For a moment, at least, let's disregard the uncertainty and apparent confusion running rampant in capital markets in the early days of January. The outlook is still not as bleak as it sometimes feels.
Compensation, location, prestige and functional titles might have ruled years ago. Today, MBA graduates will likely have realistic, reasonable criteria. Compensation and location still count for much, but lifestyle, job flexibility, job function, job growth, career horizon, diversity, and company culture count for a lot, too. It's easier now for graduates from top schools to turn down offers from Goldman Sachs or Morgan Stanley, if an offer from a smaller, lesser-known organization matches the criteria much better.
Opportunities in investment banking depend on the business environment and macro-economics, but they also depend on the financial institution, the bank that is determined to devote resources, times and talent or the bank that is willing to devote capital (to fund lending and investing) to support an all-out effort.
UBS, for example, announced a year ago it was scaling back in investment banking in the U.S. It decided it couldn't compete against other bulge-bracket firms or reasoned it could never generate appropriate revenues and returns or rise to the top of league tables. It scaled back, but the bank hasn't disappeared from the deal table. It still appears in top-15 rankings in banking fees or deals done.
Opportunities also depend on capital markets or client industries. Banking activity (including equity and debt underwriting and corporate lending) continues to flourish in banking sectors in health care, financial institutions, media and telecommunications.
Across the board, IPO activity is up; improved equity markets kept equity bankers busy in 2014 with new and add-on offerings. Debt lending and underwriting hasn't sagged, as low interest rates encourage new debt and debt refinancings.
As experienced bankers know too well, when lulls in activity occur, banks tend to shut down, shrink or withdraw from certain industry sectors quickly and often without much warning.
The deal announcements, deal statistics and backlog suggest these might be bustling times in investment banking, although they don't hearken back to explosive periods of the mid-2000's or late 1990's. For the moment, banks worry more these days about attracting top-notch talent (at all levels) than they might about deal flow and demand for services.
Boutique Investment Banking
"Boutique" banking is fashionable now, as it has been intermittently for the past 25 years. In the early 1990's, names such as Alex Brown, Hambrecht & Quist, and Montgomery Secruities were fashionable names in boutique banking, which is often described as niche banking for niche industries or for start-up and new companies. Those names disappeared when they were devoured by bigger commercial banks, which wanted to grab the boutiques' expertise, their client lists and top bankers.
Today, Moelis, Weinberg & Perella, and Evercore are top boutique banks. They tend to hire experienced professionals and won't be seen on most MBA campuses. They are thriving and have become legitimate threats to the big banks (in certain specialties and with certain clients). Unless they find ways to survive in the long term (like Lazard, Jefferies, or Greenhill), they are always candidates to be absorbed by large banks trying to fill gaps in talent.
One pattern continues from the 1980's (when Wasserstein Perella was founded by bankers from what was then First Boston). There will always be groups of top bankers ("star" bankers, the media call them) at large firms who decide they can function better and earn more by going out on their own, by starting their own boutiques. Hence, it's not unusual, whether it's 1989 or 2014, for a prominent industry banker at, say, Morgan Stanley or Goldman Sachs to decide to leave the industry, only to re-emerge months or a year later with an announcement forming his or her own boutique with others promising to move over eventually.
When large corporations do well or are confident that revenues and profits will rise in the periods to come, their finance and treasury units must hustle to support growing balance sheets, business expansion and capital needs. Many, of course, hire investment bankers for some strategic advice and market intelligence, but most have in-house finance professionals who coordinate related activity and who must manage the specific funding needs and funding costs of business units.
Larger, more established companies will prefer to ponder financial and corporate strategy and make finance decisions themselves, long before they hire investment bankers to manage the mechanics of a prospective transaction (debt offering, e.g.).
Large companies still growing and expanding and still performing well will always have internal corporate-finance opportunities.
Banks, especially the large ones, the ones that have been labeled "systemically important" enough to impose risk on the financial system if they falter, are stifled by growing capital requirements and limited opportunities to make money from lucrative trading. Many are resorting (or retreating?) to bread-and-butter banking activities: corporate lending, cash management, custody, securities process, e.g. Wells Fargo is a prominent example.
