Show Me the Money

“Money changes everything.”

— Some guy, probably without any money

Andrew Ross Sorkin, access journalist extraordinaire and alleged shill for the Great and Good,¹ put up a sensible op ed this morning to which I thought I would contribute a few brief supporting remarks. It seems Mr. Sorkin has taken somewhat of a shine to Antonio Weiss, a successful Lazard investment banker whom the current Administration has advanced as its candidate for under secretary of the Treasury for domestic finance, and he has been defending this paragon of sharp-dressed competence against detractors great and small.

Today’s fresh character assassination outrage comes from the capitalist shills [sic] at the AFL-CIO, who have apparently addressed a letter to the boards of several Wall Street banks which takes umbrage at the policy, to be enjoyed by Mr. Weiss among others, that employees leaving their firms for government service can take their unvested pay with them:

Why, the letter asked, do banks routinely pay out special compensation packages to executives who leave to take government jobs when those packages were intended to retain them?

“Unless the position of these companies is that this is just a backdoor way to pay off a newly minted government official to act in Wall Street’s private interests rather than the public interest, it is very difficult to see how these policies promote long-term shareholder value,” the letter declared.

Now Mr. Sorkin waxes poetic and high minded in response to this challenge, nattering on primarily about how we should encourage banks and other employers of bright, shiny, would-be technocrats to doff their gilded yokes of service to Mammon and don the austere chains of public service to the rest of us. He assures us that the interlocking web of influence, conventional group think, and apparent if not actual conflict of interest such revolving door practices engender are indeed problematic, but that the net gain of brilliant, accomplished, successful financiers to the government payroll is worth it, and the aforesaid conflicts can be managed with an unburdensome modicum of care and attention. This is all well and good, and even Your Altruistically Challenged Correspondent can recognize the merits of this argument in the chilly chambers of his frozen heart, but it does not go far enough. As a result, Mr. Sorkin has no compelling response to Big Labor’s additional complaint—bless their capitalist-friendly hearts—that such policies represent a squandering of shareholder value. The thrust of his reply seems to be, yes, these policies cost shareholders money, but they probably help attract some additional members of the Best and Brightest who might have a few public-service-inclined bones in their sleekly coiffured bodies, so that must be a non-numerically-quantifiable Good Thing.

This is unnecessarily weak sauce. Let me explain.

* * *

The principal issue seems to be that our intrepid financial journalist and the shrill harridan of special pleading for labor share a common confusion concerning the payments in question to Mr. Weiss and other would-be servants of the public good. For one thing, they are not special payments at all, as in, “Well done you. Here’s a couple of million or so leafy simoleons to stack alongside your Rembrandts and ill gotten bearer bonds in reward for your selflessness. Remember us kindly.” Rather, when Lazard hands Mr. Weiss a check for twenty million smackeroos give or take on his way out the door, it will be releasing into his sweaty hands money he has already earned.

The distinction which Ms Slavkin Corzo draws between this and what Mr. Weiss, e.g., would receive should he instead choose to decamp from the mahogany clad offices of Lazard for some other investment bank—bupkis, plus a swift kick to the seat of the pants—while correct, misses the point. As Your Tireless Explicateur of All Things Compensatory has often explained on this site, investment bankers are commonly paid substantial portions of the mouthwatering bonuses you read about in the form of what is affectionately known in my industry as “funny money” or “toilet paper”; i.e., deferred compensation. Such deferred compensation usually takes the form of restricted stock which vests over some period of time, phantom stock units, stock options, deferred cash payments, or some other such bullshit which replaces freely spendable legal tender with a conditional promise by one’s employer to pay one the money one has earned in the past sometime in the future, depending.

To illustrate a simple case, a modestly successful senior banker might get “paid” $2 million for her moneymaking efforts over the year, but receive only $250,000 of that in the form of biweekly salary, $500,000 in a cash lump sum payable shortly after the turn of the year, and the balance of $1,250,000 in the form of restricted shares of stock in her employer which vest in equal installments over the next three years.² Now, should she be so rash as to decide to jump ship from her existing employer to a competitor before the stock she earned by making money for the firm and its shareholders vests, in almost every case she loses it entirely. Given that most bankers stay with their employers for several years and have this or similar pay regimes inflicted on them every year, you can understand that most senior bankers tend to have quite a substantial “nest egg” of deferred pay locked up in restricted shares that are subject to forfeit in such circumstances. This explains why, unless a banker is desperate to switch employers (or, like most Lehman bankers post crash, has unvested stock which is largely worthless anyway), she is likely to extract a large payment from her new employer which is designed to replace the deferred compensation she is giving up by jumping ship. Sadly for her, such replacement payments are almost always granted in the form of—you guessed it—restricted shares with deferred vesting. So, no matter whether she hops from bank to bank like a Mexican jumping bean or stays with one her entire career, a successful senior banker is likely to have accumulated several if not tens of millions of dollars of deferred pay for her pains. The only way off this treadmill is to die, retire completely from investment banking, or, yes, join the government or some other non-competitive corporate entity.

Seen in this light, the forfeiture of unvested pay which a banker suffers when she leaves for a competitor is not the avoidance of further payment but rather the recapture or clawback of previously earned and allocated compensation. Little Muffy got “paid” those two million clams because she made, let’s say, ten million clams for her firm and its shareholders. Those ten million clams were real, deposited and cleared cash money,³ which paid real creditors and light bills and lap dance club dues and which, after said normal course operating expenses and the government’s rake were creamed off the top, were distributed to shareholders in the form of dividends and/or retained capital. Little Muffy only got $750,000 of that munificence and was forced, mutatis mutandis, to extend the balance as a long term interest free loan to the company.⁴ Sure, the shareholders face eventual dilution when and if Muffy’s shares vest, but until this happens they haven’t really fully paid her for her services. Other things being equal, shareholders should be delighted when bankers resign to work for competitors, because all those unvested share awards are cancelled and they retroactively get all those bankers’ revenue production for below market rates.

