As students consider a career in investment banking they need to be aware that the large (bulge bracket) investment banks have undergone significant changes. The opportunities for employment in the investment banking today is far different from that of ten years ago. Finance students interested in careers in banking are strongly encouraged to consider middle-market, regional and boutique investment banks - rather than only the global, bulge bracket banks.
FINANCIAL CRISIS OF 2008-2009
One of the largest global financial crisis of the past century was triggered in 2008 by multiple factors including the collapse of the subprime mortgage market, poor underwriting practices, overly complex financial instruments, as well as deregulation, poor regulation, and in some cases a complete lack of regulation. The crisis led to a prolonged economic recession, and the collapse of major financial institutions, including Lehman Brothers, AIG and others.
The most substantial piece of legislation that emerged from the financial crisis is the Dodd-Frank Act, a bill that sought to improve the regulatory blind spots that contributed to the crisis, by increasing capital requirements as well as bringing hedge funds, private equity firms, and other investment firms considered to be part of a minimally regulated “shadow banking system.”
European investment banks (Barclays, RBS, UBS, etc.) were particularly hit by more regulation, including higher capital requirements and the imposition of the retail ring-fence. The UK political climate today is distinctly frosty towards investment banking, despite the fact that the financial crisis actually hit UK retail banking activities much harder. Forced retrenchment of the UK investment banks due to regulatory and political pressure should have left the field clear for other European banks such as Credit Suisse and Deutsche Bank , but the European Union has followed the UK’s lead with higher capital requirements, and most European banks are now cutting investment banking.
But European banks are not alone. In the post-Basel III era, capital-intensive activities simply are no longer affordable. Even the American giants Goldman Sachs, Citigroup and Bank of America are under pressure to cut costs and make better use of scarce and expensive capital. We have not seen the last of serious cuts to investment banking. Remuneration, particularly, will eventually face the axe, although – perhaps understandably – investment banks have so far preferred to cut jobs rather than risk losing star players.
INVESTMENT BANKS IN THE U.S. HAVE CONVERTED TO BHCS
The US “shadow banks” raise capital and invest much like traditional investment banks but escaped regulation which enabled them to over-leverage and exacerbated system-wide contagion. The jury is still out on Dodd-Frank’s efficacy, and the Act has been heavily criticized by both those who argue for more regulation and those who believe it will stifle growth.
“Pure” investment banks like Goldman Sachs and Morgan Stanley traditionally benefited from less government regulation and no capital requirement than their full service peers like UBS, Credit Suisse, and Citi. During the financial crisis, however, the pure investment banks had to transform themselves to bank holding companies (BHC) to get government bailout money. The flip-side is that the BHC status now subjects them to the additional oversight.
INDUSTRY PROSPECTS AFTER THE CRISIS
Investment banking advisory fees in 2010 were $84 billion globally, the highest level since 2007, while 2011 saw a significant decline in fees. The future of the industry is a highly debated topic. There is no question that the financial services industry is going through something pretty significant post-crisis. Many banks had near-death experiences in 2008-2009, and remain hobbled. Profitability is lower for many of the largest financial institutions. This directly impacts bonuses for even the entry level investment banker, with some pointing to smaller fractions of Ivy League graduating classes going into finance as a harbinger of a fundamental shift.
That being said, those trying to break into the industry will find that compensation is still high compared to other career opportunities. Also, the job function of an M&A professional has not dramatically changed, so the professional development opportunities haven’t changed. Investment banking itself is not dead. There will always be a need for the services that investment banks offer: M&A activity has increased in 2013 and 2014 after being flat since 2008, and corporate investment is also beginning to rise. Wealth and asset management, too, seem set to become increasingly important as the world’s capital glut shows no sign of dissipating and interest rates remain stubbornly low.
What does seem to have ended – for the moment – is that investment banks primarily making money by doing leveraged trades with each other. Proprietary trading is dying and consolidation is likely to occur with the larger investment banks.
So where are the opportunities in investment banking? The “middle-market” banks. To the layperson, middle-market banks are “bigger” than boutiques or regional banks, but smaller than bulge bracket banks. The deals they work on are in between what you see at regional boutiques and bulge brackets or elite boutiques – a larger deal at a middle-market bank might be around $500MM, whereas a smaller one might be about $50MM.
Middle-market banks are also in the middle in terms of geography . They operate in many cities, but are not as global as bulge bracket banks. Often they have a strong presence domestically, but aren’t quite as strong internationally. Unlike small boutique banks, middle-market banks provide the full range of services: M&A advisory, equity and debt capital market, restructuring, and other variations on those. They advise on buying and selling companies and provide the financing to make it happen.
Some middle-market banks focus on a particular industry. The same also applies to many regional boutiques, but the deals they advise on are much smaller so they rarely become famous for a certain industry or deal type. Examples of Middle-Market banks would include Piper Jaffray, Baird, Cowen, Jefferies, Houlihan Lokey, KBW, Lazard, William Blair & Company. These firms should be attractive to students seeking entry level positions in investment banking.