Others like JPMorgan Chase and Citi haven't shredded investment banking prowess, but they have a greater appreciation for the value of corporate banking. Corporate banking often results in more stable revenue streams and more consistent returns on equity. A senior-management team at a major bank may conclude that generating 12% returns on capital year after year with the same reliable corporate clients is a realistic, reachable goal. Generating 10% returns in trading might be impossible, given the current regulatory climate. Over the past four or five years, these banks and others (Wells Fargo and Bank of America, etc.) have re-emphasized their corporate-banking roots and heritage.
Opportunities exist, and MBA graduates will be expected to hit the road to cultivate client activity right away. Many banks, however, have faltered in communicating the story (and important role) of corporate banking well on cmpus or haven't aggressively recruited the best graduates.
M&A is hot right now. Last year was one of the best years (with over $3 trillion in deals recorded globally) since 2007. The leading investment banks were the familiar names: Goldman Sachs, JPMorgan Chase, Bank of America-Merrill, and Morgan Stanley (with significant, notable activity from boutiques). Banks advised on big deals among pharmaceuticals, financial institutions, oil and gas companies, and health-care companies.
Activist shareholders are swarming around companies, preaching to board members about the values of their prospective deals. Large companies, swamped with cash generated from a few years of earnings but too tentative and afraid to make new investments, have once again gained confidence to consider growth and expansion (via acquisitions).
Banks are swamped with deal flow and need a stream of analysts and associates to devote their lives to get deals done within tight deadlines or to help senior bankers present their ideas to company CFO's and CEO's for deals on the table or in concept.
But M&A activity and trends have always fluctuated in frightening ways. Deal flow can reach extraordinary peaks and then, just a quarter later, can fall into an abyss with an eye blink. Banks gear up, ramp up for peak flow and then suddenly shrink, often at the expense of junior professionals.
The best banks always maintain a core of expert bankers, even in the toughest times, always ready to pitch the next transaction or convince a company CEO that the best way out of a rut is a corporate combination or a sale of an important subsidiary.
Private Wealth Management and Asset Management
With strenuous (and stressful?) capital requirements, banks will continue to emphasize businesses that generate smooth income streams and that don't require capital support based on calculations of risk. For strong performance, private banking and asset management depend almost entirely on client activity, client demand for services and investment products, and a bank's ability to attract and hold onto client assets ("stickiness," some call it). If they achieve all of the above for most of the time, banks figure they can generate 12-15% returns.
Such an attractive proposition means banks (from Goldman Sachs to UBS) want to keep the expansion going in these areas (domestically and abroad) and have implemented formal recruiting programs to attract top talent and MBA graduates from brand-name schools.
These areas offer a different kind of experience in banking. But even new bankers will be pressured to attract new clients and more client assets--year after year.
Financial regulation and the enormous reams of new laws and new rules mean enormous amounts of information-gathering, reporting, compliance, and follow-up. Banks, broker/dealers and even funds and insurance companies (including those like AIG designated as "systemically important") don't want to be perceived or seen as shrugging off rules. It's a new day, and while banks complain (and even work to roll back rules changes in the way some did in late 2014 with Dodd-Frank and derivatives regulation), they all take compliance seriously now.
They now boast about the vigorous commitment they have made to comply with rules and reporting deadlines. (Steven A. Cohen's newly organized hedge fund, Point72, the descendant of SAC Capital, boasts of having hired former SEC officials to ensure the new fund, Third Point all hints of insider trading.)
This also means significant opportunities in regulatory compliance at financial institutions, which face internal challenges of trying to boost the reputation and attractiveness of what had been one of the least glamorous (and sometimes one of the most under-paid) roles.
Few, if any, financial institutions appear on the campuses of top business schools to recruit hard for roles in compliance. They don't bother and often prefer to recruit lawyers, accountants, or those who've worked in similar positions at other banks. But the door is wide open for those raise their hands and for those who want to use the experience as a platform to understand the many activities of a bank.
Most agree, however, that no matter how important the role is and no matter how much a bank is willing to support the role and pay handsome compensation, it's often hard to transfer from compliance roles into the trenches of real business activity (banking, investing, lending, trading and research).
There actually was a time when major financial institutions like JPMorgan and Morgan Stanley invested some of their capital in new ventures. Related risks, new regulation and capital requirements discourage that.