Of course, other things often are not equal, and investment banks usually have to replace the departed bankers with new ones, sometimes from other firms for which they have to allocate a lump sum of restricted shares out of treasury that negates all the wonderful savings shareholders got from the resignations. In this respect, deferred banker compensation is sort of like a hot potato: you can pass it around, but somebody is going to have to hold it as long as the banker is working in the business.

* * *

Ergo, paying Mr. Weiss and any other loyal bankers who decamp from our industry’s fetid shores for the sweetness and light of public service (or some other employment which does not try to take money out of the mouths of investment bankers) harms shareholders virtually not at all. It does normally accelerate payment of any unvested shares or other deferred compensation, which eliminates the present value discount of deferral which shareholders otherwise enjoy, but in point of fact all such payments do is give their departing employees the pay the firm has promised them for work already done. It is a greedy and incontinent shareholder who cannot agree to that.

In fact, politically ambitious investment bankers who have a notion they might like to try public service eventually usually negotiate explicit conditions in their employment agreements up front to pay all unvested compensation in just such circumstances, and banks are happy to agree to them. It is no skin off their shareholders’ noses, it renders contractual the right thing to do, which is to pay your employees what you have agreed to pay them, and it may even generate some goodwill or at least friendly feeling in someone who might be leaning over the dais at a future Senate probe or showing up to your Executive Suite with a raft of burly auditors on Christmas Eve. It’s not bribery. It’s just good business. Plus, as Mr. Sorkin avers, it’s probably socially constructive as well.

Only an ungrateful son of a bitch of an investment bank shareholder cannot appreciate that. But I’m being redundant.

Related reading:
Andrew Ross Sorkin, Encouraging Public Service, Through the ‘Revolving Door’ (New York Times DealB%k, December 2, 2014)
Defending the Indefensible (September 22, 2012)
Five Pound Box of Money (February 9, 2009)

¹ Hey, even the Great and Good need positive PR. Besides, notwithstanding populist firebrands’ complaints, it does add materially to the public weal to have someone reporting directly from inside the belly of the Beast, and the Beast needs to give someone access to his belly for that to happen. What, you think John Mack was going to recount his conversations with Tim Geithner during the financial crisis to Yves Smith?
² Don’t get hung up on the bigness (or smallness, bless you Executive Committee members) of these numbers, children. Yes, even modestly successful investment bankers can make what in normal circumstances can rightly appear to be a metric shit-ton of money, but that is not the point of this illustration. Think about all that money tied up in restricted shares which little Muffy Megabucks thinks is rightfully hers for revenues and hopefully profits she already earned for her employer. Can’t do it? Never mind, then, you might as well switch over to BuzzFeed.
³ For clarity and simplicity I am assuming these revenues were really earned funds, like fees from closed M&A transactions or security underwriting. The same argument carries less force when the money a banker “earns” for the firm is, e.g., the calculated and booked net present value profit for a long-term trade which remains at risk for the entire term of the trade, as my colleagues on the sales and trading side of the industry are so fond of claiming.
⁴ The “principal” of which, by the way, is tied to the actual, fluctuating stock price of her employer’s shares, which can work either to her benefit or to her lasting despair (Lehman Brothers). Deferred stock is calculated as a number of shares at the time when compensation is set, not when the shares vest. The holder is exposed to changes in the firm’s stock price over the entire vesting period.

© 2014 The Epicurean Dealmaker. All rights reserved.

Quis Custodiet Ipsos Custodes?

Auguste Rodin, The Age of Bronze, 1876

“If you meet a thief, you may suspect him, by virtue
of your office, to be no true man; and, for such
kind of men, the less you meddle or make with them,
why the more is for your honesty.”

— William Shakespeare, Much Ado About Nothing

Francine McKenna of re: The Auditors recently expressed her dismay that the Big Four accounting firms have continued to be noticeably remiss about engaging reputable accounting firms to audit their own in-house broker dealer arms. The litany Ms McKenna recites of well-known and less-than-well-known failures and deficiencies public accounting firms have been accused of by the PCAOB and the SEC concerning audits of third party broker dealer clients is certainly eye-opening, and it does not give the casual reader much confidence they are sufficiently capable and diligent in this area. However, Ms McKenna’s central concern is a different one: in order to provide legally mandated audits of their own broker dealer units, the Big Four must hire unrelated third party audit firms, and the firms they have hired are tiny, no-name, no-account nobodies.

This, on its face, appears to worry Ms McKenna, and it is reasonable to presume it should worry the rest of us who are less informed about the ins and outs of public accounting than she. However, while I profess absolutely no expertise or credentials in the area of public accounting, I do have an insight into the facts of the matter which may allay some of Ms McKenna’s and her audience’s concerns.

