Anticipating 2020

Financial and market forecasts from year to year are often way off base, but investors demand guidance at the beginning of each new year.

In any given year, it is a difficult and sometimes meaningless exercise to present New Year's forecasts of financial markets and activity.  Pundits, analysts and the media attempt to do so anyway and then realize 12 months later how far off they are from their projections.

They try to predict market behavior and market volatility.  They try to predict new products and trends in the marketplace. Some try to predict which firms, financial institutions or companies will rise above all others in performance or stature.

In fact, just weeks ago, who could have projected the focus of global attention would have transitioned from trade tensions in China and protests on the streets in Hong Kong to a renewed U.S.-Iran standoff?

Yet investors and other financial stakeholders push for forecasts. They seek guidance on how to manage risks, portfolios or trading positions.  They seek reinforcement of their own views of where they think the market is headed or what activities we expect to see in capital markets.

The year unfolds, and then we observe markets going in unexpected directions. Or we observe events or trends no one had any idea was forthcoming.  Over a year ago, market analysts predicted increases in interest rates, and investment managers braced for the subsequent impact on fixed-income portfolios.  A year later, market analysts and policy makers turned course and projected interest rates would decline.  After a tumultuous stock-market year in 2018, which led to losses in most indices around the world, investors prepared for an unimpressive 2019. And then equity markets soared (although there were the usual periods of intolerable volatility).

A year ago investors and bankers salivated with glee anticipating the IPO of WeWork.  A year later, sentiments about the company have soured, while an IPO has been postponed indefinitely.  The fervor about a WeWork public offering has turned into concern about how the IPO market should work going forward (and about the specific roles of the banks that bring new companies to the public markets).

Initial Public Offerings

Will the WeWork debacle slow down the new-issues market and spur banks to overhaul the process of taking a company public? Will the debacle alter the traditional timetables of taking a new venture public? Will companies be forced to prove more definitively the plan to achieve sustainable profitability?

Because investors want more certainty about when a new company will generate positive operating cash flows, will companies postpone for longer periods the calendar to go public? What should or what will the role of investment banks be?

Saudi Arabia's planned IPO for its state-owned oil company Aramco endured starts and stops for its late fall offering, especially after it sought a $2 trillion market value and couldn't be assured the market would assess the same at the desired level. 

A few years ago, financial markets were struggling and fumbling to understand the popularity of cryptocurrencies. Many announced they would have nothing to do with them. A few decided to exploit such popularity and determine a role where they can make money.  After digesting what they were or supposed to be, financial institutions were poised to define their roles (advisers, facilitators, brokers, etc.) and then hop onto the bandwagon in some way.  

Cryptocurrencies and Blockchains

By late 2019, cryptocurrencies had not disappeared, but the fad had receded or at least capital markets and investors got comfortable that they wouldn't major currencies or traditional payments systems anytime soon. They weren't alarmed the Bitcoin would replace the precious government-sanctioned currencies (U.S. dollar, Euros, e.g.) (as some projected a few years ago).  In 2019, Facebook jumped in, announcing a planned creation of a new currency Libra (along with partners and offering comfort by backing its value with real assets).  By late 2019, Facebook's enthusiasm for the same had waned, and the company had even suggested it could withdraw from the project. 

Distributed ledger technology (or what is better known as "Blockchain" technology), the type of system that runs cryptocurrency activity, hasn't disappeared. A year or so ago, companies around the world began to figure out how to exploit it to gain advantages in trading, trade processing, trade finance, and supply-chain management.  Industries and companies have begun to experiment and roll out Blockchain systems for non-cryptocurrency purposes, although progress on all fronts (in, say, trade finance and trade processing) has been measured. 

Companies in Favor and Not

Among big corporate names, companies (like WeWork) that were favored darlings in decades past or in recent years, all of a sudden, seemed doomed by 2019. Some companies (perhaps like a GE or a Tesla) that were rocked, criticized and vulnerable continue to plod along, tweaking and adjusting to figure out a niche and regain market favorability.

GE has seemingly gone through countless reorganizations (and senior management changes), yet it may finally get things right in its latest transformation. Tesla, notwithstanding moments of anxiety surrounding its head Elon Musk, had struggled with surging operating costs, uncertain markets, stiff competition everywhere, and burdensome debt. By late 2019, it had begun to flirt with reporting profits. 

Some companies, like HP (the split-off and incarnation from the old Hewlitt Packard company), thought they had devised the right long-term strategy, but all of a sudden must regroup and figure out next steps.  HP, in early 2020, is now a takeover target for Xerox. 

All over, markets and investors are watching the entertainment-streaming industry closely.  Before it faced the fierce competition it encounters today, Netflix stepped out in front and helped change behavior of consumers (or the millions of subscribers willing to pay monthly fees for content). 

The company is now obsessed with and committed to developing its own content (because it figures it alone can assure the customer base of quality programming), but Netflix is similarly stubborn it can develop new content by funding it with more and more debt.  It knows it has competition (from Disney, HBO, Hulu, and just about any large company with financial resources and access to content); it may not understand it may not be able to refinance and roll over its debt forever. 

Amazon:  Mightier and Mightier

No analysis or discussion of global companies these days omit an assessment of Amazon, which may have--at least for the time being--supplanted big names like Apple and Alphabet-Google as the mighty titans in corporate market values. The company has always been propelled by a growth strategy on steroids. Unlike in years past, the company is now consistently profitable and generating accounting profits (about $11 billion for 2019) and gushing operating cash flows (about $8 billion a quarter).  

Because Amazon doesn't pay a dividend (and doesn't appear to be distracted by shareholder activities who demand dividends and buy-backs), it can reinvest the cash and continue to get bigger and bigger. It can, too, afford to experiment, innovate and make investing mistakes. In just three years, the company has tripled its revenues (now above $235 billion annually).  Continued growth and innovation at Amazon are likely the few sure bets for 2020. 

Markets like to contemplate, predict and reflect the political outcomes.  Markets in early 2020 don't appear to have any intuition about the results of U.S. presidential election or the impact of elections on U.S. financial institutions (to regulate more or to regulate even less?). 

About the only thing that's certain in 2020 is that (a) investors demand forecasts, (b) analysts and media observers will provide them, (c) most forecasts will be off base before 2021 arrives, and (d) as soon as there is some informed premonition about what can and will happen, markets will reflect it efficiently and quickly.

Tracy E. Williams

See also:

CFN:  WeWork: What Happened? 2019

CFN:  And Now Comes Libra, 2019
CFN:  What Will Be the Trigger? 2018
CFN:  How Will Netflix Manage Its Debt Burden? 2018
CFN:  What Does the Market See in Amazon? 2014

Checking In: Opportunity Outlook, 2016

For new MBA students, time to review where opportunities are prominent in financial services.

This is the season when Consortium MBA students in finance, old and new, return to campus.

Some, the first-years, are gleeful, excited and anxious about the new days ahead, new courses, new contacts, and new relationships with professors, deans and career advisers.  Some, second-years, are still hopeful that summer internships, including the celebrated networking receptions and occasional work on deals, will turn into offers any day now.

Both groups, whether they head back to campus at Darden, Tuck, Ross, Marshall or Haas, know they need to allot the right amounts of time to make career and employment decisions.  Corporate-finance case work is important, and so are finance-club duties and public-policy presentations. But trying to decide where to go by next summer is crucial, too.

As we head toward the latter days of 2016, let's update where the state of opportunities among sectors of finance.  Let's peek and highlight where banks, funds and financial institutions have elected to expand (or not), grow (or not) or support (or not). 

Opportunities, in general, seem bright, if only because capital markets, while occasionally volatile and uncertain, are stable these days, notwithstanding ongoing uncertainty about where interest rates are headed.  Market experts know well that with a finger snap, markets can misbehave, volatility can surge and financial institutions will retreat and tighten up as quickly as winter will inevitably approach.

This follows reviews and assessments from late, 2015, and early, 2016.

