Wall Street Irina Zilbergleyt My Background Graduated with a Finance Major December 2002 Merrill Lynch Investment Banking Analyst Chicago Allied Capital Private Equity Associate Oct 2004 Present Chicago and New York 2 Why Work in the World of Wall Street Challenge Responsibility Be in a position to provide advice and guidance to people whom if you worked in a corporate setting you would probably have no exposure to Compensation 2006 Investment Banking Average First Year Compensation 60K salary 70K bonus 130K Opportunities after Investment Banking Private Equity Venture Capital Hedge Funds Corporate Finance Business School Networking Direct Promotion to Associate 3 Components of Wall Street Sell side Firms Buy side Firms Agents or Middle Man Principals Sell investment banking services Acquisition Advisory Capital Markets IPOs Trading Services Stock Research Morgan Stanley Goldman Sachs Merrill Lynch Example Merrill Lynch advised P G on their acquisition of Gillette in 2005 Those who buy the services that the sell side is offering money managers including Mutual Funds Private Equity Firms Hedge Funds Fidelity Putnam KKR Carlyle Group Blackstone Citadel Example Fidelity asking Merrill Lynch to sell their Microsoft Stock 4 4 Sell Side Buy Side Sell Side INVESTMENT INVESTMENTBANKING BANKING CAPITAL CAPITALMARKETS MARKETS SALES SALES TRADING TRADING RESEARCH RESEARCH strategic advisory underwrite and place securities CORPS Abbott GE 5 Sell Side INVESTMENT INVESTMENTBANKING BANKING CAPITAL CAPITALMARKETS MARKETS SALES SALES TRADING TRADING RESEARCH RESEARCH strategic advisory underwrite and place securities CORPS Abbott GE sell equity and debt securities provide research MUTUAL MUTUALFUNDS FUNDS Buy Side Buy Side in ve st di re ct ly 6 Sell Side sell equity and debt securities provide research financial planning INDIVIDUAL INDIVIDUAL INVESTORS INVESTORS INVESTMENT INVESTMENTBANKING BANKING CAPITAL CAPITALMARKETS MARKETS SALES SALES TRADING TRADING RESEARCH RESEARCH strategic advisory underwrite and place securities sell equity and debt securities provide research MUTUAL MUTUALFUNDS FUNDS Buy Side Buy Side CORPS Abbott GE in ve st di re c tly 7 Sell Side INVESTMENT INVESTMENTBANKING BANKING CAPITAL CAPITALMARKETS MARKETS SALES SALES TRADING TRADING RESEARCH RESEARCH sell equity and debt securities provide research financial planning sell equity and debt securities provide research strategic advisory underwrite and place securities CORPS Abbott GE MUTUAL MUTUALFUNDS FUNDS Buy Side Buy Side in ve st d in ve s td ire ct ly INDIVIDUAL INDIVIDUAL INVESTORS INVESTORS invest indirectly by buying mutual funds insurance policies etc ire ct ly institutions 8 Money Flow Institutional Investors Individual Investors Insurance Companies Pension Funds College Endowments High Net Worth Individuals Investment Types Cash Equivalents Buy side Firms Debt Securities Stocks Mutual Funds Real Estate Private Assets Hedge Funds Other Metal Oil Private Equity Publicly Traded Investments Privately Traded Investments 9 Private Equity Fund Private Equity Fund is an investment company that provides equity capital in exchange for an ownership position in a private company not traded on a public stock market post transaction Venture Capital invest in start ups and early stage deals Technology Leverage Buyout Funds invest in buyouts usually of mature companies Allied Capital Leverage Buyout LBO is the process of acquiring a company using a significant amount of debt which helps increase the acquirer s equity return 10 Leverage Buyout Example House Leverage Buyout LBO Pre Deal Research Hire a Broker or look at listings attend open houses Hire investment bankers who help find potential opportunities or do your own search Visit companies meet management Deal Related Work Investigation Due Diligence Hire inspector attorney title company Perform Financial Legal Accounting and Insurance Due Diligence Usually hire outside parties 20 25 40 Mortgage Payment Interest Payment Varies 3 7 years Payment 1 Down payment 2 Borrow From Bank Hold Period 11 Leverage Buyout Ultimate Goal Buy low sell high An equity investor expects that the Company will grow in value How does Private Equity Firm create value Cost cutting outsource to Asia Selecting operating executives and boards of directors Industry consolidation or acquisition strategies 12 Power of Leverage Why borrow capital debt to fund buyout transaction Cash Purchase LBO Purchase Price Today 100 million 100 million Equity s Invested 100 million 30 million 30 Selling Price 1 year 125 million 125 million 25 million 25 million 25 profit 100 invested amount 25 25 profit 30 invested amount 83 Transaction Structure later Profit Simple Return Calc 13 Private Equity Firm Structure General General Partners partners GPs The private equity firm employees that manage the firm s investing activities Receive a 2 management fee and 20 of profit Managing Directors MD s Principals Limited partners LPs The pension funds college endowments etc that provide capital to the private equity firms but do not actively manage the investments Receive their initial investment and 80 of profit Recent MBA s often with related experience Vice Presidents Undergrads with 2 3 years experience as Investment Bankers Management Consultants Big Four Accountants Back Office Accounting Treasury etc Operating Partners Former CEOs COO s CFO s and management consultants Sr Associates Associates 14 Deal Process Allied acquisition of Meineke Development Meineke hired investment bankers to help them sell the Company Investment Bankers put together a book describing the business Offering Memorandum and submitted it to Allied and other interested parties Allied Internal Process Financial Analysis of Historical information Determine the appropriate Capital Structure How much debt should the company hold Hire Third Party providers to perform additional investigations Allied performed financial analysis to determine the value of the Company and submitted it to Meineke through Investment Bankers Accounting Allied met Meineke management Background Checks of Management Investment Bankers compared all the offers and decided that Allied s offer was the best Present the deal to Allied s internal Investment Committee for approval Deal Execution Work with Lawyers to prepare acquisition documents debt documents management employment agreements Finally work with Allied s treasury department to make sure that the money wires go to the right