For one thing, as a lawyer who read her post inquired, the curious among you Delightful People might wonder why public accounting firms have broker dealer subsidiaries in the first place. Well, the answer to that—notwithstanding the corporate doublespeak Ms McKenna cites from the firms in question—is quite simple: they like to do investment banking. They like the fees, they like the prestige, and they are often thrown into situations where clients do hire them to provide capital raising or M&A advice. In particular, the Big Four accounting firms have over the years developed a huge and thriving business providing financial due diligence, accounting, and audit services to private equity firms in connection with the latter’s frenetic buying, managing, and selling of companies. Private equity firms, the cognoscenti among you may recall, are paragons of corporate outsourcing, and because they normally consist of three ex-investment bankers, a part-time bookkeeper, and the bookkeeper’s dog, they must employ an army of outside lawyers, consultants, and advisors every time they want to do a deal. Chief among these, of course—save the ineluctable lawyers—are accountants, since virtually none of the private equity professionals are qualified accountants, either (nor can they be bothered to take time from dealmaking to tot up balance sheets, income statements, or other such trivia).¹

Private equity firms are occasionally willing to hire accounting firms as deal advisors in addition to their accounting duties because 1) what the hell, they’re already neck deep in the numbers anyway, 2) they may owe the accounting firms some love for the last ten deals which blew up and for which the PE firm accordingly stiffed them on their accounting fees (“We’ll make it up to you next time”), and 3) they’re normally much cheaper than real investment bankers. So Big Four accounting firm partners are always wheedling and cajoling their financial sponsor clients to let their pet investment bankers “do something,” and sometimes the PE guys let them. By the same token, relationship managers at public accounting firms are always looking to soak their corporate audit clients for additional fees, and the occasional corporate client decides to use his audit firm’s in-house bankers to raise some financing or do some small acquisition or divestiture, often for similar reasons to the PE guys.²

* * *

Now the trick is, of course, that if you decide to offer M&A advice or capital raising services to anyone, including PE firms and corporate clients, the redoubtable SEC requires you by law to register as a broker dealer. This is based on the notion, as I have explained elsewhere, that such services normally entail recommendations concerning the purchase and sale of securities, which is the third rail of financial market regulation in this country. Unfortunately, the law currently makes no distinction between a small band of semi-retired corporate development guys who advise on one or two deals per year and a globe-straddling colossus like Goldman Sachs. The former can just as well operate out of a suitcase. The latter not only advises on billions of dollars of M&A and raises billions of dollars of capital for its institutional clients, but also maintains client accounts, handles funds, and does all sorts of other security-related things for a much broader range of retail and institutional clients. Both are, de jure, “broker dealers,” and both require annual audits.

But if all you do is agency business like advising institutional clients on M&A and raising private debt or equity funds from institutional clients, the types of things which the SEC wants to check you are doing or not doing are relatively few and uncomplicated. For example, they want to know whether you are taking custody of or handling client funds at any point (normally no) or, if you are raising funds from institutional investors, you have controls in place to make sure they are indeed qualified for the deals you offer. They want to make sure you have written policies and procedures and adequate capital to support the business you conduct. But the financial complexity of a pure agency advisory business is very low. You have fee revenue, compensation expense, unreimbursed marketing and T&E expense, and other general and administrative expenses. The balance sheet and retained capital you require to run such a business is minimal. From an auditor’s perspective, it is a pretty darn simple business to audit.

And this, as I understand it, is what the broker dealer units of the Big Four accounting firms do. They are not taking custody of client funds, investing money on behalf of customers, or maintaining large sales and trading platforms which operate across multiple geographies and markets. Notwithstanding the size and complexity of the Big Four, their broker dealer platforms have got to be pretty trivial. Accordingly, it makes sense that they have chosen to hire pissant little audit firms to satisfy their SEC-mandated requirements because 1) their businesses are simple enough to be adequately audited by a couple CPAs operating out of a strip mall and 2) the strip mall CPAs are going to be a hell of a lot cheaper than a larger firm. This latter point is important since it is likely—and Ms McKenna confirms it in the case of PwC—that most of these broker dealer arms are either losing money or making a pittance.

Now if this is not true, and Ernst & Young is running a hedge fund like MF Global inside its broker dealer or selling restricted biotech warrants to unqualified widows and orphans, then obviously none of the above is true or adequate. But if that is the case, I think E&Y and the SEC have a much bigger problem than Ms McKenna has tentatively identified.

Related reading:
Francine McKenna, When Big Four Audit Firms Need an Audit They Choose Cheap (Medium, October 14, 2014)
Francine McKenna, Update: The Shoemaker’s Children… The Big Four And Their Own Broker-Dealers (re: The Auditors, October 27, 2014)
In Loco Parentis (April 13, 2014)

¹ This is in sad contrast, regular readers of these scribblings will recall, to private equity firms’ endemic reluctance to hire M&A advisors like Yours Truly for the combined reasons that 1) PE professionals believe they can do deals themselves and 2) doing deals, unlike accounting, is fun.
² In the UK and Europe, where I understand public accounting firms have a closer historical and statutory advisory relationship to their clients, they actually maintain a relatively robust position in the advisory league tables for mid-sized and smaller deals, unlike their poorer American cousins. When it comes to big public deals, however, investment banks dominate there as they do here.

© 2014 The Epicurean Dealmaker. All rights reserved.

The Privy Counselor

Diego Velasquez, Portrait of Pedro de Barberana, 1631

No! I am not Prince Hamlet, nor was meant to be;
Am an attendant lord, one that will do
To swell a progress, start a scene or two,
Advise the prince; no doubt, an easy tool,
Deferential, glad to be of use,
Politic, cautious, and meticulous;
Full of high sentence, but a bit obtuse;
At times, indeed, almost ridiculous—
Almost, at times, the Fool.