Corporate treasury:  STABLE/POSITIVE

If companies are growing, expanding and investing in new businesses, then such growth or new assets must be funded. New cash generated from growing business operations must be managed or reinvested.  Hence, corporate-treasury and finance functions (at non-financial institutions) are active, tapping into resourceful ways to finance the business and reduce financing costs or assisting senior managers in deciding how best to deploy cash on hand.
 

Many big companies (the familiar Fortune 500 names, for example) continue to try eke out higher returns and bolster stock prices by taking advantage of cheap debt and continuing to repurchase stock.  That keeps corporate-finance types busy, too. 

Many other big companies choose to hoard millions/billions in cash, taking precious time to decide the right investment opportunity (if they choose not to buy back stock to boost market values).  That keeps them busy, too. Other finance managers are actively involved in hedging balance sheets and earnings against interest-rate spikes or unforeseen currency movement (similar to "Brexit" fluctuations, e.g.).

Investment banking: STABLE

Investment bankers are in satisfactory moods these days.  Deals are in the pipeline, mergers and acquisitions continue to bloom, and these might be good times to spark up the IPO engine.  Big companies continue to issue cheap debt and buy back stock--under the guidance of bankers.  Other companies are always on the prowl for the next right acquisition--also guided by bankers.  A technology bubble burst was projected by naysayers earlier this year, but it hasn't happened yet. Technology bankers, however, haven't been successful in convincing many familiar "unicorns" (Uber, AirBnB, e.g.) to go public.

With banking, a lot depends on the sector:  healthcare, consumer goods, real estate, energy, financial institutions, diversified, industrials, technology, media, pharmaceuticals, etc. For much of 2016, energy has been the untouchable (oil and gas exploration, most notably), but activity in many ways is still brisk in pharmaceuticals and some technology segments. 

Boutique firms continue to form, sprout, spread and make an impact. And companies, large and small, won't hesitate to be advised by small outfits still unpacking boxes in a new Park Avenue office.  

The big I-banking names, however, continue to push hard in banking, because investment-banking fees are more valuable than ever--fees from advising, underwriting, committing, processing, managing, arranging, and syndicating.  The big names (including Goldman, Morgan Stanley, Citi, Bank of America, and JPMorgan) haven't curtailed their investment-banking strategies.

Some foreign banks (Deutsche Bank, Credit Suisse, e.g.) are having second thoughts, as they seem to do every other year.  Other names (like Wells Fargo and other foreign-based banks) start, stop and resume in the sector, but still command respect in certain niches. Barclays this year, with many prominent hires in the senior ranks, appears to be regrouping to prepare to compete fiercely with the big names.

  

Private banking and private wealth management:  POSITIVE

For more than a decade, financial institutions have adored wealth management as a business line, partly because of the stable, predictable fee-income streams and partly because the related activities come with manageable risks and manageable balance-sheet requirements. This, along with other asset-management businesses, has been a targeted growth area.

Results have been satisfactory at most banks, and growth might not have soared as they had hoped. But it's still a preferred area, as banks prefer to grow in sectors where capital requirements aren't onerous and where balance-sheet impact is tolerable. 

Competition, however, is fierce--and not necessarily from other large institutions. Robo-advisers have surfaced and claim to provide the same banking, wealth management and asset management services for much lower costs. Financial institutions now fend them off or try to convince clients they aren't better off retreating toward algorithmic-driven online advisers. The robo-segment will likely seize younger clients and those just starting to build wealth. Banks must decide a strategy of how to react: Compete or form partnerships. 

Corporate banking:  STABLE/POSITIVE

Regulators like it when banks go back to basics--deposit-taking and loan-making. With more and more restrictions and with banks' hands tied in knots, corporate banking appears more attractive than banks' pre-crisis efforts to engage in the exotic in those go-go years.  Banks appreciate the corporate relationships and more stable net-interest-earned revenues that come with corporate banking.

Boosting this business helps boost revenues and potential transactions in investment banking. The two go hand in hand now.  In fact, many big banks combine the sectors. It's more common to see the sectors named "Corporate and Investment Banking."  The banking group that can issue the bonds on behalf of a big company will likely be the same group that can arrange a billion-dollar syndicated loan.

Corporate banking, nonetheless, comes with big risks.  Some of the biggest losses banks have absorbed over many decades have resulted from bad risk management or aggressive corporate lending in certain industries. 

Thus, while they beef  up corporate-banking units, they must concomitantly beef up risk management and suffer the headaches (and capital requirements) that come with big loans to big companies.

Sales and trading:  NEGATIVE

The outlook for those interested in working on trading desks is negative, but that doesn't imply there aren't opportunities to sell and trade securities, derivatives and currencies profitably. As long as there are thriving capital markets, there are opportunities to trade for gains.

But financial institutions continue to review and rationalize sales-and-trading businesses. Senior managers are still determining what their roles should be and what the right business model will be. Some institutions are deciding whether computers and machines can substitute for the roles of humans on trading desks consummating large equity or bond sales/trades with other institutions.

Regulation has restricted what they can do or how they can do it. Profit opportunities are fewer.  Dodd-Frank's Volcker Rule (which prohibits proprietary trading at banks) is in place. Some banks have scaled back; other big banks continue to hold big positions (to facilitate customer flow), while they struggle to ensure compliance with new rules.  Some determined banks have found ways to be profitable, but most banks aren't seeking to expand these areas aggressively. Hiring occurs, but not in the way it did before 2008.

Risk management:  POSITIVE

Risk management opportunities continue to grow, even if banks have not figured out the best ways to recruit talented MBA's in finance into these areas.  For the most part, risk management has become a complex responsibility. At major financial institutions, it is now sub-divided into several areas:  market risk, liquidity risk, credit risk, operations risk and now even such areas as reputation risk and enterprise risk.

Many financial institutions seek what they need in mid-level and senior roles by convincing bankers and traders to assume risk positions. Some banks have tried hiring junior risk managers and developing them through the years, as they take on more responsibility. 

Risk management, like it or now, now encompasses regulatory compliance. The new rules have become voluminous, arcane and difficult and are often tied to how a financial institution quantifies and manages risks.  The best risk managers are now expected to understand new regulation, as well as understand clients, borrowers, counterparties, markets, financial modeling and analysis, and (more and more) advanced levels of statistics.

Banks have always encountered the fact that few colleges and business schools offer courses in financial risk management, if only to give students an idea of what risk management is all about. So when they recruit, they must convince prospects of the importance of such roles (and of course pay them as if they would pay bankers and traders).

Yet year after year, most institutions are desperate to find the right people to fill critical roles.

Asset management:  POSITIVE

Like private wealth management, asset management is a targeted growth area. Financial institutions (including banks and some insurance companies) scramble to accumulate investors' assets (ranging from individuals to institutions and mutual funds) and charge fees for holding and investing them, based on criteria.

The arena is crowded and now includes the aforementioned robo-advisers.  Because it's crowded, institutions must offer competitive pricing or offer a bundle of services under a price sheet. Robo-advisers claim they can provide much of the service bundle at much lower cost.

Like private wealth management, banks are attracted to asset management's minimal regulation:  Not much capital is required to appease the Federal Reserve when managing a billion dollars. The fees and a tolerable amount of regulation keep some banks pushing harder to expand and grow, although performance has reached a plateau in recent years.

Investment research:  STABLE

Research applies to institutional equities and fixed-income ("sell side") for broker/dealers and may apply to the same ("buy side") for asset managers.  

After years of trying to fix the business model of equity and bond research (after scandals during the dot-com-bubble era), the industry seems to have settled into something that works for many institutions.  Debt investors still examine credit ratings from ratings agencies. Equity investors and traders still seek guidance on company stocks and embrace the research and valuations researchers offer. Those researchers are still paid from the commissions their firms generate from equity-trading activity. And many investment managers will still do some credit and equity research themselves.

While an MBA in finance is an advantage, many institutions like what the CFA adds.

Venture capital:  POSITIVE

At the start of 2016, many suspected we might be on the brink of a technology bubble, a bubble that could burst the apparently inflated stock values of new companies and burst the enthusiasm of venture-capital companies supporting any start-up that has a heart beat.