Venture capital, while just as lucrative and prominent as ever, is a closed business activity. We know who the leading firms are, know where they reside, and know the deals they do. But there's no easy way to be recruited. In recent years, many of the large and influential firms in venture capital were started by entrepreneurs themselves who retired from starting and running businesses after they amassed extraordinary wealth. Venture-capital firms have sprouted in Silicon Valley and even in areas a red-eye jet ride from San Francisco (New York, e.g.).
Many of the founders and leaders of venture firms are MBA graduates themselves (from such schools as Stanford, Wharton and Columbia and Consortium schools such as NYU-Stern, Dartmouth-Tuck and others). Venture-capital firms don't broadcast employment opportunities widely and loudly. Their approach is hush-hush, often a tap on the shoulder. Theirs is a stealth, network-oriented form of recruiting.
The firms are flush with capital, ready to fund new companies, as angel investors or in rounds two, three or four. They need analytical and research support, not to mention senior, experienced professionals with relationships and keen understanding of new products and markets. How to ferret and unearth any opportunity to get through the door of Kleiner Perkins or some of the other new firms (Andreessen Horowitz, e.g.) has always been a daunting challenge for business-school graduates who want to work in this sector.
Private equity is not experiencing a boom. Many firms are digging out from debilitating investments from the recession years, which means restructuring portfolio companies is taking longer than expected and taking them away from hunting down new investments.
Other firms are preparing for better times ahead with improved prospects in the economy. The industry is much about value investing--finding opportunities (established companies that are under-valued or are under-appreciated or require management overhaul) and turning them into growth stories over a 5-7-year period.
Private-equity firms exist in niches, cover most industries, and are big and small. Many hire MBA graduates, but not as formally and predictably as large financial institutions. While some of these firms are mired in solving problems in the past, many are hopeful about the years to come and will likely reach out for professional support in certain pockets.
All is sour with hedge funds. Yes, some like Cohen's new (family) fund reports healthy returns in 2014, at least from the bits and pieces of information that trickle out about its performance. Activist funds, the funds that chase down corporate boards and shareholders to force them to revamp business strategy or restructure their balance sheets, did well. In aggregate, however, the track record for investing in hedge funds the past couple of years is dismal (2-3% gains when overall equity markets have done much better).
It's not that funds are losing money; it's the scorn they receive (and deserve?) for requiring investors to pay fees on top of fees (management fees, performance-sharing fees, etc.) for mediocre results. While many funds have shut down in 2013-14, opportunities will exist at the best-performing funds and at long-established funds.
Hedge funds and private-equity firms in the past decade have resorted to a round-about way of recruiting. They tend to permit bulge-bracket banks to dominate campus recruiting and hire and train some of the best graduates. After those recruits (working as analysts or MBA associates) have gone through training and have mastered spreadsheets, financial analysis, and market analysis (about 2-3 years), they sweep through surreptitiously and pluck analysts and associates from Barclays, UBS, Goldman Sachs, RBC Capital, Morgan Stanley, etc. On Wall Street, it's a rite of passage for analysts to get that first call from a head-hunter representing a fund, less than a year on the job.
They usually promise a swifter rise up the promotion ladder, better compensation, a different kind of experience, and sometimes a more sane lifestyle.
For those interested in bond trading (whether at banks, dealers or funds), these might be the worst of times. A number of factors are to blame. First, banks haven't made money from fixed-income activities for the past year or two for several reasons (low activity, lack of the right kind of interest-rate volatility, regulatory restrictions on trading, and the threat of low margins from the oncoming onslaught of electronic dealing).
Second, banks and the entire investing populace had been preparing for an upsurge of interest rates, which hasn't occurred yet, but which was supposed to cause a nightmare of losses for those who dared to hold substantial fixed-income securities on the balance sheet.
Third, experts and experienced traders know fixed-income markets are transitioning into electronic trading in the way equity trading has led the way the past decade. For traders, high margins from arranging client trades will disappear; for banks, unless the bond is exotic, complex or unexplainable, they won't need to populate trading desks with armies of humans (brokers and traders). If the bonds are exotic and unexplainable and if the institution is regulated, regulators will frown on the activity and impose tough capital requirements. And the public will declare banks are using deposits to finance the trading of those unexplainable assets.
MBA graduates interested in fixed-income sectors should be forewarned.