— T.S. Eliot, “The Love Song of J. Alfred Prufrock”

So The Blackstone Group decided yesterday to spin off its advisory business and merge it with Paul Taubman’s advisory “kiosk.” This is just the sort of relatively trivial exercise—the advisory group in question accounted for only 6.4% of Blackstone’s revenue and 2.1% of its economic income—that sets financial journalists’ and Wall Street pundits’ heads to nodding and chins to wagging, based almost entirely on the undeniable fact that Blackstone is big and important in the financial ecosystem.¹ But I must pop my head up from my hidey hole, if only briefly, to take issue with some of the hasty conclusions being drawn here. I promise to withdraw swiftly and silently at the conclusion.

First, I must disagree with William Alden that Blackstone’s actions somehow contradict prevailing wisdom on Wall Street:

For decades, it has been a deeply held belief among many of Wall Street’s giants that a multiplicity of business lines is superior to a more streamlined model.

No, the conventional wisdom on Wall Street is and always has been quite simple: do whatever makes the most money. This is actually quite a sensible, beautiful, adaptable, and flexible business strategy. Sometimes, in fact, it does encourage executives to add business lines to their firms when they believe those businesses will add revenue and profit synergies to their existing business while being profitable in their own right (i.e., earning a return on top of paying for the people, assets, and financing costs they require). But more often than not it entails creating new products or services within existing business lines (like derivatives within capital markets operations), or just hiring a bunch of clowns who can cover an industry or execute a kind of business you do not already perform. (A “business line” in my industry is frequently little more than a handful of guys with business cards and a budget.) Often, as in the current environment, it encourages senior executives to discard unprofitable business lines, assets, or personnel by shutting them down, selling them, or just firing the unprofitable clowns because they can’t make money anymore or regulators are forcing you to get rid of unapproved activities.

Certainly there is a sensitivity among senior executives in finance to the benefits of maintaining a portfolio of complementary business lines, wherein secular and cyclical variations in the fortunes of certain lines can offset the different variations of others, and often there is a corollary fondness for the diversification accomplished through sheer size alone (usually by executives of big firms, natch). But both these considerations take a back seat to the short-, intermediate-, and long-run profit contributions, both direct and indirect, by the business lines in question to the mother ship. You can suckle at the corporate teat for a little while in my business while you wait for conditions to turn, but patience in the Executive Suite runs out pretty quickly if you can’t pull your own weight over the intermediate and long term. And notice I wrote the business lines must be complementary: if they don’t have the ability to contribute revenue and profit synergies to other business lines or the firm overall, their chance of staying within the fold long term—whether at GigantoBank or Two Guys and a Phone, LLC—are pretty darn slim.²

Enforcing this strategy from the other direction, by the way, are the self-interested considerations of the personnel who run the business lines in question. If they calculate belonging to the mother ship does not enhance their own intermediate- and long-term earnings and personal wealth generation prospects (via subsidy in bad times and better pay in good times than they could achieve elsewhere), they have absolutely no hesitation to jump ship for sunnier shores. From the top of the firm to the bottom, very few successful people on Wall Street value their job title and business card more than the contents of their paycheck, and most of us act accordingly. Besides, managing a multiplicity of business lines is hard. Even Wall Streeters know we are crap at management.

* * *

So I think it’s fair to take Blackstone at their word when they say they are divesting their advisory business due to structural conflicts with their core asset management businesses. In other words, not only was the advisory business not contributing any meaningful profit or revenue to the main group (q.v. supra), but also belonging to Blackstone was throttling the advisory group’s growth and profit opportunities. One can see this clearly in their results, where the Restructuring group has advised on the lion’s share of the unit’s business this year, $32.4 billion worth of deals, versus the regular advisory group’s relatively paltry $4 billion. This makes sense, since restructuring advisory (think bankruptcy, turnarounds, and workouts) is its own special business, with a different set of clients (failing companies, creditor groups, distressed investors), revenue model (hefty monthly retainers versus deal success fees), advisors (lots of ex-lawyers with sharp elbows and fierce manners), and business cycles (naturally, they tend to do well when everyone else is flat on their backs). They should normally have few conflicts with Blackstone’s core asset management businesses, most of which tend to invest in healthy companies or assets. The major exception cited in the articles—their inability to advise Lehman on its bankruptcy because Blackstone’s real estate division wanted to bid on its assets—is the killer exception that proves both the rule and the magnitude of the potential conflict.

Given that conditions are booming in regular M&A markets, the lackluster performance of Blackstone’s corporate advisory business is telling. Because Blackstone is so big and so active in principal investing across private equity, real estate, securities, and other asset classes, they must constantly show up on one side or another of potential transactions which its advisory group would like to get hired for. Such direct conflicts will usually put the kibosh on Blackstone’s advisors getting hired, or at least severely limit their alternatives. And even if no direct conflicts obtain, many corporate clients and virtually all competing private equity firms and principal investors are no doubt reluctant to hire Steve Schwarzman’s trained killers to give them highly sensitive financial and strategic advice. I can’t help but think this goes double for the third leg of Blackstone’s advisory stool, which helps raise money for—wait for it—other asset managers.

The point, in other words, is that Blackstone divesting its advisory business has nothing to do with bucking a nonexistent trend on Wall Street to add business lines like barnacles on a freighter. Instead, it has everything to do with dumping business lines that add no value, subtract value, or fail to realize their own value due to inherent negative synergies resulting from persistent structural conflicts of interest with the parent company. In other words, it is business as usual.