But the bubble hasn't burst yet. The industry proceeds, however, with both caution and optimism. 

For opportunities for MBA's, the challenge is always the same even when the going is good:  Finding a way to get through the front doors of a closed-off, clubby world.

Private equity:  STABLE/POSITIVE

Private equity differs from venture capital in one important way. Both industry segments invest in and manage operations in private companies. Venture-capital firms focus on the unknown--new company, new managers, a vision, new products or services, almost no track record.  Private-equity firms focus on the known--often old companies, experienced managers, old products and services, a withering brand, long track records, and often a worn-out vision. 

Venture-capital firms determine a business model and find new ways to generate revenues and cash flow.  Private-equity firms often invest in companies with sound revenue streams, but focus on streamlining operations, reducing costs efficiently, and exploring new markets or channels.  At some point, when timing is right and after companies are spruced up, they consider selling those old companies back into the public markets.

There is an argument that private-equity firms thrive when equity markets are down, the better for them to discover and buy under-valued companies. There is another argument that private-equity firms thrive when equity markets soar, the better for them to consider selling refurbished companies back to the public market.

When business is brisk and opportunities exist, private-equity firms are always stalking banks and business schools to find the hordes who will do the complex finance models to determine when to buy and when to sell.

Hedge funds: NEGATIVE

Might these be the worst of times for hedge funds?

Hedge funds have experienced horrible returns and times the past two years. Many have shut down, closed shop, and returned money to disappointed investors. Some updated statistics show as much as 15-20% in redemptions, partly reflecting dismal performance when other market indicators are doing well, partly reflecting frustrations at investors paying fund managers the proverbial 2-and-20 fees (2% asset fees and 20% of fund profits) for almost embarrassing outcomes.

These would also include activist-shareholder funds, funds that do less frequent trading and are more involved in building equity stakes in notable companies to drive a new financial strategy (merge, acquire, expand, change business model, pay more in dividends, reward shareholders better, reconstruct board membership, conduct stock buy-back campaigns, etc.).  Some have had satisfactory results; some, too, have had weak returns. Others have just merely withdrawn their relentless efforts to force the new strategy.

Many hedge funds, therefore, aren't opening their doors widely to new candidates fresh from business school.

Compliance and regulation:  POSITIVE

Dodd-Frank has been in force for more than a half-decade. Financial institutions continue to do all they can to understand, interpret, analyze and comply with the thousands of pages (yes, thousands) of new rules.  Many rules under Dodd-Frank and Basel III are still in formation, still in draft form.  So banks must be ready to comply with regulation that has still not been written in entirety.  Or they must work harder to improve the metrics that show they have excess levels of whatever is required--capital, liquidity, stable funding, cash reserves, etc.  They must survive complex annual stress tests and prove their demise (even if it won't happen soon) won't damage the financial system.

Compliance and regulation are now beastly tasks that require attention, investments (for systems), and expertise (in the rules, in statistical analysis, or in organization structures).  And they must be explained to bankers and traders in a way to help them understand the impact on their businesses and their dwindling returns on capital.

They must prove (based on new quantitative tests of their roles in the financial system) they aren't "too big to fail" or suffer the onerous regulatory requirements that come with being global, colossal institutions.

Many large institutions will admit they don't have sufficient enough people who willingly and eagerly want to be involved in ongoing compliance. Those doors are as wide open as any door in a bank is these days.

Financial technology:  POSITIVE

If there's a hot sector for the times, it's financial technology--or fin-tech. The time is ripe where the worlds of technology, new ventures, and financial services are locking hands to create something new, or at least "disrupt" the traditional ways of providing financial services, advice and funding. 

Fin-tech presents innumerable opportunities. While the trends are upward and show promise, the sector is too broad and too unpredictable to pinpoint how young professionals can best take advantage of opportunities.  Fin-tech includes electronic payments, small-business lending and robo-advising in wealth management, but it may also include mergers and acquisition, investment research, and financial reporting.

Companies have formed everywhere, not just in Silicon Valley or on Wall Street.  Companies have been started by computer experts and former bankers and traders.

A few themes are emerging:  Big institutions have taken notice and are responding with their own strategies (and investments or partnerships). As with most new ventures, not all fin-tech businesses and models will survive.  Many won't be able to expand in scale.  Others will make mistakes not in technology, but market strategy or risk management.  Most will require time to perfect a business model (how to provide financial services, funding, or advice profitably).

But all that won't diminish opportunity in the early days of what might be called a financial revolution of sorts.

Tracy Williams

See also:

CFN:  CFA:  Where It Makes Sense, 2010

CFN:  Are MBA's Turned Off to Investment Banking? 2012

CFN:  Getting Set for MBA Internships, 2015

CFN:  What's Corporate Banking? 2010

CFN:  Venture Capital After Pao Lawsuit, 2015

CFN:  How Does Goldman Do It? 2010

The Fin-Tech Revolution

New fin-tech companies have sprouted by the hundreds and promote speed, cost efficiency, and information flow in financial services.

Financial technology is a bona fide industry sector in finance. Most people involved in banking and financial services refer to the sector as "fin-tech." (Some say, "FinTech.")

Fin-tech, however, encompasses much. It depends on who's describing the industry, talking about it or making observations.

We first heard widespread use of the term in the late 1990's, early 2000's, when securities and trading transactions drifted online, during an awakening when institutions realized that paper and telephone trading of securities or transferring of funds could be accomplished quite efficiently with computers communicating with each other.

Even back then, Bloomberg terminals were planted on most trading desks, and funds could be transferred electronically around the globe. But the industry was not yet sure how the Internet and other forms of technology could drastically improve the delivery of financial services.

Today, there is no boundary for what fin-tech refers to. In general, fin-tech describes a reorientation or new delivery of financial services, taking full advantage of technology and Internet connections. That can apply to any aspect of finance--from retail payments to the settlement of securities, from lending platforms to stock-trading matching engines, from corporate-finance modeling to corporate-finance advice, from wealth management to information gathering in capital markets.

That means just about anything beyond the conventional way of performing transactions and delivering services, as long as the new technology offers blinding speed, cost efficiency, and the neat assemblage of massive amounts of data.

A few years go, mention " fin-tech," and industry observers would think institutions trading securities online and institutions exploiting computer power to engage in algorithmic, high-frequency trading or organizations creating electronic markets to match buyers and sellers of securities, currencies, derivatives and commodities.

Today, fin-tech now means, also, payments, brokerage, and asset management for institutions and individuals.

The fin-tech phenomenon has resulted in the sprouting of hundreds of new companies, recent start-ups and young firms hustling to fill gaps in finance, occasionally threatening the domain of big banks.  They include companies with colorful names like PayPal, Square, Stripe, Wealthfront, Betterment, SoFi, CommonBond, ThinkNum, DataFox, and Axial.

(They include companies organized by Consortium alumni, like MyFinancialAnswers, founded by Virginia-Darden graduate Ben Pitts. There is even an boutique investment bank, FT Partners (as in "Financial Technology Partners"), based in San Francisco, solely focused on fin-tech deals.)

Many big banks, like JPMorgan Chase, Goldman Sachs and Citi, are aware they no longer compete just with each other and assorted funds, but also compete with well-funded enterprises with the best ideas about how to lend money, trade and settle securities, facilitate payments, and analyze markets--swiftly and cheaply and often without substantial capital deployment.

Over a decade and a half ago, JPMorgan established "LabMorgan" as an incubator for new ideas in fin-tech and helped birth new companies that went on to become leaders in selling services to quantify market and credit risks, trade credit derivatives and corporate bonds, and settle foreign currencies.

In the past year, JPMorgan's CEO Jamie Dimon mentioned in financial reports that his bank must now confront the competition of fin-tech start-ups that threaten to swipe swaths of market share in consumer banking, securities services or corporate finance.  In recent months, the bank established a working partnership with one outfit to facilitate to small business loans.