Financial institutions large and small have expanded their risk-management units steadily in the past five years. Risk management has marched to the front row of importance at major financial institutions.
It now encompasses far more than it used to. Decades ago, risk management was mostly about corporate-lending and trading risks. Today, risk management is enmeshed in every activity in the financial institution and now encompasses regulation, reputation, compliance and financial management.
Most banks are still tweaking the risk-management model (how to structure the risk organization, where to put personnel, how to define roles and authorities, and how to capture all forms of risk from credit risk to market risk, liquidity risk, documentaition risk and operations risk, etc.).
While they mold the right model, many banks struggle with determining how to attract competent people into risk-management roles, how to recruit talented entry-level professionals, and how to design a promising career path.
When financial-institution recruiters promote themselves in lavish ways on campus, they are groping to figure out how to sell an MBA student in finance on an exciting, challenging role in risk management. Some banks won't try to recruit at top business schools. Other banks recruit for risk management internally. Most banks try to convince strong performers on the business lines to transfer into risk management (and many do).
Notwithstanding recruiting issues and challenges, its visibility and importance grow year after year; for recent MBA graduates, it could be the best way to crack the front doors at some prominent institutions without having to settle for an under-cover position far from the front lines.
Capital markets in all asset classes (equities, corporate bonds, government bonds, municipal bonds, commodities, options, derivatives, swaps and currencies) are headed in the direction of electronic markets. Trades are executed where computers communicate with each other while humans preside on the sidelines. They observe to make sure algorithms run correctly, instructions are input without error, and all market scenarios are covered or hedged.
Many argue there is room for humans on the trading floor (for odd-lot activity, for non-standard trades, for new products, and even for clients who stubbornly prefer to interact with a human voice). But the numbers won't stack up.
The guiding hand of humans won't disappear. Professionals with keen understanding of markets, regulation, trading rules, and risks need to be present to operate (and implement software for) electronic markets, electronic exchanges, electronic trading schemes, and electronic match-making systems. (These include, for example, such firms as Markit, ICE, Nasdaq, TradeWeb, Knight Capital, and Liquidnet.)
Therein lie opportunities for recent graduates who understand markets and financial products and who understand what can happen when markets collapse, markets become inactive, markets are crushed by pressures from participants, and market pricing spirals out of control. Opportunities exist for those who will know what to do in these scenarios.
The diversity picture is better than it was immediately after the crisis, when diversity initiatives were shelved while banks struggled to survive, literally. Financial institutions, across the board, have renewed commitments to hire under-represented minorities and women. Even venture-capital and private-equity firms, which have had atrocious track records, have promised they will do better.
However, some of the same issues continue to plague most of them. Banks and investment firms recruit, attract and hire minorities and women and pave a way for them to work in high-profile, challenging tracks.
But they can't keep them (in significant numbers). Many opt out, and many become discouraged by the suffocating dog-eat-dog culture. Others are disappointed that financial institutions fail to fulfill promises related to development and work-life balance (issues that all younger employees, not just minorities and women, have with big banks).
Many don't see mentors (senior managers) like themselves or can't find sponsors who can help them get to the next steps. Some cling and thrive. Others depart and go where they'll be more comfortable.
Meanwhile, banks and institutions worry there is no pipeline to ensure the ranks are diverse among senior traders and bankers and sector heads. So they continue recruiting efforts to "maintain the numbers" and replenish the desks and cubicles vacated by others.
Transformation, regulation, electronic trading and waiting for interest rates to turn upward (after markets ponder the meaning of sinking oil prices). That defines the opening days of 2015. Somewhere around and in between, there really are scattered opportunities.
CFN: Work-life Balance in Banking, 2014
CFN: Merger Mania: Boom Times Ahead? 2013
CFN: Why Greg Smith Left Goldman, 2013
CFN: Today's Bulge Brackets, 2013
CFN: Are MBA's Turned Off to Investment Banking? 2012
CFN: Investment Banking vs. Private Banking, 2009
CFN: What About Corporate Banking? 2010
CFN: Banking Boutiques: Pros and Cons, 2009
CFN: Is Investment Banking Still Hot? 2011
CFN: Vista's Smith Found a Way, 2014
CFN: Horowitz and His Latest Venture, 2014