* * *

However, and for the very same reasons, Schwarzman pulling the ripcord on his M&A bankers does not signal the start of an industry-wide trend of divesting advisory groups by integrated investment banks. For one thing, big integrated investment banks with sales and trading, securities underwriting, and corporate advisory practices like the C-suite access top M&A and industry coverage bankers give them. Because they talk to the CEO, the CFO, and occasionally the Board of Directors, they have access to a level of decision making at corporate clients that the debt capital markets bankers and derivatives structurers do not. (They tend to talk to Treasurers or their finance staff.) This means they can get access to bigger, more profitable debt and derivatives deals and valuable, profitable product to pump into the insatiable maw of their huge trading machines. Profitable equity underwritings are also CEO- and Board-level prizes to give, and M&A deals are just icing on a cake that does not require meaningful capital to be put at risk.

M&A and corporate finance bankers like belonging to big integrated investment banks, too, when things work as they should. For one thing, it gives them more deals and ideas to talk about with their clients than just the usual who-should-buy-whom rigmarole. For another, it allows them to deepen and institutionalize their firm’s relationship with important clients by establishing multiple touch points and ongoing dialogues between subject matter experts within the bank and counterparts at the client. For a third, having equity research analysts who cover their clients and target industries gives them an entrée and a credibility with clients they do not know, and a capability to underwrite profitable equity business for those they do.

But most importantly, having M&A and industry bankers gives integrated investment banks an excuse to deliver ideas, industry and client insight, and all-important deal flow to the biggest-paying class of clients on Wall Street: private equity firms. While it is well known that private equity firms do not like paying M&A advisors for advice—usually because, rightly or wrongly, they think they know at least as much or more as bankers do about companies, deal-doing, and opportunities—they absolutely love paying investment banks to supply and arrange leveraged loans and high yield debt to finance buyouts of target companies. And banks love this too, because it is both huge and hugely profitable business. PE firms are usually happy to hire investment banks to sell their portfolio companies or take them public upon exit, too, although they tend to favor the banks which brought them the investment in the first place, financed it, and or smothered them with loving attention and juicy new buyout opportunities in the meantime.

So no wonder Blackstone ejected their M&A advisors. Not only can’t they offer the biggest and best paying clients on Wall Street (or anyone else) access to highly profitable leveraged lending, IPOs and equity underwriting, or sales and trading for securities and derivatives (because Blackstone Mère does not offer them), but also the biggest and best paying clients on Wall Street have no interest in hiring them because 1) they don’t value the advice they do have to offer and 2), duh, they work for one of their biggest competitors. I mean, if you could somehow engineer a similar set of constraints for Goldman Sachs’ M&A department, you can bet dollars to donuts the entire group would be camped out on West Street selling pencils before lunchtime.

* * *

Lastly, I have to I disagree with Jeffrey Goldfarb, too. I don’t think this action will start any powerful trends toward consolidating independent M&A advisors like the new PJT-Blackstone Advisory spinoff or even any significant acquisitions of same by larger financial institutions. For one thing, there are only so many synergies and complementarities one can generate in a homogeneous business line like M&A advisory or restructuring before negative returns to scale begin to kick in. At the end of the day, firms like PJT-BA, Moelis, Greenhill, and Evercore are really just a loose collection of fiercely independent, egotistical rainmakers who focus almost entirely on mergers & acquisitions for corporate clients. There isn’t a lot of infrastructure or shared assets to leverage, and there are no complementary business lines like securities underwriting, derivatives structuring, or sales and trading to juice the vig. Managing an advisory boutique is almost exactly like herding a passel of recalcitrant cats, and in my experience, the more the cats, the harder the shepherd’s job becomes.

Similarly, the likelihood a large commercial or foreign bank would snatch up any of these independent advisory shops should be limited by sheer common sense. For one thing, if the acquirer does not already have most of the key complementary underwriting and securities businesses listed above, adding a costly team of pinstriped M&A advisors is going to be an expensive exercise in cultural frustration and no synergy. Adding such capabilities after the fact would be even more expensive and less reversible, since those businesses require real assets, infrastructure, and permanent fixed costs that dwarf those required by the usual M&A department. For another, the history of such acquisitions argues more eloquently than I can against it.

* * *

For Steve Schwarzman, who has not paid noticeable attention to his old advisory business for years and who probably needed to be reminded by Tony James that Blackstone stilled owned it, the motivation for getting rid of the division is clear. He no longer wants or needs to be privy counselor to captains of industry or titans of finance.

It is many years since Steve Schwarzman has considered himself to be—and rightly so—a king in his own right.

Related reading:
Kiel Porter, David Carey, and Devin Banerjee, Blackstone to Spin Off Its Advisory Business With Taubman (Bloomberg, October 10, 2014)
William Alden, Shunning Wall Street Norms, Blackstone to Spin Off Its Advisory Group (DealBook, October 10, 2014)
Jeffrey Goldfarb, Blackstone’s Move Could Set Off a Trend (DealBook, October 10, 2014)
L’État, c’est moi (February 12, 2007) — Steve Schwarzman, Rex
Go West, Young Sheik (September 12, 2007) — Foreign bank acquisitions
Oxymoron (October 13, 2007) – Investment banking “management”
It’s Not the Meat, It’s the Motion (July 15, 2009) — Advisory boutiques

¹ There is perhaps an ancillary motivation derived from investment bankers’ unwarranted glamour and notoriety due to their current popular role as B movie villains in our global financial crisis soap opera. But you already knew that.
² This is not to deny that there are easy returns to scale (to a point) within business lines. Two Guys and a Phone, LLC would likely become much more profitable if it were One Hundred Guys and Several Phones, Inc., if only because they could share resources, support personnel, purchasing synergies, and enhanced marketing and sales generation prospects by looking bigger and hence more reputable to their potential clients, who are often big and diversified themselves. But these cost and revenue synergies often do not obtain between business lines that each have their own separate and different operating structures, client bases, and external market reputations. And past a certain point, scale and diversification can hurt you. The only thing belonging to GigantoBank ever did for me was open the door to an occasional new client who took a meeting because they were afraid GigantoBank would squash them (or more likely revoke their credit line) if they didn’t. A few others refused to meet with me because that is exactly what GigantoBank had already done.