Fin-tech companies can be subdivided into the following categories:

Payments
Investments
Financing
Advisory
Processing and information 
Infrastructure

Robo-investing is now a popular sub-sector of fin-tech under the investments category. Bands of financial entrepreneurs have determined there are cheaper and scientific ways to help people invest, manage assets over a long term. They devised unbiased formulas to help investors to allocate funds among stocks, bonds and mutual funds. They argue that young investors will not pay exorbitant fees to financial advisers at large, reputable firms, when they can use surveys and algorithms to make the same selections at minimal costs (or at no cost, in some cases).

Examples of fin-tech firms include the following firms. Often, their employee rolls include computer specialists, data scientists, quantitative finance graduates, and finance portfolio theorists.

In robo-investing, ETF's tend to be the favorite investment, the better to minimize costs in all possible ways.  Investors sleep at night, aware that computer models update market statistics and assess performance and risk. They feed algorithms that redistribute funds among the classes of assets that include stocks, bonds, mutual funds, cash, commodities, and currencies. They allocate to minimize tax obligations, country risks or industry risks.

Wealthfront, a favorite among Silicon Valley professionals, claims to use behavior finance, machine learning and data science to strike the right allocation balance for investors.  It helps to have Burton Malkiel and Charles Ellis, legendary names in portfolio finance and investment banking, as advisers to give the firm credibility and to complement the core of Stanford MBA's on staff.  It helps, too, to have some of Silicon Valley's best known venture capitalists as backers.

The firm is now four years old and has amassed $2 billion in assets. Portfolios less than $10,000 pay no fees, an attractive lure for twenty-somethings, who are accustomed to DIY methodology and interfaces with computer screens.  The average client portfolio totals about $91,000.

On the East Coast, a competing firm is Betterment, based in Manhattan, a year older than Wealthfront and flocked with Columbia MBA's.  It, too, claims to offer algorithms that rebalance portfolios continually into about 12 asset classes (most of them ETF's), favoring "modern portfolio theory" (or more specifically a "Black-Litterman model," an updated version of finance that manages investment risks with a steady plan to diversify and rebalance).  It has accumulated $2.5 billion in assets.

The above firms, as investment-adviser companies, are not broker/dealers or stock-picking or stock-transacting firms.  Robinhood, a New York firm, falls in that category. It was founded by Stanford graduates who migrated to New York to work at big banks, but were outraged by high commissions on stock trades.  They devised a broker/dealer business model to use technology to reduce costs to virtually nothing and facilitate free trades. (Revenues will come from free use of customer balances and margin lending.)

They hope to upend the world of retail brokerage in the way the discount brokers (e.g., Charles Schwab) did a generation ago.  Operating in the fin-tech sector, the firm sells single stocks without hiring a house full of human brokers and consultants.  Andressen Horowitz, the venture capitalists, believes in the model enough to have invested with the firm.

At another end of the fin-tech spectrum exists Digital Asset Holdings (or "DA"), now run by former JPMorgan Chase executive Blythe Masters, best known for contributing to a core group there that created the credit-derivatives market.

While observing the explosion in popularity in the Bitcoin currency market the past two years, DA reasoned the technology and transaction logic behind Bitcoins could be useful in other markets.  DA's founders and computer programmers, with Masters now aboard , are researching ways to restructure the nuts, bolts, pipes and plumbing of traditional trading and settling of securities, currencies and derivatives by replicating the best of what happens in the Bitcoin marketplace.

DA claims when one bank agrees to sell a large corporate loan to another bank, it shouldn't take hours 2-3 weeks of negotiating documents and finalizing trade terms before the trade is settled. Technology should reduce such a trade to an immediate settlement after two parties consummate a transaction.

The Bitcoin market is decentralized, uses "distributed ledger technology," is an open data base, and boasts about being transparent, open-sourced, and, in some ways, democratic.  That market is not policed by government regulators, which presents issues for countless observers and potential participants. That market is also often volatile and unpredictable, although not necessarily because of its structure. (See CFN-Bitcoins.)

DA argues that, notwithstanding the volatility of the value of the Bitcoin market, the efficiencies of Bitcoin settlement can be transported into the trading, settling and risk management of corporate loans, foreign currencies, U.S. government repos, and derivatives.  While they present their case to institutions, they are in a fund-raising phase ($35-40 million), hoping to get investor and institutional support for a model that could diminish the roles of major organizations already involved in trading and securities clearance.

How about a fin-tech firm that takes advantage of social media?  Dataminr, a start-up formed by Yale graduates, does just that.  Aware that hedge funds, banks and traders are constantly hunting down information, news and data that will have impact on their portfolios or trading strategies, they determined it would be invaluable if all the updatesthat emanate from Twitter could be organized into "actionable signals."

Instead of traders sifting through mountains of Twitter feeds, Dataminr (for a fee) organizes Twitter feeds into useful streams related to mergers, acquisitions, energy, and specific companies.

If, therefore, bankers and traders have all this useful, organized information, expedited by Dataminr, what trading strategies should they adopt to take advantage of it?  Along comes another fin-tech outfit, SumZero, which was formed as an "investment community" of hedge-fund traders, asset managers, and private-equity investors to share ideas, research, concepts and thoughts about trading opportunities (for a fee, of course, and at different access levels).

It's ingrained in traders not to share investment strategies or trading positions they contemplate, but the site is popular and has attracted thousands of members, partly under the principle of reciprocity--that to find new strategies, you have to share your own.  A recent trading strategy on the site explained how traders can put on a Yahoo position (longs and shorts), tied to the likelihood the company will be split, the likelihood that it will have substantial tax liabilities related to its Alibaba investments, and the likelihood that it could be acquired.

The above companies are just a handful in scattered world of fin-tech, which now has tentacles in every sub-sector, every financial market.  The sample above hardly touched the bulge in fin-tech efforts in retail payments (mobile payments, online payments, etc.), consumer lending or small-business finance.

This snippet proves, nonetheless, how small technology-oriented enterprises are quietly and busily overhauling the industry in the way AirBnB and Uber are transplanting the travel and transportation industries.  Not only are these new companies changing the industry, mostly for the better, some are luring away the talent that otherwise might have opted for multi-decade careers at established firms.

And the big-name institutions know it.

Tracy Williams

See also:

CFN:  Bitcoins:  Embrace or Beware? 2014
CFN:  Financial Technology:  New Opportunities, 2014
CFN:  High-Frequency Trading:  What's Next?  2012
CFN:  Opportunities and Outlook, 2016

Opportunities and Outlook, 2016

Where are the best opportunities in finance for MBA graduates in 2016 and beyond?

Opportunities in finance ebb and flow, surge and subside, as most MBA graduates (and older, experienced alumni!) in finance know well.

Capital markets, economic trends, regulatory whims and winds, and the make-up of financial institutions will dictate how many and who will get hired from business-school campuses each year and how many and who will be able to transition from one sector in the industry to another, when they wish to do so. 

The year 2015 wasn't a disaster by anybody's measurement, although there were periods of head-turning turbulence (at least in August and at least in equity markets). Market watchers obsessed over China's economy, China's currency, and energy prices for most of the year. Optimists were happy investment portfolios didn't collapse. Pessimists were bothered that we didn't experience the upswings we observed in the year or two before. 

The economy improved by inches, and markets and finance managers waited the whole year for interest rates to make a microscopic upward budge, thanks to the Federal Reserve daring to make its first move. 

In corporate finance, deals proliferated, and, depending on the measuring stick, the year reached unprecedented levels in mergers, acquisitions, and restructurings.  The favorite deal du jour was the spin-off, the split-up, as company after company explored whether shareholders (HP, Yahoo, e.g.) were better off with simpler organization structures and less-diverse revenue streams.  (Pfizer announced its merger with Allergan and then announced that the two, when combined, will spin-off certain units. Hence, a merger begets a spin-off.)

Markets, transactions, politics, and corporate strategies down the road set the stage for whether opportunities exist for MBA graduates in the short term.  Let's explore by sector.

Let's also apply an informed, unscientific rating on the general outlook in each for opportunities to establish a thriving career:

What are the chances that a solid MBA finance graduate from a top (including Consortium) business school will encounter favorable opportunities in a particular sector in 2016-17?

