Markis Capital Seminars: Introduction to Investment Banking

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  • 2013

    Introduction to Investment Banking

    Markis Capital Limited

  • What is Investment Banking? 2

    Giving Advice Raising Capital

  • ? ?

  • ex. Fubon FHC 4

    Source: Fubon FHC IR Presentation

  • ex. Fubon Securities 5

    Source: Fubon FHC IR Presentation

  • Financial Services Landscape 6

    Commercial Bank

    Custody

    Lending

    Operations

    Asset Management (Buy-Side)

    Investment Team

    Operations

    Investment Bank (Sell-Side)

    Global Research

    Sales & Trading

    (Markets)

    Investment Banking

    Operations

    Merchant Banking

    Private Equity

    Venture Capital

    Insurance

    Investment Team

    Distribution

  • Front, Middle, Back Office 7

    Front Office

    Investment Banking

    Markets

    Sales & Trading

    Research

    Private Wealth Management

    Middle Office

    Risk Management

    Compliance

    Operational Risk analysis

    Back Office

    Operations

    Technology

    HR / Training

    Finance / Treasury / Audit

  • Equity Research Research Analyst, Research Associate/Assistant

    Sales & Trading Research sales, sales trader, dealer, dealer assistant

    Corporate access, desk analyst

    IBD: Corporate Finance, Advisory

    PWM: Private Wealth Management

  • The "Culture" of I-Banking 9

    Bonus-oriented culture "Total Comp" basis

    Prestige Front office vs. back office, star analysts

    Challenge "only the top candidates", long hours, BSD,

    "work hard, play hard"

    Fame "advisor" to major companies, front page

    transactions, In-the-know, on the inside.

    "Benefits" global travel, overtime meals, overtime taxi,

    training & development, etc.

  • The Chinese Wall 10

    Individuals Pension Funds Insurance Companies Asset Managers Corporate Treasuries Sovereign Wealth Funds

    Corporations Governments Municipalities

    Providers of Capital

    Investment Banking

    Chinese Wall

    Sales & Trading

    Research

    Users of capital

    Public side Private side

    Strategic advisory Securities

    underwriting

  • Corporate Finance 11

  • Basic Structure 12

    Investment Bank (Sell-Side)

    Global Research

    Economics & Investment

    Strategy

    Fixed Income Research

    Equity Research

    Quantitative Research

    Sales & Trading (Markets)

    Equities

    Fixed Income

    Commodities

    FX

    Investment Banking

    Capital markets

    Advisory

    Operations

    IT

    Compliance

    HR

    Legal

  • Overview of Investment Banking 13

    Capital Markets

    o Equity capital-raising o Initial public offerings (IPOs) o Follow-on offerings o Equity-linked (convertible)

    o Debt capital-raising o High-grade or investment grade o High-yield o Syndicated loans o Tax-exempt

    o Mergers & Acquisitions o Buyside o Sellside o Spin-offs / Splitoffs / Carve-outs o Hostile defense o Hostile takeovers / proxy fights o Joint Ventures

    o Restructuring

    Capital Markets Advisory

  • Underwriting Process 14

    Source: Financial Markets + Institutions (2006)

  • Corporate Finance Activities

    Value Company (Financial Models)

    Write Selling Memo

    Conduct Due Diligence

    Identify and Contact Buyers

    Create Management Presentation

    Negotiate with Buyers

    Close Transaction

    Value Company (financial

    models)

    Conduct Due Diligence

    Draft terms and determine price

    offered

    Negotiate with Seller

    15

    Represent Companies for Sale Represent Companies Buying Other Companies

    Advisory Services on M&A, Foreign Exchange, Valuation, Financial

    Strategy, Issuing Debt and Equity, etc.

  • Industry or Product Groups

    Consumer Products & Retail

    Energy and Power

    Financial Institutions

    Healthcare

    Global Industrial Group

    Real Estate

    Technology/Media/Telecom

    Transportation & Services

    Debt Capital Markets Group

    Equity Capital Markets Group

    Equity Corporate Finance Team

    Financial Sponsors

    Leveraged Finance

    Global Syndicated Finance

    Mergers & Acquisitions

    Private Equity Placement Group

    16

    Industry Groups Product Groups

  • Investment Banking Corporate Titles 17

    Managing Director

    Analyst

    Executive Director

    Director

    Associate Director/Associate

  • What Does An Investment Banker Do? 18

    Financial Analysis Communication

    o Management, Board of Directors o Internal Committees

    Identify Potential Investors Negotiation / Structuring Transactions Due Diligence Documentation

    Client Relationship Management o Ongoing dialogue on financial

    markets, industry developments, new products

    o Long-term relationship as advisor to Senior Management and Boards

    Idea Generation and Problem

    Solving o Strategic Alternatives o Capital Raising o Optimizing Capital Structure o Risk Management, Dividend Policy

    Assessment Of Opportunities

    Origination Execution

  • Banking Skill Sets 19

    Financial Modeling Intricate (LBOs, structuring) to simple (comps)

    Writing/Presentations Selling memos, management

    presentations, commitment memos, Roadshows,

    Prospectus (or other filings)

    Research Gathering data, understanding legal aspects,

    capital markets process & procedures

    Communication & "Rain-making" bringing in business, acts

    as the relationship manager and client expert.

