FLAGLER FINANCE CLUB If you are analytical and have strong people skills, Sales is for you! If you live for non-stop action and can handle multiple tasks at once without leaving the seat of your chair, Trading is for you! Overall, Institutional Salesmen and Traders have a completely different lifestyle than investment bankers. The typical workday begins at 7am and ends at 5pm. No weekends. Nevertheless, the day is much more stressful and active than the investment banker and requires a lot of entertaining. 2. Private Client Services PCS is the investment management division for high net-worth individuals. Investment Representatives are typically generalists and offer all the services of the firm (equities, fixed income, derivatives, private equity and asset management) to high net-worth individuals. If you are entrepreneurial and enjoy working with sophisticated high net-worth investors, PCS is for you! If you do not like sales, entertaining and making “cold” calls, PCS is not for you. Basically, PCS is extremely stressful and difficult the first two years as one builds up a client base. However, it can be one of the best jobs imaginable after one establishes a book of clients. The typical day begins at 7:30am and ends at 6pm. Weekend work is rare but frequent entertaining is a standard. 3. Research Equity and Fixed Income Research (especially Equity) is critical to investment banking, sales and trading for the typical investment bank. Analysts who become widely followed and respected can move markets in one sentence. Research incorporates quantitative research, industry research, market strategy research, economic research and individual company research. Research requirements: Analytical and detail oriented Passion for the industry/coverage area Convincing writer and oral presenter Strong, decisive decision-maker Hard working and willing to work long hours (and weekends) Comfortable with numbers and computers Overall, Research is very similar to investment banking – hours can be long and you must have strong analytical skills. While the hours may not be as harsh as investment banking (~60-80 hours/week), research analysts have a lot of responsibilities to juggle – investment banking, sales force, traders and buy side investors. 4. Portfolio Management Portfolio managers are the customer to the sell side and hold all the power - $$$. They essentially manage portfolios (the asset are given to them) according to their firm’s view on the asset class (equity, fixed income, currencies, etc) and the market and economy as a whole. Their focus is buying and selling securities based on the fund’s objectives, and they are rarely involved in raising capital for their portfolio(s). KENAN-FLAGLER FINANCE CLUB It should be noted that this is perhaps the most difficult job to get because there is huge demand for this position and little supply. Most portfolio managers begin as buy side or sell side research analysts. There is no generalization on portfolio managers and their lifestyle. They typically work from 8am to 6pm. However, some work more (hedge fund managers) and some work less (high net-worth portfolio managers). Their jobs however can be very stressful given the risks involved with managing large amounts of other people’s money. Finance Flow Chart KENAN-FLAGLER FINANCE CLUB ABC Inc. "Industry Finance" Needs to raise capital: Debt or Equity Commercial Bank KFBS Investment Bank Merchant Bank Makes a loan to ABC and Corporate Finance Department Makes equity investment in receives interest payments Underwrites a debt or equity offering by ABC with its own capital placing a value on ABC Inc. Sales Department NASDAQ Research Department Institutional Equity Sales Trader Analyst initiates coverage Private Client Services of ABC Inc. Fixed Income Group Listed The salesmen above sell the deal Sales Trader to their respective clients. XYZ Capital Management Buy Side Portfolio Buy Side Research Analyst Manager Trader KFBS KFBS Block Floor Broker Floor Clerk Trader Specialist Post Makes a Market in ABC Inc.
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