© 2014 The Epicurean Dealmaker. All rights reserved.

Amakudari Revisited

Thomas Nast, Mr. Moneybags

“If you were sensible of your own good, you would not wish to quit the sphere in which you have been brought up.”
“In marrying your nephew, I should not consider myself as quitting that sphere. He is a gentleman; I am a gentleman’s daughter; so far we are equal.”
“True. You are a gentleman’s daughter. But who was your mother? Who are your uncles and aunts? Do not imagine me ignorant of their condition.”
“Whatever my connections may be,” said Elizabeth, “if your nephew does not object to them, they can be nothing to you.”

— Jane Austen, Pride and Prejudice

Newly listed advisory boutique Moelis & Company set the cat among the pigeons yesterday by announcing it has hired former House Majority Leader Eric Cantor to be a director of the company and a Vice Chairman in their advisory group. This news seems to have pleased approximately everybody, from Moelis & Co., which is delighted with their prominent and newsworthy new hire; Mr. Cantor himself, who can anticipate being approximately $3.4 million richer over the next 18 months or so; and up to and including critics of the Washington-to-Wall Street revolving door, who are now in possession of rich fodder for tut-tutting opinion pieces bemoaning the sorry state into which our crony capitalist democracy has sunk. In Washington, D.C. and on Wall Street as well, it is an ill wind that blows nobody any good.

While the generous cash and restricted stock which Mr. Cantor is receiving from his new employer seems to have been viewed by most as sufficient and self-evident explanation of why he chose to accept Moelis’s offer, there does seem to be some confusion among certain commentators as to why Moelis wanted him. Dennis Kelleher, former Senate staffer and head of non-profit public interest lobbying group Better Markets—about which nobody was talking last week and about which everybody (or at least a larger number of somebodies) is talking this week, thanks to said announcement—claims loudly that Moelis hired Cantor because 1) they wanted the publicity, 2) they want his political insight and connections to lobby for legislation and regulation favorable to their business, and 3) they want to matter more in Washington. While Matt Levine effectively deflates the more grandiose and overreaching of Mr. Kelleher’s claims—and particularly punctures the notion that a focused advisory boutique like Moelis & Co., which faces few of the proprietary trading or balance sheet capital issues its larger integrated universal bank competitors do, has common cause with said competitors in shaping the larger regulatory agenda—I cannot disagree with the broad outline of Mr. Kelleher’s remarks.

The important nuance which I would add, however, is that Moelis’s hire of Mr. Cantor must be examined in light of their mission as a client-focused advisory firm. Mr. Kelleher’s claims gain more weight if one properly understands that, notwithstanding the official job titles which Moelis & Co. have granted the deposed ex-Congressman, his real role at the company should be understood as Pet Famous Politician.¹

As such, Mr. Cantor has several interrelated roles and duties:

• Publicity magnet – To raise, by his very presence, the profile and awareness of Moelis & Company in Washington, D.C., the news media, and the general population at large. Ken Moelis, while broadly known on Wall Street and among the business community, does not carry the star wattage to pull this off by himself. This is known as general brand advertising.
• Fame whore magnet – Notwithstanding all their wealth, power, and influence in the economy—and their often low opinion of and fraught relationship with government—even the most illustrious businessperson tends to get a flutter of excitement when they meet a well-known politician. This can probably be laid to the fact that even the meanest politician tends to have fame and celebrity status well in excess of the average business leader, and almost everybody is curious to meet a celebrity. It also probably has to do with the fact that politicians tend to have power, and business people tend to be the kind of people who are attracted to power.
• Door opener – As Messrs. Kelleher and Levine both agree, Mr. Cantor is neither trained in nor necessarily exhibits any of the transaction processing skills of an advisory investment banker. Nevertheless, Mr. Cantor is likely to have some contacts in his Rolodex whom his new colleagues would love to get in front of to pitch their wares, and I am sure they will hand him a prioritized call list as soon as he walks in the door. Even if Mr. Cantor does not personally know all of his employer’s prospective clients, senior calling officers will be eager to use him as bait (see Fame whore magnet, supra and Subject matter expert, infra) to get that key meeting with a high priority target CEO or Board of Directors which they’ve been trying to break into for ages. The kind of large, high profile clients which a Moelis & Co. wants to work with tend to have overwhelming numbers of investment bankers constantly importuning them for business and usually limit their work to a small handful of trusted relationships. Hence they tend to keep unknown bankers at a firm arms length. The flimsiest excuse to get a client to open the door and take a meeting—“Hey, come meet the former House Majority Leader of Congress!”—is welcome. Besides, correctly or not, most senior bankers believe once they get in front of a client they have the skill to win the assignment themselves; all it takes is access. Mr. Cantor will only have to smile, relate a few political war stories, and then shut up.
• Subject matter expert – Our ex-Congressman does have one obvious skill set which is highly valuable in corporate advisory work and which is cultivated assiduously by senior bankers eager to build a name and a business for themselves: he is very well connected and extremely knowledgable in an important segment of the economy and the dealmaking environment. The fact that his subject matter is relevant in multiple dimensions to almost every business which Moelis & Co. would like to serve is just icing on the cake. Chief Executives and Board directors will be exceedingly interested in the insights Mr. Cantor can share about who knows what, who hates whom, and how things get done inside the Beltway, because in almost every instance that will have a direct effect on their daily business and/or the particular capital raising, M&A, or corporate finance transaction at hand. This is an area where Mr. Cantor will be able to add real content to the discussion and share valuable information and intelligence all on his own, and it won’t involve him smiling and shaking hands like a bobble doll.
• Deal originator – Of course, under the right circumstances, there is nothing to prevent Mr. Cantor from using the assets and attractants listed above to source his very own transactions, instead of just contributing to those of his colleagues. This would certainly entitle him, in my book, to a shot at much larger incentive compensation than Moelis & Co. have guaranteed him for joining the firm. There is also circumstantial evidence that Mr. Cantor may indeed have key senior investment banker skills of a high order. After all, a very large component of his job as Congressman and House Majority Leader involved selling, creative dealmaking, and high stakes, high pressure negotiation. These are the critical skills a senior investment banker must bring to bear to win assignments and close transactions, not filling in spreadsheets or wordsmithing press releases. That’s what the little people do. If Mr. Cantor is looking for inspiration along these lines, he could do worse than consult the case of Rahm Emanuel, who turned a senior political aide position in the Clinton administration into a two-and-a-half year stint at Wasserstein Perella that earned him over $18 million.

