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Investment Banking

Investment banking is still one of the most popular career choices for business undergraduates and MBA students, although its popularity has been in decline for quite a few years now. You might have read about the crazy working hours in the book Monkey Business or watched dubious morals in the movie Wall Street. And you might have heard about overpaid investment bankers in the press and decided you might want to join the ranks of the overpaid!!! I have never been an investment banker but I have enough friends in M&A that I can tell you what you need to know to decide if it is for you.

Is it for you?

The best indicator if a career in investment banking is for you is if you like corporate finance and if you are a night owl, it’s as simple as that.  With this as a prerequisite, there are several traits that are essential in investment banking – if you have them, you can do really well, if you don’t, it will be hard for you to survive. You need to be…

  • a night owl: ibankers might not start the day till 9 or 10am, but they do stay at work very long, till midnight or even later. You might know from university if that suits your style. If you’re like me and you need evenings and weekends of leisure, you won’t like it one bit
  • humble: investment banking can be quite hierarchical and analysts get a lot of grunt work dumped on them by the associates. Anybody who is a senior associate or VP will be happy to delegate everything they don’t want to do downwards, so it helps if you can swallow your pride and get on with it
  • patient: related to the previous point, the job gets more interesting as you move up, but it can be 2-3 years if not more until you do more challenging and interesting work, so if you expect to do amazing things right from the start as you might do in consulting, you might end up frustrated.
  • into corporate finance: it is all about financial statements, valuations and mergers and acquisitions, so you have to like working with financials and numbers. If you’re truly interested in accounting and finance (and I know not everyone is) it’s the only way you are going to enjoy the job despite the long hours. I know a lot of people who leave ibanking quite quickly, those I know who stick around for the long term and are happy are those who are truly interested in corporate finance
One advantage of investment banking is that it can open up doors in more attractive finance careers, such as private equity and hedge funds. It is not a guaranteed path and many investment bankers don’t make it to the buy-side, but you do have a wide range of attractive exit options that people in sales & trading don’t have (in return, they have the better work-life balance).

The $$$ factor

The media (particularly in the UK!) doesn’t stop discussing bankers’ pay, so you may expect bankers to earn a lot of money. But the point about patience above is key, so let me give you a more realistic expectation.

Bankers in mergers and acquisitions used to have a base salary of about $60,000 at the analyst level and $90,ooo at the associate level, which was a very good starting salary for graduates but slightly less than what those classmates going to consulting or corporate law would earn. The important part of bankers’ pay was the famous bonus, which could be as low as $10,000 – 20,000 in the first year, but could quickly move up to 100 – 300% of base salary after a couple of years.

The current situation is that, due to increased regulation and scrutiny of bonuses, base salaries have been raised considerably so that you can be paid a base of about $140,000 straight out of graduate school, but in turn bonuses are lower and come with more strings attached. Let’s say you are a high performing associate in a team that has seen a lot of deals that year, you could get a base of $140,000 and a bonus of $150,000 on top of that – probably not in your first year but maybe in the second or third year. But only about $100,000 would be paid out in cash, with the rest given to you in deferred compensation, usually in shares in your bank. This part of the bonus is tied to your job, and if you quit your job, you lose your deferred compensation. Also, if your bank’s share price goes down 50% (which my bank’s share price certainly has!), the $100,000 you thought you had in deferred comp is now worth only $50,000. If your bank goes bankrupt, that part of the bonus is worth zero.

How to manage your bonus will be enough material for ten blog posts, so I won’t go into it here, but let me just warn you that a lot of bankers don’t understand the uncertainty and volatility of their bonus and spend it before they have the cash. Don’t be tempted to spend like crazy and live the highlife thinking “I am earning $300,000″, because in terms of cash you have only half of that, and after taxes (particularly in London), it’s more like a quarter. It’s still great, but even with that it will take you more than 5 years to become a millionaire, and current trends in taxation and bonus regulation suggest it will soon be more like ten years, if at all.