Corporate treasury:  STABLE/POSITIVE

Opportunities in financial management, corporate treasury, and corporate finance depend on the corporate industry. In the current economy, where we are now long beyond the early stages of recovery, companies continue to grow, expand, and invest, sometimes not at the urgency that economists covet.  But these are not recessionary days. As long as companies grow and invest, they must finance activity, manage capital structures, issue debt and/or equity, and manage business investments and flows of funds. 

That ensures opportunities in financial management, financial analysis, and corporate treasury. It also means companies can develop future CFO's across all business lines. 

Investment banking: STABLE

The year 2015 was a blazing year in global mergers and acquisitions, while the year might have been lukewarm in other investment-banking-related activities (debt issuance, equity offerings, etc.).  

Investment-banking opportunities always present themselves in a whimsy--soaring one year; negative, cold and repulsive in another.  Activity by industry group will vary, as well.  When technology groups might be bustling, more staid groups like industrials, manufacturing and automotive might lag. Other groups like healthcare, financial institutions, or diversified will have deal flow and activity (as they did in 2015), mostly because those industries are restructuring or in immediate need of equity capital. 

In 2015, energy groups might be at a standstill or in "work-out" mode, as banks determine whether energy-related companies can manage through debt obligations in the current low-price environment. 

Market-timing and interest rates are also important factors that influence whether banks will hire more analysts and associates. 

Debt financing of all kinds (loans, bonds, notes, and private placements) flourished in years of low interests. Companies took advantage record low rates to refinance old, high-rate debt or invest in new projects with low cost of capital.  When interest rates rise, debt financing might pause or stay flat. 

The big names in banking tweak their hiring numbers from season to season, if not from year to year. Meanwhile, boutique firms (Moelis, Greenhill, Evercore, e.g.) continue to sprout. They start up, win headlines by slipping in the back door to advise on gigantic transactions, and don't go away. Some have been successful enough to increase their banker rolls steadily and expand into other cities, as they prepare for their own public offerings.  

As long as top bankers at "bulge bracket" banks (Goldman Sachs, Morgan Stanley, e.g.) feel the need to escape the bureaucracy, politics and regulatory burden at large institutions or decide they will enjoy the craft without being tethered to a large organization, boutique firms will appear, and some will survive and do fine.  

Private banking and private wealth management:  POSITIVE

Banks' best response to increased capital requirements (and to lesser returns on equity (ROE) is to expand in businesses that don't require enormous balance-sheet usage.  Private banking and wealth management are favorite go-to strategies. 

Banks don't deploy too much of their own balance sheets when they chase after clients to park their wealth in private-banking units.  The challenge, of course, is to keep others' assets under management (AUM) growing. 

In the last decade or so, banks (and financial-management start-ups that claim they can do better than banks) have hired aggressively in private wealth management.  New professionals, nonetheless, are usually required to hit the pavement promptly to help build assets.  

Corporate banking:  STABLE

In the 1990's and early 2000's, thanks to the generous regulation of the time, large banks rushed to reinvent themselves as investment banks. Many (JPMorgan Chase, Citi, e.g.) completed the transformation, but shifted some corporate-banking basics (corporate lending, cash-management services, payments, custody services, etc.) to the sidelines.  

After the financial crisis, large banks re-emphasized corporate banking, even if these activities pile up assets (loans) on the balance sheet.  They have renewed appreciation of the benefits of relationship banking, low-risk lending, and non-lending services, especially for mid-sized companies that can grow into prosperous global companies.

Opportunities exist in these areas, often for those with experience in specific bank functions (lending, cash management, securities processing, e.g.) and for those with both experience and deep corporate relationships. 

Sales and trading:  NEGATIVE

These are times when banks' large, football-field-size trading rooms are just as likely to be vacant or half-empty, as they are to be jammed with boisterous traders and blinking monitors. 

Regulation has pummeled this sector, and most banks except for a few (like JPMorgan and Goldman Sachs) have reduced emphasis substantially.  The new Volcker Rules (which prohibit proprietary trading), new limits on bank leverage, and increased capital requirements have made it near impossible for banks to rationalize large trading desks (in equities, fixed-income, and derivatives).  A few will forge ahead and make an effort.  Many others won't bother. 

Banks are permitted to facilitate "flow" or "customer-related" trading, but unless they are blessed with continually high volume, they have determined, too, it's not worth the pain to sift through trading to decide what's permissible (customer-related) and what's not (proprietary). 

Trading and capital-markets desks still exist at all banks (for foreign currencies, funds movement, repo markets and government securities and for some derivatives activity (interest-rate swaps, credit-default swaps, e.g.)). But the numbers are down, and the prospects for growth almost non-existent. 

Risk management:  POSITIVE

Risk management in financial institutions beefed up substantially after the crisis.  The function is well-integrated in bank organizations. Prudent risk management up and down the organization chart and in all business lines was a lesson well learned after the crisis. Moreover, bank regulation now requires banks to have an enhanced risk-management culture and rigorous risk-management discipline.  

Risk management nowadays encompasses several forms of risk:  credit risk, market risk, operations risk, legal and documentation risk, and even reputation and headline risks.  Financial institutions seek expertise, experience and talent in all these areas. They seek, too, expertise in managing all forms at once ("enterprise risk").  

Banks typically look for experienced people and have done poorly in explaining and promoting these roles when they recruit on campus.  Yet the needs exist, and opportunities abound. 

Asset management:  POSITIVE

Just like private banking and private wealth management, financial institutions continue to emphasize this segment.  (Asset management sometimes includes private banking and private wealth management and usually includes corporate and institutional clients and mutual-funds activities.)  

The impact of regulation hasn't been too harsh, and banks can still earn high returns.  Banks continue to push to accumulate and grow assets under management--fee-based businesses that don't require much balance-sheet usage. 

Competition is fierce among financial institutions.  But that hasn't dampened the aggressive efforts of most of them to compete for assets, charge reasonably for fees and generate satisfactory returns for shareholders.

Investment research:  STABLE

Research applies to institutional equities and fixed-income ("sell side") for broker/dealers and may apply to the same ("buy side") for asset managers.  

The sector on the "sell side" underwent a massive overhaul in the early 2000's to eradicate conflicts of interest and too-cozy relationships with investment bankers (after related scandals of the era). Compensation models and incentives for analysts have changed, too. 

Research has now grown more comfortably into its new, mandated role. Analysts seem to understand clearly what they can and can't do, whom they should and shouldn't speak to. Opportunities exist based on corporate industries, asset classes, and institutions' willingness to promote the value of research.  

Research (on both sides: "sell" and "buy") performs an invaluable service.  Analysts not only attempt to determine proper values of stocks and bonds, but they digest, interpret and explain the vast amounts of information that influence the performance of companies in an industry.  

Venture capital:  POSITIVE

Venture capital is trendy in this era, especially the funds and firms that hover about Silicon Valley, all searching to invest in the next new thing.  

Opportunities would appear to be positive in selected segments and regions. The environment is optimistic, no matter the scuttlebutt about a "technology bubble" or over-valued "unicorns." Investors are eager to find and finance new business ideas and new companies in new industries.

But opportunities are fleeting. They exist, but are hard to find, difficult to ferret. There are few recruiting schedules or broadly announced openings. Connections, special industry expertise, and years of experience open doors to the elite VC firms (Kleiner Perkins, General Catalyst, Sequoia, et. al.).   

Opportunities, however, might exist at non-traditional venture-funding organizations, those that finance or "incubate" businesses with small scope and rely on various crowd-oriented financing. 

Private equity:  STABLE

The industry is dotted across the country (and globe). There are big, known firms like KKR, Blackstone, and Silverlake.  There are industry-niche firms like Vista.  

Macroeconomics, investor appetite, and general business conditions often influence opportunities and the decisions firms make to close down old funds and start new funds. PE firms prefer stable, businesses with proven management. 

