Sunday, February 27, 2011

Sympathy for the Devil

Please allow me to introduce myself
I'm a man of wealth and taste
I've been around for a long, long year
Stole many a man's soul and faith


Pleased to meet you
Hope you guess my name
But what's puzzling you
Is the nature of my game

— The Rolling Stones, "Sympathy for the Devil"

I recently received an inquiry from an unnamed Professor at an anonymous law school, Dear and Long-Suffering Readers, who requested I grant his charges an interview or appearance. Demurring on the latter, since the effects of surgery to remove horns, tail, and cloven hooves have not completely healed, I elected to do the former. What can I say? After Charlie Green plied me with peyote and Balinese dancing girls, I appear to have gone all soft in the head, and am granting interviews left and right. I worry for my long-term reputation.

Anyway, Herr Professor Doktor steered his chicks toward my most recent post but two, on the vagaries and trials of travel as one of the Übermenschen, and suggested they ask me questions to their little hearts' content. HPD collected and transmitted said queries, which I have represented here, in lightly reordered and edited form, along with my discursive replies. Perhaps these nuggets will answer one or two unresolved questions in your own befuddled brains, or even while away some dull hours of a Sunday evening. I wish you joy of them.

What else were you gonna do tonight? Watch the Oscars?

* * *

Q: Do you hate your life, and if you do, do you simultaneously realize how good you have it?

A: No, I don't hate my life. Compared to most people, I know I have it pretty sweet. Could it be better? Of course. Is my job all fun and games? No, but overall I would not trade it for any other means of making a living I am aware of. A cushy retirement, on the other hand...

Q: What percentage of your job/income is built on intelligence, and what percentage of your job/income is built on bullshit?

A: Your question appears to presume that intelligence and bullshit are mutually exclusive. That has not been my experience in the real world at all. There is such a staggering quantity of bullshit floating around in the spheres of commerce, culture, and politics, that I find the occasional example of intelligent bullshit to be a pleasure and a relief. I pride myself on trying to increase its stock in the world, for others' entertainment and amusement. This applies to work, as well, where I would estimate the ratio to be 75%/50%.

Q: If your clients are constantly owning you bankers, when do they have time to own their lawyers?

A: Clients appear to have a practically unlimited capacity to own (or feel they own) their professional advisors. It's almost magical. The fact that one owns me does not impinge on his ability to own his lawyer too. On the other hand, bankers like me typically only swoop in for periods of limited duration, usually in connection with a transaction, so a client really only rents me. His lawyers, on the other hand, he owns outright in perpetuity: lock, stock, and barrel.

Q: Of the investment bankers you've worked with who are also attorneys, how do they add typically add value, if any, by virtue of having a legal education?

A: First of all, you can't bank and practice law at the same time. Regulators tend to frown on such things. However, bankers who have legal training and who have practiced law before can be quite effective in certain capacities. A trained mergers and acquisitions lawyer tends to be more technically proficient at M&A, and a trained securities lawyer can be more effective in arcane areas like structured finance than your average non-lawyer banker. But technical proficiency alone is not enough. Among other things, you need to be a good salesman. In my experience not all lawyers have that personality or skill. Those who do, and who can make the transition to a business predicated on eating what you kill, rather than slaving away at a sinecure, tend to do very well.

* * *

Q: Since you are apparently dissatisfied with the efficiency of your chosen line of work, what suggestions would you have for improving the efficiency?
– and –
Q: Would you say this seemingly inefficient client relationship model is where most of the “fat” is in investment banks, or some other traditional way of doing business?

A: I am not sure I agree with your premise that a client service business can be "efficient." There is a lot of sucking up and relationship building to do with my clients, in addition to actual deals, and sucking up in my experience is relatively time-inelastic. There is much wasted time, and many false starts, but those come with the territory of any business predicated on large, intermittent transactions. Like the Army, investment bankers do a lot of hurry-up-and-wait.

Unlike the Army and many other businesses, however, there usually isn't an enormous amount of bureaucratic fat or organizational sclerosis in an investment bank. We tend to recreate and retool ourselves too often in pursuit of the almighty buck to let much moss grow. When it does, however, it tends to happen at the biggest universal banks. Citigroup is perhaps the poster child for what happens when bureaucracy and inertia are allowed to take over an investment bank. It isn't pretty.

Q: You focus on the "pressing the flesh" aspect of your job mostly in this post. Is this what you spend most of your time at work doing, or is there another aspect of your job that you spend more time on?

A: It's important to understand just exactly what I mean in this regard. I do spend a great deal of my time with clients, traveling to them, and working on deals in their presence. But I do comparatively little of the traditional client entertainment—wining and dining, golf outings, $50,000 "bar" tabs at Scores—that you might think I do. In fact, I would guesstimate that investment bankers on average do less of this than many other professionals.

However, we do spend a lot of face time with clients both selling and doing deals, because when the future of your company, your career, and your net worth is on the line—as it often is in M&A deals and major capital raisings—the client justifiably wants to see the whites of his banker's eyes. Very little of what we do can be done solely by conference call or email. The client wants to meet us, look us in the eye, and shake our hand before he puts his fate in our hands. In large part, it is an issue of personal trust.

Q: Given [your heavy travel] schedule, how does a senior level banker adequately digest all of the research and information necessary to provide the client with a researched and informed pitch? It seems as though this working situation does not lend itself to a quality work product.

A: One word: subordinates. Seriously, I and every senior investment banker out there relies heavily on junior bankers for research, facts, financial analysis and modeling, and pitch preparation. We could not do our jobs without them.

