Friday, May 30, 2014

Finance MBA's Face a Complex Landscape

Michigan's Ross (above) and 18 other Consortium schools welcome 405 new MBA's
In a week or two, over 400 new MBA students will journey to Austin, Tex. for the Consortium's 48th annual Orientation Program. Like other OP sessions, they will meet each other and share cocktail, networking moments with business-school deans and large throngs of corporate representatives. They will attend special sessions related to industries and job functions. They will discuss hopes and expectations of a current generation of MBA graduates.

For this moment, they'll celebrate reaching a fork in the road that opens up to bright opportunities. And for right now, they'll dismiss worrying about the burden of coursework they confront in the fall.  Nineteen Consortium institutions, all prominent business schools with rigorous programs, will welcome them in Austin and then escort them back to the MBA experience in the fall from California to New Hampshire.

Of the 405 Consortium students of 2014, about 100 have indicated an interest in finance or financial services, hoping to land jobs in a range of positions from M&A investment banking to real-estate private equity.  Many in this group endured the grueling times of the financial crisis.  Some were undergraduates during those years (2008-2010) trying to make sense of a financial system on the verge of collapse. They must have asked themselves:  Could they envision themselves as role players in the industry in years to come?

The landscape has changed in many ways, and most new MBA's know that. It's complex. Financial institutions, encountering limited revenue opportunities and mountains of regulation, struggle to figure out, every day, what they want to be and how they are going to get there.  They ask themselves:  With thousands of rules to adhere to, with strapped balance sheets, with enormous requirements to maintain large capital cushions, and with none of the chances as before to do just about what they wished, how will they generate revenues and sufficient returns on capital?

If it's complex for financial institutions (including banks, broker/dealers, boutique investment banks, insurance companies, hedge funds, asset managers, and private-equity firms), then it might be overwhelming for MBA students in finance.

These times, nonetheless, are not the terrifying months of the financial crisis and recession.  These same institutions have cleaned up their balance sheets, siphoned off distressed assets, shut down non-performing operations, injected new capital, and sliced off much of what was proprietary trading. They have also rationalized every single business line under the CEO and continue to hunt desperately for ways to generate new forms of revenue to help find new earnings for all the capital they must now maintain.

This new class of MBA's in finance will have abundant opportunities to explore, spread out across many functions and regions. But gone are the days when a Consortium grad could study corporate finance, do an internship at Morgan Stanley, and then hop on board at Merrill Lynch and spend the next 20 years rising to the top negotiating with clients while doing deals.

What will this class encounter?

1.  Investment banking has been a long-time favorite destination of many finance MBA's from top schools.  The industry is in flux. Challenged by new regulation after having  been bowled over in the aftermath of the crisis, some banks have withdrawn from full-scale emphasis (UBS, Barclays, e.g.)  Others have decided to re-deploy resources, capital and talent toward commercial and corporate banking (Wells Fargo, e.g.).

The big bulge-brackets (JPMorgan, Goldman Sachs and Morgan Stanley) have doubled down, will continue to hire large numbers, and are prepared to bang heads with each other chasing down many of the same headline deals, but willing to work arm in arm in transactions if they must.  Big banks will cross the country in search of new MBA associate, as long as the deal environment is brisk or predictable.  

2.  But the boutique banks continue to make their marks.  Big banks aren't threatened by them, although they certainly squeeze themselves into numerous advisory mandates. The roster of boutiques changes from time to time. The favorites these days are Lazard, Evercore, Greenhill, Moelis, Weinberg Perella, Soundview, and a handful of other small, but still relevant shops (M.R. Beal, Williams Capital, e.g.). 

They look for MBA talent, but their relationships with top schools are often limited and fleeting. Think in terms of founding partners focusing primarily on the few schools they attended when recruiting season rolls around. They covet MBA's from top schools, but won't jet across the country recruiting them.

2. Banks are facing a debt and commodities crisis this year--not from having highly leveraged balance sheets, but in managing debt-product units that are struggling to be profitable.  Debt sales & trading and many activities in the realm of what the industry now calls "FICC" (fixed-income, currencies, and commodities) are ransacked by regulation, low interest rates, and low profit margins. An MBA interested trading bonds on a debt is headed toward a dead end. 