Firms may specialize in a certain industry or, like a Blackstone, will traverse the landscape to find any stable business with predictable results (fast-foods, railroads, real estate, merchandising, e.g.).   When the economy blooms, PE firms invest, grow, and watch for easy-to-project returns on capital. When the economy sours, they sweat and tend to the large debt loads they mounted to gain control of the companies they acquire.

The brand-name firms (like Carlyle or Blackstone) have begun to seek analytical help by approaching campuses and establishing relationships at favorite schools.

Smaller PE firms will avoid campus recruiting and traditionally pick the pockets of big banks in numbers larger than banks and head-hunters care to admit. (One of the biggest headaches of investment banks is responding to the onslaught of PE firms making offers to young bankers who've gained just enough experience to be invaluable to outsiders.)

Hedge funds: NEGATIVE

The past two years have been a nightmare for most hedge funds.  Performance has lagged most equity benchmarks.  Hedge funds compete among themselves, but also compete with the proliferation of ETF's and other investment vehicles. "Crowds" of trading funds chase a handful of trading strategies, no matter how complex they are. Often the results are paltry or undistinguished when compared to what investors might reap from channeling funds into a low-cost, simple S&P index. 

Fund managers have had to redeem cash to investors, in 2015 upset with losses or embarrassing returns. Others have shut down funds or implemented new trading strategies.  

Opportunities may exist in pockets at a few established funds (Citadel?), but the industry is focused on bouncing back and convincing armies of investors that it still makes sense to pay high fees for specialized, professional management. 

Compliance and regulation:  POSITIVE

Knock on the door of just about any regulated financial institutions (banks, broker/dealers, insurance companies, and fund companies), and watch them roll out lists of jobs they need to fill in regulatory compliance.

Regulatory reform resulted in thousands of pages of new regulation.  Banks need people to interpret rules, accumulate related data, and ensure compliance. They need people to price assets, perform calculations, and preside over stress tests.  They need people who understand new rules for leverage, liquidity, capital, systemic risk, and money-laundering.  And they want people who will be attentive to the regulatory agenda, not prone to distractions, and who will want to stick around. 

Despite such needs, financial institutions haven't done well to explain these roles to candidates or promote them as desirable careers.  Often they prefer those who have some legal or compliance experience or who are comfortable being off the front-lines, away from doing deals and mingling with clients. 

Raise your hand, express interest and commitment, show that you can learn a lot about a dozen or so banking functions quickly, and the institutions will swoon.

Community banking:  STABLE

Regional banks, those that survived, have recovered after the mortgage woes of the crisis. They rebounded and restructured. Many have recommitted to community banking via on-line transactions and branch relationships.  

They, too, encounter strenuous capital requirements, but are figuring out a way to reap sufficient returns from plain-vanilla banking:  deposit-taking, consumer and small-business loans, mortgages, and perhaps credit cards.  

Business is still fiercely competitive, especially as new non-bank, financial-technology firms have discovered ways to attract customers with low fees and Internet connections. Banks, however, are not in a holding pattern as they fight off the competition. 

Community development:  STABLE

Banks are subject to regulation to support communities and are audited for compliance.  Most try to engage in their respective communities meaningfully. 

Financial technology:  POSITIVE

Financial technology (or "fin-tech") has grown significantly over the past 15 years and expanded into broad areas of finance. 

Think Internet, and think of various ways to exploit technology for the benefit of investors, retail customers, or corporate clients.  Think of various ways for investors to find opportunities via an Internet community, retail customers to do transactions (payments, loans, etc.) cheaply via a mobile device, or corporate clients to discover potential merger partners from an algorithmic match-making process.  

Fin-tech now encompasses all facets of finance. The number of companies that have organized, formed, and sold their services to a global market has exploded. Some (like PayPay, e.g.) will become household names. Others will disappear.  Shake-out is inevitable. 

Opportunities will exist in the years to come, but in unconventional ways.  Many will prefer to recruit as if they are the start-ups they indeed are.  Many will prefer those experienced in finance, financial transactions, and capital markets.  

Electronic markets:  STABLE

This includes electronic exchanges; trade-matching engines; markets in equities, fixed-income, derivatives, municipals, and currencies, and the controversial sub-sector of high-frequency traders. 

Since the late 1990's, the presence of electronic markets has increased steadily, although growth might have plateaued. (There are now nearly a dozen electronic stock exchanges under the auspices of the SEC.) 

Electronic markets evolve, too, under the wary eyes of regulators and other industry participants. Some electronic markets are match-makers or pure brokers. Some see themselves as "liquidity providers" or "liquidity-takers."  Others are involved in trade-processing, trade-settlement or trade-netting.  Others are involved in pricing and quoting services.  

Almost all try to persuade markets (and their investors) they perform services to improve liquidity, efficiency and fairness in markets. Some critics say high-frequency traders inhibit market efficiency and fairness.  

Opportunities will exist, but may not be easy to find.  They may exist best for those with technology skills and an uncanny understanding of how markets work and function.  

Tracy Williams

See also:

CFN:  Today's "Bulge Brackets," 2013

CFN:  Jefferies:  Comfortable in Its Niche, 2012

CFN:  Credit Suisse Makes a Big Move, 2015

CFN:  Banking Boutiques, 2009

CFN:  Bank ROE's:  Stuck at 10 Percent, 2015

CFN:  Risk Management at JPMorgan, 2012

CFN:  How Will Steven Cohen's Sage End? 2012

CFN:  Dark Days at Knight Capital, 2012

CFN:  Lewis' Back-Door Move in HFT, 2014

CFN:  Finance:  Still a Popular Destination? 2014

CFN:  High-frequency Trading: What's Next? 2012

CFN:  Opportunities, 2015

CFN:  Financial Technology:  Opportunities, 2014

CFN:  Investment Banking vs. Private Banking

CFN:  How Mentors Help, 2009

CFN: Banking Today:  What Have You Done for Me Lately? 2011

CFN:  Venture Capital Updates, 2015

CFN:  Wall Street's Favorite Business Schools, 2014

MBA Recruiting, 2015-16: Ready, Set, Go

It's that time of the year at top business schools.  Recruiting season is about to be launched in full swing.

First- and second-year finance students must implement strategies they've devised to find the right job in the right sector at the right company. MBA graduates everywhere remember how recruiting is a full-time effort, a sixth course, an effort that requires massive amounts of time and worry.

The Consortium Finance Network, as part of its mission, hosted its fourth annual recruiting and interviewing webinar Nov. 5 for first-year Consortium students in finance.  Students from all 18 Consortium schools were invited to dial in to get advice from a panel of Consortium alumni in finance.

During the one-hour session, CFN hosts and panelists reviewed opportunities in several finance sectors (from investment banking to private equity) and provided step-by-step guidance on how students can sell themselves and convince prospective employees to extend an offer--for the summer or for full-time employment.

This year, in the webinar's second half-hour, CFN decided to focus on venture capital, private equity and financial entrepreneurship, partly because these sectors do not recruit formally on campus and because these sectors have abundant hurdles when MBA graduates try to get through the front doors.

CFN steering-committee members D-Lori Newsome-Pitts, Camilo Sandoval, and Tracy Williams organized and hosted the webinar.

Panelists included Consortium alumni Ed Torres of Lilly Ventures (Michigan MBA), Ben Pitts of MyFinancialAnswers (Virginia MBA), Eddie Galvan of Nomura (USC MBA), Mark Linao of Technicolor Ventures (Michigan MBA), Sinclair Ridley-Thomas of JMP Securities (USC MBA), and Enoch Karuiki of HIG (Dartmouth MBA).  (Karuiki and Galvan had participated in a previous CFN recruiting webinar and returned to volunteer their advice and experiences this year.) All panelists had thoughtful guidance and offered lessons learned from their own days in business school. They added special tips and encouragement, based too on their own few years inside the front doors and on the front lines.

Outlook, 2016

Webinar participants evaluated financial sectors and offered a rating outlook for employment in 2016 for interns and for long-term careers.  Opportunities are a function of many factors, including economic trends and cycles, companies' relationships with specific schools, companies' past success in hiring MBA graduates, and financial regulation.

