Monday, December 28, 2015

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

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