M&A units are smirking these days.  It's as if they've found gold in their back rooms. What they've found are company CEO's and CFO's now confident enough to contemplate a strategic acquisition. They've found companies now willing to spend cash they wouldn't touch after the haunting, crushing blows of the crisis. M&A activity, however, fluctuates and swerves, and all MBA graduates should be forewarned.  For new MBA's, this might be the optimal time to secure a spot at a major bank or boutique.

3.  Few MBA's in finance head off to business school with an ambition of becoming legal, regulatory and compliance officers at major banks. And financial institutions have done a poor job in explaining the role or convincing students to consider these now visible, important functions.  However, banks everywhere are hustling to fill roles. They are tossing millions into budgets to build a long-term infrastructure to manage every aspect of compliance--from data accumulation, regulatory reporting, regulatory compliance, capital allocation, and risk-capital computations.  The functions exist far from the front lines of client banking, yet are getting maximum attention from senior managers and boards. 

4. New MBA's, especially those interested in proprietary trading, investments, and equity research, will aim for hedge funds, private equity, and venture capital at firms big and small.  But they'll learn quickly after they attend the first corporate-recruiting reception that the road to Blackstone, Carlyle, Citadel, Bridgewater, or Sequoia is far more treacherous than the road to Goldman Sachs or JPMorgan.

Opportunities will exist, because these are the best of times for venture-capital firms and favorable times in private equity. They all need finance associates to crunch numbers, run models, value companies, perform research and present conclusive findings. Every deal requires these exercises.

Meanwhile, hedge funds have stumbled in clumsy ways the past year or two. Some large ones have closed.  Hedge funds will still persist and will always be happy homes for market traders in all asset classes who insist they can out-perform broad markets.  They'll welcome MBA talent that in years past might have spent early years in apprentice roles on equity, debt, and emerging-markets desks at big banks.

5.  The corporate-finance function at non-financial institutions thrives, especially in a post-recovery setting where companies are finally confident about deploying cash that has sat dormant for years. They appear ready to use idle cash to expand, grow, and perhaps acquire a company or two.

In the past, pursuing a career in financial management or corporate finance at an industrial company or Fortune 500 corporation wasn't a preferred route for some MBA's at top schools.  MBA graduates chased the fanciful, more lucrative opportunities on Wall Street.  But after late-2000's turmoil, working as a financial analyst at places like IBM, Eli Lily or Pepsico was more attractive and offered a more stable, more sane existence.

Furthermore, the same companies have become shrewd and begun to bring more of its corporate-finance and corporate-strategy work in-house before they reach out to investment bankers to do some of the same.

5. The asset-management industry also presented itself as an oasis of stability, predictable revenue streams, and growth.  The industry welcomed MBA's and has successfully recruited them over the past decade.  Yet even this sector must fend off challenges.

Investors have low-cost options now, especially after the explosive growth of ETF's.  Some investors and experts question the value of hiring advisers to manage funds to try to beat market performance.  Why pay high fees when investors can push assets into a low-cost ETF's or similar portfolios that match the market? Why pay high fees when it is possible that managers' performance will fall shy of market returns, as they have done at many hedge funds the past year or two?

Asset managers won't concede.  They work hard to convince investors (individuals and institutions) that they have analytical tools to out-perform market indices and to reallocate funds quickly among different asset classes when market conditions encourage a reshuffling.

6.  Financial institutions that once thought they could escape the grasp of regulation must also adapt and comply with new requirements. Federal regulators, for example, can now parachute in, tap the front doors of non-bank institutions that had little to do with Dodd-Frank or Basel III, and wrap them under new rules.  Insurance companies like Prudential and AIG have been designated "systemically important financial institutions," or "SIFI's," institutions that have roles and market positions too large in financial markets not to be supervised like big banks.

New MBA's shouldn't fret.  The environment is not discouraging; it's merely complex, evolving. The industry harbors many forces, including forces that want substantial regulation and oversight and forces (applied by banks and hedge funds, for the most part) that don't want to be strangled too much in their desperate efforts to maintain earnings and returns.  The jockeying, pushing and pulling have been going on the past few years and will continue.

In an improved business environment, there's still room for the new deal, new client, new financial model, new investment, new discussion to acquire or merge or new financing to support new product lines--all promising signs for a new MBA in finance.

Tracy Williams

See also:

CFN: Consortium OP, Getting Psyched, 2012

CFN: Consortium OP, Alumni are Welcome, 2011
CFN:  Consortium OP, June is OP Time, 2010
CFN:  Finance, Still a Popular Destination, 2014

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