Why do top investment bankers make so much money? In one word (three words, actually): big deal. Principals, directors and partners lead teams that work on expensive items and earn large commissions because the bank’s fees are usually calculated as a percentage of the transaction in question.
Banks with bulges, for example, will reject projects with small store sizes; for example, an investment bank may not work with a company generating less than $250 million in revenue if it is already swamped with other larger deals.
Investment banks are brokers. A real estate agent who sells a home for $500,000 and earns a 5% commission will make $25,000 on that sale. Compare that to an investment banking office selling a chemical manufacturing company for $1 billion with a 1% commission, which is a cool $10 million.
Not bad for a team of several individuals; say two analysts, two partners, a vice president, a director, and an executive director. If this team completes $1.8 billion worth of M&A transactions in a year with bonuses awarded to senior bankers, you can see how the compensation numbers add up.
Researching industry trends
Analysis of company operations, finances and projections
Conducting due diligence or coordinating with review teams
Directors oversee these efforts and are typically in touch with the company’s “C-level” executives when key milestones are reached. Partners and CEOs have a more entrepreneurial role in that they must focus on client development, business creation and office growth and staffing.
It can take 10 years to reach director level (assume two years as an analyst, two years to get an MBA, two years as an associate, and four years as a vice president); however, this timeline depends on several factors, including the firm involved, the individual’s success on the job, and firm dictates. Some banks require an MBA, while others may support exceptional bankers without an advanced degree.
1. Key features
2. Success criteria include:
3. Technical skills
4. Ability to meet deadlines
5. Team work
6. Communication skills
Those who can’t take the heat move on and there is a filtering process before being promoted to a higher level. Those looking to leave the banking industry can make lateral moves into corporate finance (eg working at a Fortune 500 company, which means possibly making less money), private equity and hedge funds.
Private equity firm principals and partners easily clear the $1 million-a-year compensation barrier, with partners often earning tens of millions of dollars a year. Managing partners at the largest private equity firms can bring in hundreds of millions of dollars because their firms manage billion-dollar companies.
If their investment banking counterparts handle high-priced items with high commissions, private equity handles high-priced items with very high commissions. The vast majority follow the “two-and-twenty rule”; this means charging an annual management fee of 2% of assets/capital under management and a 20% profit on the back end.
Take a private equity firm that has $1 billion under management; the management fee is equal to $20 million per year to pay for personnel, operating costs, transaction costs, etc. The firm then sells for $200 million a portfolio company that it originally acquired for $100 million for a profit of $100 million, taking another $20 million dollars.
Considering a private equity firm of this size won’t have more than a dozen or two dozen employees, that’s a lot of money to give to just a few people. Senior private equity professionals will also have “skin in the game”; that is, they are often investors in their own funds.
Private equity is involved in the wealth creation process. While investment bankers collect most of their fees after the transaction is completed, private equity must complete several stages over several years, including:
Go on roadshows to raise investment capital
Securing trade flow from investment banks, brokers and transaction professionals
Buying/investing in attractive, healthy companies
Supporting management’s efforts to grow the company both organically and through acquisitions
Harvest by selling the portfolio company for a profit (typically between four and seven years for most firms)
Analysts, Associates, and Vice Presidents provide various support functions at each stage, while Directors and Partners ensure that each stage of the process is successful. The level of director and partner involvement varies from firm to firm, but they hire the best and brightest pre-MBA and post-MBA talent at the junior level and delegate most tasks.
Most of the initial filtering of potential investment opportunities can be done at the lower levels (partners and VPs are given a set of investment criteria against which to judge potential deals), while seniors typically step into investment reviews on a weekly basis. meeting to evaluate what the younger people have brought.
Working in investment banking is usually a stepping stone to working in private equity. Directors and partners conduct negotiations between the firm and the seller. Once the company is bought, directors and partners can sit on the board and meet with management during quarterly reviews (more often if there are problems).
Finally, the directors and partners plan and coordinate with the investment committee on sales and harvest decisions and strategize to achieve maximum returns for their investors. If a private equity firm is unsuccessful at a certain stage, you will typically see the principals and partners become more involved in supporting the effort at that stage.
For example, if there is a lack of business flow, older people will take a trip to visit investment banks. At road fundraising events, senior private equity professionals meet institutional investors and high net worth individuals on a personal level, as well as give presentations.
In the sourcing phase of the deal flow, principals and partners will get involved and develop a relationship with intermediaries; especially when it.