  • 20

  • Sales & Trading / Markets 21

  • Basic Structure 22

    Investment Bank (Sell-Side)

    Global Research

    Economics & Investment

    Strategy

    Fixed Income Research

    Equity Research

    Quantitative Research

    Sales & Trading (Markets)

    Equities

    Fixed Income

    Commodities

    FX

    Investment Banking

    Capital markets

    Advisory

    Operations

    IT

    Compliance

    HR

    Legal

  • Sales & Trading

    Foreign Institutional

    Investors (FINI)

    Custodian Broker

    23

  • vs.

    Client Type

    Business Scope

    Product Range

    Risk Control

    Culture

    Research Scope

    Perspective

    Global Resources

    Internal Control

    Access to FINI

    vs.

  • Securities Firm Market Share 25

    Aug-13 % Aug-13 %

    1 13.184 26 1.1022 8.573 27 0.9513 5.208 28 0.8774 5.205 29 0.8185 4.960 30 0.7396 3.583 31 0.7357 3.413 32 0.6318 3.385 33 0.5829 3.275 34 0.508

    10 3.117 35 0.49211 3.039 36 0.45012 2.725 37 0.44913 2.279 38 0.44314 2.070 39 0.40615 1.851 40 0.38716 1.802 41 0.32017 1.780 42 0.31318 1.631 43 0.30619 1.475 44 0.29820 1.341 45 0.27721 1.335 46 0.25822 1.271 47 0.24623 1.173 48 0.22524 1.165 49 0.18425 1.162 50 0.182

  • Head of Equity/FX/Fixed Income

    Head of Research Head of Sales

    Chief Investment Officer

    Analysts

    Sales

    Sales Traders

    Dealers

    Fund Manager

    Sales Traders

    Dealers

    Analysts

    26

  • Tools of a Trader (I'm kidding) 27

  • Example: Commodities Org Chart

    Investor

    Corporate

    Light structuring

    Product design

    Complex structuring

    Commodities

    Trading Structuring Sales

    Proprietary Trading

    Market making

    Desk analysts

    Research Origination

    Physical deals

    Private

    transactions

    Fundamental

    analysis

    Price forecasts

    Product design

    Mid office

    Back office

    Credit

    Legal

    Compliance

    Others

    Hedge Funds

    Institutional Clients

    Retail clients

    Cash

    Derivatives

    Equity

    Fixed Income

    Credit

    IBK Investor

    Sales DCM, ECM

    M&A

    Strategic

    investments

    Strategic

    divestments

    Corporate

    Sales Flow

    Hedging

    Budget Hedging

    Prime

    Brokerage

    Futures and

    Options

    Others

    Origination

    Financing

    Public

    Sector

  • : Sell Side

    Head of Equity/FX/Fixed Income

    Head of Research Head of Sales

    Analysts

    Sales

    Sales Traders

    Dealers

    Buy Side

    Buy SideSales Traders

    Buy Side

    29

  • : Buy Side

    Chief Investment Officer

    Fund Manager

    Sales Traders

    Dealers

    Analysts

    Sell Side

    30

  • / 31

  • 32

  • Breadth of Hedge Fund Investment

    Strategies 33

    Equity Hedge

    30.02%

    Equity Market Neutral

    2.23%

    Equity Non-Hedge

    4.51%

    Emerging Markets (Total)

    4.03%

    Distressed Securities

    4.70%

    Convertible Arbitrage

    3.32%

    Event-Driven

    13.77%

    FI: Arbitrage 2.57%

    FI: Diversified 1.78%

    FI: High Yield 0.79%

    FI: MBS 2.63%

    FI: Convertible Bonds

    0.08%

    Macro 10.68%

    Merger Arbitrage 1.40%

    Market Timing 0.37%

    Regulation D 0.24%

    Sector (Total)

    4.77%

    Short Selling

    0.30%

    Relative Value Arbitrage

    11.80%

  • Equity Research 34

  • Basic Structure 35

    Investment Bank (Sell-Side)

    Global Research

    Economics & Investment

    Strategy

    Fixed Income Research

    Equity Research

    Quantitative Research

    Sales & Trading (Markets)

    Equities

    Fixed Income

    Commodities

    FX

    Investment Banking

    Capital markets

    Advisory

    Operations

    IT

    Compliance

    HR

    Legal

  • 36

  • The Role of Research 37

    Sell-side

  • =

    =

    = (Reg AC, Reg FD, etc.)