Another point to add before I stop is that you shouldn’t take this salary and assume you will be earning this for the next ten years. One reason pay is high is also that it is a high risk career. You can get paid a lot one year and nothing the next, and because of market cycles, every three years or so a big firing wave hits the banks and I think we are just about to see another one now. Of my peer group starting out as investment banking associates in 2008, at least half if not more are already gone – many lost their jobs in the winter of 2008 already, some more in late 2010/ early 2011. The only people who stay really long and succeed are those truly into corporate finance as mentioned above. Those who just thought it’s a great way to get rich quick didn’t last very long.

Compared to sales & trading, in line with responsibilities it seems to me that pay via bonuses tends to be somewhat lower in investment banking initially but can then overtake those working in the markets around the VP/director level. Obviously, there are also cycles that affect which division of the investment bank has more negotiating power when bonus time comes.

Lifestyle and the lady factor

Of all the high paying jobs out there (leaving corporate law aside), investment bankers easily have the worst lifestyle. You work at least 12 hours every day, and since you start quite late, this means spending your evenings and sometimes nights in the office. Even on weekends you can be called into the office at any time, especially at the junior levels. There can be some travel especially as you move up, but it’s not a lot. Just like in consulting, the hours will vary from team to team and also depending on the activity level (pitch work versus a live deal), but in general expect to work 70-80h per week.

Is it a good career for women? It’s funny, at many women’s events candidates ask me if I can get them in touch with female M&A bankers, and the truth is I don’t know any. I know a few who started out in M&A before business school or following business school, but I don’t know any close friends who stayed beyond two years. I have to find some to be more helpful, but it suggests to me it is not the best environment. It is a job where face time counts and the rewards come only after a good number of years of grunt work, and those features generally aren’t advantageous for women. It does depend on the stage of your career that you are in though: out of undergrad, if you are young and ambitious and okay with working a lot, I think it could be a very good way to start your career. Spend three years in a bank, learn a lot of modelling and valuation skills, then move to the buy-side or go to business school and use the money saved to do your own thing or have fun. At a later stage, if you’re looking for a career that will be compatible with having a family, it’s probably going to be difficult. That’s not really specific to women, I think even any guy who cares about seeing his family will struggle to be happy in investment banking in the long term. So if you love corporate finance, don’t mind working hard and you are young and at the start of your career, why not do a summer internship in M&A and see if you like it? As I said I never worked in M&A myself, but I have enough friends in M&A and have enough experience in jobs with a horrible work-life balance from working at McKinsey that I know it wouldn’t be for me. So if you have experience working with M&A and want to offer your perspective, I would LOVE it if you could leave a comment below!

How to get in

The best way to secure a job in investment banking is to do a summer internship during your undergraduate degree or the MBA. I would say 80% of people get their jobs through summer internships that they convert into full time offers, others might get an offer out of school directly if they have other relevant work experience in corporate finance. To get an interview, you need to go to a top university in your country (banks usually only recruit from a small number of elite universities), have excellent grades (you should be at least in the top 20% of your class) and have a very good grasp of corporate finance. If you’re an MBA student, the bar for your corporate finance and accounting skills will obviously be higher than if you’re an undergraduate.

Investment banks are quite flexible about your type of degree, and you can apply even if you study history or literature, as long as you can convince your interviewer that you want to be an investment banker.

Your best way in is to get a summer internship and convert it into a full-time offer. It is much harder to get a full-time offer directly because most banks fill up their class from the previous year’s summer interns, so they don’t always interview further after the summer (the reasoning being that only those who couldn’t find a internship or were turned down by other banks in their interships would still be looking). But if you have done internships in investment management firms or other corporate finance related jobs, you should still check for banks that have additional spots for external candidates.

Interviews are likely to revolve around:

– basic financial valuation concepts (free cash flows, multiples analysis…)

– specific financial accounting questions

– merger and acquisition deals of the last year discussed in the press (know who bought whom, for what price, what do you think about the deal etc.)

– why you want to be an investment banker – this is a really important one! You really need to show that you know what it’s going to be like and have realistic expectations – your interviewer is likely to be cynical of many candidates who are hoping to get rich quickly

If you can’t get a job straight out of undergrad, you can try for a related job in finance (working in asset management or accounting, for example) and then doing an MBA at a business school that is very strong in corporate finance, such as the HBSUniversity of Chicago, Wharton, or the London Business School.