Perhaps Mr. Cantor is not quite so unworthy after all.

* * *

Of course, in your wonted role as Clever and Discriminating Readers, you delightful people will already have noted that nowhere in my speculative litany of tasks for which Moelis & Company may have hired our peripatetic politician is the duty of lobbyist. It is possible, of course, that his employer does anticipate fielding Mr. Cantor back inside the Beltway when his current restrictions expire. But, if so, I suspect any such lobbying will be indirect and done on behalf of clients rather than for Moelis & Co. itself. In fact, I venture to guess Mr. Cantor will most likely offer access and intelligence on whom to contact within government to his employers and clients, rather than leading any direct or indirect lobbying charge himself. After all, if he pulls off his other roles appropriately, he will be both too busy and making too much money for the firm to spend much time hanging out with politicians and regulators.

I suppose this is the best explanation of both Mr. Cantor’s appeal to an investment bank like Moelis and the amount of money a former Congressman like him can make via amakudari. Like it or not, government is important to business, and the people who know how it works, how to make it work, and whom to work to make it work carry extremely valuable intelligence, even if they do not meddle directly in the process. In fact, I suspect Moelis & Co. spends less on senior lobbyists than they hope and intend to pay Mr. Cantor.

After all, investment banks are in the business of making money. Not changing regulations.

Related reading:
Moelis & Company, Form 8-K dated September 2, 2014
Annie Lowrey, What Eric Cantor Is Really Going to Do on Wall Street (New York, September 2, 2014)
Matt Levine, What Can a House Majority Leader Do for a Bank? (BloombergView, September 2, 2014)
Timothy P. Carney, Cantor’s not lobbying, but his big payday should upset conservatives (Washington Examiner, September 2, 2014)
Amakudari (January 20, 2007)

¹ It is important to note I claim no special insight into Moelis & Company’s actual rationale for hiring Mr. Cantor or its future plans for him. These remarks constitute rank speculation, based solely on public information and my over 20 years of experience in the Wall Street septic tank, not privileged insider information. That being said, I have seen similar scenarios before, and they almost all fit the pattern which I lay out for you charming people above. My rank speculation, in this instance, is probably a pretty good guess.

© 2014 The Epicurean Dealmaker. All rights reserved.

All Hail and Farewell, the Trophy Kids

Adolphe-William Bouguereau, The Birth of Venus, 1879

Mildred: “That Ted Forrester’s nice-looking, isn’t he? Veda likes him.”
Monte: “Who wouldn’t? He has a million dollars.”

— Mildred Pierce (1945)

Wall Street has a problem.

Kevin Roose, who wrote the definitive bildungsroman/sob story of early-2010s twenty-somethings on Wall Street, nails it. Finance is no longer the first choice of ambitious, high-achieving college graduates. Technology is:

Hyperdriven, multitalented young people aren’t picking tech over finance because it pays more. They’re picking it because the lifestyle is better, because it’s just as competitive to get into (if not more so), and because being on Facebook’s mobile ad team allows them to feel better about themselves than making DCF models for Fortune 500 companies all day. In their eyes, going into tech is a way to remain among the cultural elite without selling your soul.

It’s not that Goldman Sachs, Morgan Stanley, and every other well-known firm aren’t attracting enough candidates, they’re just not attracting the “best” ones:

These firms are having no problems drawing applicants out of college, but what I’ve heard from senior Wall Street hiring managers is that they’re not the right kind of applicants. They’re second-stringers, as far as the banks are concerned. The students these firms want to attract — badly — are increasingly going to Google or Facebook instead of Goldman and J.P. Morgan. (Or, almost worse, going to Goldman and J.P. Morgan, working for a year or two, and then quitting to go to Google or Facebook.) And that kills the banks’ sense of supremacy.