Banks and other financial institutions' business opportunities are somewhat constrained or influenced by new regulation.  Limitations on balance sheet and leverage and new rules, for example, discourage banks from hiring in large numbers in sales and trading.

A "Positive" rating suggests major institutions in the sector project revenue growth and business opportunities that will likely require hiring ample numbers of MBA finance graduates to come on board in the next few years.

The following sectors were assigned "Positive" outlook ratings:

Financial technology (payments, processing, clearing, advisory)
Compliance and regulation
Risk management (credit, market and operations risks)
Asset management (all asset classes)
Private wealth management
Venture capital

Webinar hosts and panelists awarded a rating outlook of "Stable" for the following sectors:

Corporate treasury (financial management, non-financial institutions)
Investment banking (bulge-brackets and boutiques)
Corporate banking
Investment research (equity and credit)
Private equity
Community banking
Community development
Electronic markets (exchanges, market-makers)

Sectors receiving a "Negative" rating, based on constraints banks are experiencing and general performance over the past few years, include the following:

Hedge funds 
Sales and trading (at regulated institutions)

Galvan, an investment banker in the financial-sponsors group at Nomura, reminded students that within investment banking, certain industry groups are "hot."  There could be glowing opportunities in technology, health-care, energy and real-estate groups.

Torres of Lilly Ventures agreed that while the outlook in venture capital is as favorable as ever, the route to employment continues to be hard, unpredictable.  "Very few folks get hired by a VC firm right out of school," he said. The best way to land a good offer from a prestigious firm (like Kleiner Perkins or Sequoia), he suggested, is to have already racked up many years as a successful entrepreneur. "Been-there-done-that experience is what is attractive to VC firms."

Torres added, in venture capital, "It's not a recruiting process. It's a dating process."

Summer Goals

When an MBA student in finance wins an offer, another phase of hard work is about to begin. Student interns have less than 10 weeks to prove they can do the work, make contributions, and fit in. CFN panelists summarized the primary goals in an internship, which fall in many broad categories:

Networking
Technical skills
Industry knowledge
Work ethics
Firm culture
Clients
Diversity

MBA interns and graduates on a new job should show they have expert technical skills and industry knowledge and demonstrate it everyday.  If they haven't mastered the skills, they should prove they can learn quickly.

The summer is also a chance for them to observe the culture around them and decide whether the company, the company's diversity commitment and the industry are right for them.  Work ethics count for much, too, and MBA students will need to show they will work hard, produce, show up, be eager, and contribute.

As they become more closely linked to the outcome of deals or transactions, MBA associates will want to show their comfort and rapport with clients.

Of course, the ultimate goal is to win a full-time offer, even if the intern has decided the fit at the company is not favorable or the culture is not ideal. It's ideal to at least have the offer in the pocket when the first days of second year arrive.

Interview Road Map

CFN co-founder Sandoval reviewed CFN's road map to interviewing successfully.  He reminded students they should have a strategy set for the season and asked, "What is your story?" New recruits should know their story, know what they want, and polish the story. "Think about why you want to work (at a financial institution)," he said. " Don't miss any opportunity to discuss who you are."

CFN's road map is based on the MBA interviewee being able to express clearly (a) background, (b) interest, (c) drive, (d) capability, and (e) insight.

Galvan from Nomura said, "There are two different routes to investment banking.  The non-core school route and the core-school route."  Galvan had gone to a non-core school (USC-Marshall), a school not necessarily on the primary recruiting lists at top investment banks when he pursued and eventually earned a job offer at JPMorgan.

"Show active interest and the 'want-to-be-there'," he added.  Coming from a non-core school, "I became the guy from USC that everybody liked.  I don't get the technical interview if I don't show interest."

Karuiki from the venture-capital firm HIG said that the interview process is sometimes summarized by the recruit answering a series of why's:  Why do you want to be a banker? Why do you prefer and enjoy finance? While he was at Dartmouth-Tuck, his strategy was to combine his science background with his interests in finance. (He worked at UBS before eventually joining HIG.)

Ridley-Thomas, a recent USC-Marshall graduate, was able to secure an internship after his first year with the private-equity firm Oaktree Capital.  He said he connected with the right people before the interview process started and he "benefited from referrals," getting to know people who could recommend other people.

Linao, who worked at Amazon during his MBA summer, explained how he pursued working for a start-up when he began to look for full-time opportunities, but ended up in venture capital in the process.

Pitts, while at Virginia-Darden, was able to gain offers from firms like Lehman Brothers (before its demise) and Goldman Sachs, where he worked after graduation before founding his own private-wealth firm. "Do what is genuine to you," he advised MBA students.  "Don't get easily distracted from your own goals. Be true to yourself."

Mentors matter a lot, panelists said.  "Seek out the most senior people you can," Pitts added. In school, "you have to be at all the corporate social events."

Torres advised students, "During the interview process, focus not just on the 'what,' but also on the 'how,' too."  Interviewers, he said, will want to know whether MBA graduates know how markets, finance, products and companies work or how to get a job or task done.

Galvan said, "The (recruiting) process starts really early, so be prepared."

Linao, an associate in venture capital, said, "A lot of it (the process, getting an offer) is being lucky. You'll want to force serendipity."

Pitts, the entrepreneur, encouraged graduates to consider the daring route he took after a few years at Goldman.  He started his own firm that offers wealth-management solutions.  "People think being an entrepreneur is this mystical thing," he said. "I think it's about just doing it. Motivation, relationships, and just do do it. The actual risk is less than the perceived risk."

Ridley-Thomas said, "Get focused as quickly as possible. Be relentless."

Focus on Venture Capital

Sandoval led a special discussion on venture capital, explaining major principles of how a VC firm is organized, how it raises funds, how it invests in companies, and what goals it has in the short- and long-term.

For the benefit of MBA finance students, Karuiki explained the primary difference between venture capital and investment banking.  Investment bankers have a transactional approach. Bankers work from deal to deal and seek to close them as quickly as possible. Venture capitalists, he demonstrated, have a long-term approach with clients (4-5 years typically).  They have a sustained, high level of involvement and get involved closely with people issues and senior-management hiring.

Torres, who has spent over two decades years leading Eli Lilly's venture-capital unit, said venture capitalists spend enormous amounts of time immersed in the operations of the companies they invest in.  There is a different pace and timeline when considering a deal, investing in a deal and monitoring it.  Unlike investment banking, where deals are birthed and consummated in short order, in venture capital, Torres said, "It may take three months just to decide whether to work on a deal and six months to complete a deal.  It may take four, five, six years before we exit."

In venture capital, there are winners and loses, home runs and duds, whopping gains and occasionally embarrassing losses.  "You've got to have perspective," Torres said. Venture-capital firms look at countless possible investment opportunities before they invest. "You're looking for reasons to say no. We look at 100, 150 deals for every one we do."

He summed up, "In venture capital, we're looking for the jockey, the horse, and a large unmet need." Strong management, efficient operations, and an interesting, novel product.

Tracy Williams

See also:

CFN:  Recruiting Webinar, 2013
CFN:  Recruiting Webinar, 2012
CFN:  Recruiting Webinar, 2011
CFN:  MBA Job-Hunting:  No Need to Panic Yet, 2012
CFN:  MBAs:  Second-Year Dilemma, 2010
CFN:  Opportunities, 2015
CFN:  The Finance Resume' and Recruiters, 2014
CFN:  Summertime, Summer Internships, 2010

The Mid-Year Review in Finance

Time for a mid-year review in finance. Any surprises?

July is about to roll in, and that means, besides the start of a hot summer, a time to figure out how the year has fared at its half-way point.  In finance, have things turned out as expected, or have there been surprises, both pleasant and unsatisfying?

Much of early 2015 has been an ongoing and sometimes agonizing mulling over interest rates. Every analyst in all corners contends they will rise, but when, how soon, and what will be the immediate impact?   Market watchers, traders, banks, and economists have looked for clues from the Federal Reserve and speculated on how to be prepared.  Interest rates will rise, they argue, but, in fact, an upturn has been anticipated and discussed for years (since the early 2010's) and is now expected any day.

