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 0.50810 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 Hedge30.02%Equity Market Neutral2.23%Equity Non-Hedge4.51%Emerging Markets (Total) 4.03%Distressed Securities4.70%Convertible Arbitrage3.32%Event-Driven13.77%FI: Arbitrage 2.57%FI: Diversified 1.78%FI: High Yield 0.79%FI: MBS 2.63%FI: Convertible Bonds0.08%Macro 10.68%Merger Arbitrage 1.40%Market Timing 0.37%Regulation D 0.24%Sector (Total)4.77%Short Selling0.30%Relative Value Arbitrage11.80%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 - About Hedge Funds - Wall street forum - another blog - Job Website - Excel modeling tips - Career website - CFA (Teddy H. Tsai) (Director & CEO) 801 2092 : +886-7-241-2329 123 : 0910723698 : : Q&A 54


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