But it's important to realize that the value I bring to a potential client or transaction is not entirely dependent on facts or analysis. The secret sauce I bring is my extensive, two-plus-decade knowledge of an industry, its participants, the executives in it, and the dealmaking and capital raising scenarios possible within it. That is network knowledge, which is not limited to shareholder lists, valuation ratios, or CEO resumes. Those are facts. Facts are critical to get right, but facts are, in the most important sense, trivial. What matters more is the mental model you plug those into; it is the network map which spits out the interesting answers.

Along these lines, you may now understand that all the travel I and my senior colleagues do—the deal pitching, the flesh pressing, the occasional schmoozing—is actually critical to maintaining our network knowledge. A client visit isn't a waste of time. It's research.

* * *

Q: You said dealing with Private Equity professionals is not all peaches and cream. What are the typical tensions between Private Equity and Investment Bankers? Is it just two egos constantly butting heads?
– and –
Q: Is it that hard to move into a position where you would be dealing with financial sponsor coverage? Would you want to, and if so, why haven't you?
– and –
Q: How is dealing with private equity firms a curse?

A: Private equity professionals are their own breed. While many of them used to be investment bankers, the nature of their job is quite different. They are tasked with investing other people's money in long-term, illiquid businesses through leveraged buyouts and the like: they are investors, not bankers. Many if not most of them are quite smart, but they are usually nowhere near as smart about any particular subject or industry as they think they are. Like most people who come from a background which they are happy to have escaped, they tend to sneer at people who still work there. They tend to look down upon us lowly investment bankers as a necessary evil.

If they have a dominant personality flaw, it is overweening arrogance. The successful ones are far richer than the successful investment bankers, but, as in banking, the number of truly exceptional and successful private equity professionals is much smaller than they think it is, and usually does not include the person expressing the opinion at the time. As you might be able to tell, I am not the best banker to assign to stroking these individuals' egos, no matter how much money they tend to pay investment banks in fees. I have my own arrogance to contend with, and that is not a good personality trait for a sponsor coverage banker.

Q: Looking back, how many of your clients (as a rough percentage) would you say have a good understanding about corporate finance and what is "best" for their companies in terms of equity versus debt and which types of securities to issue?

A: Technical proficiency with the tools and techniques of corporate finance? About 50%, with most (although not all) of those at larger companies. Strategic competence and vision—i.e., top-flight Chief Executive and Chief Financial Officers who make a real positive difference to the health and future prospects of their firms? Maybe 30%, at best, distributed almost randomly across size, scope, and nature of client. For do not forget: true value is created on the left side of a balance sheet—the assets of a firm, and how they are deployed—not in financial engineering of the right. The latter is important, but it's not where the real shareholder value rubber meets the road.

Q: What are some of the larger factors that you typically look at in a company when deciding what sort of deal to present to them?

A: I may be somewhat unusual in this respect, but I tend to like to listen to what the client thinks and wants before I start offering ideas. Until I learn otherwise, I like to assume that the CEO and CFO know their business, their competitors, and their opportunities and threats better than I do. Perhaps this humility costs me lost deals, but it certainly raises me in most executives' estimation as something more than just one more goddamn investment banker.

* * *

Q: Did your educational background play a significant role in preparing you for the real-world experience, or has that been something that you have had to learn on your own?

A: Not really. My undergraduate degree was in something completely unrelated to business or finance. My MBA provided no more help than to open the door to investment banking: an entrance ticket, or table stakes. You have to be able to communicate in my business, and it's hard (but not completely impossible) to get by without some basic level of numeracy, but I have seen people from all sorts of educational background succeed and fail in this business. A lot of it boils down to sheer grit and determination.

Q: You speak of the negative attributes of the lives of investment bankers, but what positives attributes of the job (if any), other than the money entice someone to remain in such a high-paced and high-pressured field?
– and –
Q: You tell what you thought your career would be like and what it is actually like. Are you disappointed at all? Would you change anything about your career?
– and –
Q: If were feasible for you to start over, would you choose another career? If so, what?

A: Let me tell you something: unless you're raking in Lloyd-Blankfein-level bucks, the money just isn't enough for what I do. Especially when you try to keep up with the Blankfeins and the Schwarzmans in a crazy burg like Manhattan. But that's my choice; I do not expect or deserve any sympathy on that account.

More importantly, money is not the only reason I have stayed in investment banking for over 20 years. The job is challenging, intellectually stimulating, and often a sheer blast. It's fun to work balls to the wall, day and night, for weeks on a big deal and see it hit the tape on Monday morning. It's fun to yell and scream at some numbnuts across the table at a negotiating session. It's fun to think up a multi-billion dollar transaction, initiate it, and see it to conclusion. And, notwithstanding what I said before, it's fun to fly home first class from Asia, swilling vodka tonics and watching Japanese films on DVD for 20 hours. My job can be a goddamn hoot.

Of course, it hasn't all been peaches and cream. If I could wish for one thing in my career, it would be for a few more big deals to have broken my way. On such serendipities careers—and true fortunes—are made. But I can't complain. It's been a good ride, and it's not over yet. If I started something new, it wouldn't be to make money. Maybe blogging...

* * *

Okay, kiddies. That's all for now. Happy lawyering, and if you meet me on the street one day, I suggest you tip your hat.

So if you meet me
Have some courtesy
Have some sympathy, have some taste
Use all your well-learned politesse
Or I'll lay your soul to waste, mmm yeah

© 2011 The Epicurean Dealmaker. All rights reserved.