Now in late 2015, the probability seems certain. As a result, markets are occasionally jittery, corporations are winding up their rush to refinance long-term debt while there is an opportunity to tap cheap funding, and investment managers ponder what to do about massive portfolios with large bond positions (Reallocate and sell off now? Later? Be patient or act now?)  Others sense that misbehavior in markets and panic striking bankers, traders and corporate treasurers could lead to a mini-crisis of sorts. A rise in rates will increase borrowing costs to companies that want to grow, expand and/or invest. A rise could cause a sudden slowdown in the multi-year recovery.

The Federal Reserve is policing it all, and most market participants are ready to act.

Equity markets, to date in 2015, aren't soaring as they have done the past two years.  They haven't, however, collapsed. There are good days followed by sour days, much of the latter explained by interest-rate uncertainty, varying perspectives of a recovering economy, and interpretations of geo-political events.  Most indices are up for the year (just a little bit), and financial advisers continue to be confident in the long-term. They counsel keeping most assets in equities.  But it hasn't been unusual this year for 100-point drops in the Dow to be followed days later by 100-point rises, only to be followed by a similar drop the next week.

Even with some topsy-turvy market behavior, IPO's haven't evaporated. (Fitbit was the most recent highly touted offering.) With liberal new regulation permitting small companies to raise equity funding without cumbersome registration, new companies or old, small private companies have many options to go about doing it.

For many new ventures, the question these days is less about market timing (the best time to go public, based on equity-market behavior and demand for shares), but more about whether the new venture is willing to tolerate the unrelenting demands (reporting, shareholder expectations, growth projections, etc.) on a public company.

Think Uber. An IPO of Uber in the second half of 2015 would be popular, well-promoted, extensively analyzed, and likely successful. A 2015 Uber IPO would attract the same fanfare Alibaba's IPO did in 2014.  But Uber IPO this year is not in any bank's deal pipeline. Not yet. Uber management is steadfastly focused on strategy and exponential early-stage growth, instead of SEC registrations, road shows, quiet periods, and unstable earnings reported to new shareholders. Uber still has a few more countries to penetrate.

Bond markets are feeling some pain.  Investors and traders who maintain positions do so courageously. The expected increase in rates will reduce bond prices suddenly and could lead to earnings stumbles among traders and funds, even if they say they are prepared and hedged. New bank regulation has spurred banks, one by one, to reduce emphasis on fixed-income trading and market-making. The profit margins had become too slim, and the balance-sheet burden too great. The unintended consequence of bond-market restructuring is that these markets are now less liquid.  And what happens when rates rise and funds, dealers and traders want to sell? Big banks won't be accessible or helpful.

The year has featured a handful of notable M&A deals and corporate restructurings:  Charter Communications is acquiring TimeWarner and Verizon grabbed AOL, among others. GE caught may off guard by announcing it will sell off  GE Capital, even while the finance unit contributed substantial amounts of revenues and earnings to the consolidated GE organization.  This one was a decision based on long-term corporate strategy and long-term concerns about GE's balance sheet.  GE Capital is overwhelmingly profitable, but it also overwhelms GE's balance sheet and makes it subject to meddlesome surveillance and oversight by financial regulators. GE made the earth-shaking decision. It had to push a favorite child out the door. And in doing so, few have criticized its move.

Financial institutions (banks, asset managers, hedge funds, insurance companies, and broker/dealers) continue to cry for relief from the onslaught of what they contend is burdensome regulation.  In 2015, large non-bank financial institutions have done most of the crying, especially those that could be tapped with a label "SIFI"--strategically important financial institutions, a designation by regulators that subject non-bank organizations  (including insurance companies, finance companies, and investment funds) to bank-like regulation of balance sheets and capital requirements.  More than a few institutions (AIG and GE Capital come to mind) have hustled to craft rebuttals for why they shouldn't qualify.

Meanwhile, from quarter to quarter, the large, familiar global banks reorganize, restructure, consolidate, and rationalize everything under the institutional umbrella.  And in doing so, even some CEO's have been hustled out, as bank boards struggle to pinpoint the right overall strategy.  Deutsche, HSBC and Credit Suisse are big banks in 2015 that have replaced CEO's or announced a series of corporate overhauls. Other banks have endured stand-offs with equity analysts and politicians who argue the biggest banks are better valued and less risk if they broke themselves up into their natural parts. (JPMorgan Chase seems to be the bank defending most of the break-the-bank arguments.)

Every year, global banks contend with the scandal du jour.  Following years of litigation, write-offs and fines related to mortgage securities and LIBOR (interest-rate pegging), in 2015, the club of banks that dominated foreign-currency dealing for decades agreed to admit to wrongdoing in FX trading and pay big fines to regulators.  In the process, they had to open up closed doors about how this enormous marketplace has worked and how banks colluded to make it unfair to other participants (smaller counter-parties and dealers, corporate and institutional clients, etc.).  The big banks paid up hundreds of millions in fines, but their dominance in the trillion-dollar market continues.

In mid-June, JPMorgan Chase's heralded and consummate deal-maker Jimmy Lee died suddenly, and bankers and corporate clients around the country paid tribute to him. Some attribute the birth of the syndicated-loan market to him.  He didn't invent this financing market, but he is likely responsible for its boom in the 1990's. He was instrumental in turning it into a major financing machine, a viable, reliable funding vehicle for large companies that all of a sudden became just as important to the corporate treasurer and CFO as the corporate bond, high-yield and equity markets.

When companies needed billions and wanted it quickly, a bank syndicate could step up more quickly, more efficiently and more assuredly than if companies wanted to finance themselves via equities or bonds. At JPMorgan, the syndication machine was big, visible, effective, responsive, and successful. In due course, it became efficient, aggressive and comfortable with stomach-turning deal sizes. If a corporate CEO in the midst of an acquisition wanted confidence over a weekend that it could finance a bid in the billions, Lee's syndication army could arrange the financing by Sunday evening.

In turn, Lee made syndicate lending the centerpiece of investment banking activity and, in many ways, turned the organization of an investment bank upside down. At traditional investment banks, M&A and equity and bond underwriting are core activities.  At JPMorgan Chase (and later at other big banks), the syndication unit was the heart and core, around which competence in M&A, equities and bonds was built.

He was so successful in the machine he built that by the early 2000's,  investment banks that were once indifferent to corporate lending (Goldman Sachs, Morgan Stanley, e.g.) quickly developed lending operations to compete for and retain traditional investment-banking business (M&A, equities and bonds).

Mid-year always means a flood of new graduates, including MBA's, many of which continue to march into lucrative positions in finance, trading, investing and research.  In 2015, some big banks, knowing they now compete for talent that is distracted by more interesting or less-taxing opportunities in other industries, decided to raise base salaries for new analysts and some associates. This is an industry, remember, where if Goldman Sachs makes a human-resource move (hiring numbers, compensation levels, incentive payments, etc.), the rest of the industry watches and tries to follow, even if sometimes they lack the financial resources to do so. Hence, a bump-up base for many in entry positions.

Work-life issues, however, continue to surface.  Banks don't manage them well, even after they announce serially new initiatives and new rules to ease the physical toil of working on Wall Street. (Underneath the finance headlines this year, two analysts jumped to their deaths in apparent suicides after having reported to others how they suffered from working long hours.)

Is a crisis around the corner? That's the question that must be asked. Some will say the probability is low.  Some pinpoint signals (over-valued markets, under-capitalized banks, too much exuberance in new ventures, e.g.) and swear that a doomsday is on the horizon.

Others will say, despite probabilities, the more important question is whether the financial system (with new structures and new regulation and oversight) can exploit the millions of data points to detect tell-tale signs of the next crisis better and whether the system is better prepared for anything that can happen.

Tracy Williams

See also:

CFN:  Banks and the FX Scandal, 2014
CFN:  Banks and the Libor Crisis, 2012
CFN:  Verizon Rescues AOL, 2015
CFN:  Do Banks Have Enough Capital? 2015