    38

  • 39

  • Equity Research Methodology 40

    1. Review Public Information

    2. Conversations w/ company management for detailed

    information

    3. Prepare 3-yr Prelim Earnings Model

    4. Review Financial Assumptions

    5. Assessment

    6. Finalize Earnings Model

  • Minimum initiation requirements 41

    Company description

    5-year P&L, cash flow, balance sheet (2-3 years forecast)

    Most recent results, commentary

    Risks

    Rating, price target

    Compliance analyst certification (Reg AC), editorial,

    compliance review, restricted list

  • Report Submission Process 42

    1. Submit initiation form

    2. Upload model

    3. Draft report

    4. Research Recommendation Committee (RRC)

    5. Editorial

    6. Compliance

  • Valuation Considerations

    10-15 year projection, PV versus

    current

    Asset-Based Valuations

    P/E, P/B, EV/EBITDA, Efficiency,

    Margins

    ratios vs. peers

    company value (multiples history)

    High/low in cycle

    current P/E justification

    Valuation vs. TAIEX

    P/E, P/BV, Div Yield, FCF Yield,

    EV/EBITDA, EV/Sales

    private market values for firms

    individual units

    break divisions as standalone

    entities (sum of the parts)

    calculate relative value for each

    division

    Arrive at blended valuation

    Risk Assessment

    TP over 12 months

    Risk Ranking

    43

  • Industry Analysis 44

    1. Define Scope of Industry

    2. Identify Key Players

    3. Determine Size Metric to Use (Revenues, Market Cap, Net Income, Capacity, etc.)

    4. Collect Annual Historical Data for Key Players

    5. Forecast Growth for key players

    6. Forecast TAM (Determine concentration ratio of key players)

    7. Calculate CAGR

    8. Check reasonableness of assumptions

  • 45

    -

  • Operations / Talent Development 46

  • 47

  • Competency Model 48

    Strategic Thinking

    Business Knowledge

    Innovation and Creative Thinking

    Business Results

    Execution

    Analytical Ability

    People Leadership

    Talent Building

    Team Leadership

    Collaboration

    Personal Effectiveness

    Communication

    Energy & Drive

    Decisiveness

    Character

  • 49

    Research Assistant

    Research Associate

    Research Analyst

    Star Analyst

  • Training Curriculum Topics 50

    New Hire Orientation - Company's Value, Principles & Leadership, brand and history,

    core businesses, global/regional structure

    Managing Your Time

    Developing your Personal Communication Style

    Collaborative Negotiations

    Performance Management

    Mechanics of Business Writing / Presentation Skills

    7 Habits of Highly Effective People (Steven Covey)

    Financial Environment

    Financial Skills Intro to Corporate Finance, Market Data and Economics, Financial

    Analysis, Operational Risk, etc.

    Product Knowledge Derivatives, FI, Equities, Capital Markets, Valuation, etc.

    Desktop Applications Word, Excel, PowerPoint,

    Research Applications - research website, analytics, report/model upload platform

  • Interesting Reading 51

    Liar's Poker (1990) Michael Lewis

    Monkey Business: Swinging Through the Wall Street Jungle (2001) John Rolfe and Peter Troob

    The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders (1988) Connie Bruck

    Den of Thieves (1992) James B. Stewart

    The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (1990 & republished 2010) Ron Chernow

    Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts (2010) James J. Valentine

    (2013) (2003)

    Periodicals: Institutional Investors, Asia Money, FinanceAsia, Bloomberg Markets, Bloomberg Businessweek, The Economist, Forbes, Fortune, Harvard Business Review,

  • Movies 52

    Trading Places (1983) - Comedy

    Wall Street (1987)

    Barbarians at the Gate (1993)

    Boiler Room (2000)

    Capitalism: A Love Story (2009) documentary

    Inside Job (2010) - documentary

    Wall Street: Money Never Sleeps (2010)

    Margin Call (2011)

    Too Big to Fail (2011)

    Arbitrage (2012)

  • Online Resources 53

    http://www.opalesque.com/ - About Hedge Funds

    http://www.wallstreetoasis.com/ - Wall street forum

    http://www.mergersandinquisitions.com/ - another blog

    http://www.efinancialcareers.hk/ - Job Website

    http://chandoo.org/wp/ - Excel modeling tips

    http://www.careers-in-finance.com/ - Career website

    http://www.cfasociety.org/taiwan/Pages/default.aspx - CFA

  • (Teddy H. Tsai) (Director & CEO)

    801 2092

    : +886-7-241-2329 123 : 0910723698

    : teddy.tsai@markis.tw : http://www.markis.tw

    Q&A

    54

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