I suppose it is a measure of our diminished times that Mr. Roose chooses to dub these careerist paragons of conventional wisdom “Renaissance Kids,” but I get that he needs to flatter his demographic that their uninspired and riskless choices denote some measure of intellectual breadth or reflected historical glamour. After all, he has trend pieces to write and books to sell. Personally, I cling to the outmoded notion that “renaissance man” (or woman) should mean something deeper than a Groton- and Harvard-educated 3.70 GPA history major/lacrosse player who read the Bhagavad Gita once in order to satisfy a distribution requirement. But I am stubborn that way.¹

Instead, I prefer to label these special snowflakes Trophy Kids, since their entire young lives have been spent in pursuit of trophies and awards of all kinds, scrapping and scrambling to get into the best schools and the best clubs and the best jobs from the moment their hypercompetitive parents decided they should. Of course, “best” in this context means what everybody else thinks is best, so the trophies we are talking about are clear, unambiguous, and well recognized by everyone: top grades in school, passionate commitment to approved extracurriculars, conspicuous community service to high profile, photogenically needy causes, and the right employer out of college.

“Trophy Kids” is also apt because these socioeconomic poster children make themselves highly desirable as acquisitions by those institutions which aspire to have the best themselves, just like aging billionaires like to accumulate trophy wives and girlfriends. It is not too far to stretch a metaphor to observe that Trophy Kids’ relationships to high-prestige employers are fundamentally the same as trophy wives’ to their husbands: an often temporary marriage of convenience in which the former trades her looks, sex appeal, and other attractive qualities for the wealth, prestige, and social access her unpleasant toad of a spouse delivers her. A cynic might also point out the parallels between sweating 80 to 100 hours a week under fluorescent lights day in and day out for two years as a Financial Analyst to the occasional unpleasant duties of the marriage bed which a hot young sex bomb must endure with her aging Lothario. Everything has a price, children.

* * *

And this explains why investment banks like Goldman Sachs want to recruit the tippy top of the best and brightest to their sausage factories, O Dearly Beloved: they want trophy employees. They want them not because, as Kevin Roose correctly observes, they need such hyper-accomplished hothouse flowers to program their 50-page spreadsheets and 100-page PowerPoint presentations. I have banged on at length about this before: they don’t. Trophy Kids often make lousy investment bankers, at least over the long term, because my business is a client service business. In contrast, Trophy Kids have been raised from birth to want and expect to be the client.

No, investment banks seek out recruits like these because it makes current employees who interview them feel powerful, important, and validated when hundreds of eager young beavers with looks, accomplishments, and grades better than theirs grovel and squirm to get into their good graces. They want them because Human Resources Department employees—virtually none of whom even got accepted to the top schools they limit their recruiting to—want to create glossy brochures, college night PowerPoints, and website profiles which look like Benetton commercials on steroids: multicultural, multigendered, multicolored paeans to underprivileged Rhodes Scholars who rose from Detroit to Stanford on full merit scholarships and singlehandedly saved the economy of Botswana in their spare time sophomore year. They want them, pace Mr. Roose, not because any client ever bothers to read the junior analyst’s bio on page 97 of the pitch book (they don’t) or because Lloyd Blankfein likes to shoot the shit with 23-year-old Yale graduates about Kierkegaard’s conception of agape love in airline waiting lounges (I venture to say he doesn’t), but because both these audiences like to brag to their wives and Business Rountable buddies they have Ivy League valedictorians lining up dozens deep to carry their golf bags. Trophy Kid employees validate the social status of investment bank(er)s, too.

* * *

And Mr. Roose rightly points out this mutual attraction is fading. What he fails to note, however, is that Wall Street’s perch as the preeminent post-graduation employer of choice for high-achieving college graduates is a relatively recent phenomenon. Finance in the 1980s was a relatively sleepy backwater, as far as ambitious college graduates were concerned. It didn’t employ very many recent graduates, and its reputation was somewhat louche and recherché for conventionally ambitious folk: Liars’ Poker and Barbarians at the Gate, not In Search of Excellence. It accumulated prestige as the industry grew in the 1990s, but it took the tidal wave of money that drove the global financialization of economies in the early- and mid-2000s to really push it to the top of the heap of college seniors’ preferred employers. At that point, the leading banks were rich, familiar to everyone around the world, and hiring thousands of eager young tyros. What was a graduating Yalie not to like?

Individual firms evolved very different reputations over that period, too. I snorted out loud when I read Mr. Roose describe Goldman Sachs styling itself “the thinking man’s investment bank.” It wasn’t too many years ago when Goldman bankers were universally considered hardworking, relatively unimaginative schlubs, B players who sacrificed their health, their marriages, their relationships with their kids, and the chance to make more money almost anywhere on the altar of Mother Goldman in exchange for the brass ring of partnership after twenty years of toil. They weren’t the most brilliant bankers on Wall Street; they were just the most relentless and the best coordinated. Goldman’s effectiveness did not arise from its bankers’ individual intelligence. It came from their discipline and uncanny ability to act in sync like a colony organism. Goldman bankers didn’t need to be smart. They just needed not to be stupid, unlike most of their competitors. And they did a pretty good job.

Recently of course—probably contemporaneously with its entire Executive Committee each earning over $60 million in one year and their former CEO parachuting into the padded chair of the Secretary of the Treasury—Goldman Sachs became the font of all munificence and socioeconomic status for a large class of strivers, including the products of elite higher education. But now the Financial Crisis and the ongoing secular shrinkage of the industry thereafter has taken the bloom off that rose, and the wealthier and more prestigious environs of Silicon Valley are what make the supremely ambitious college senior’s heart flutter. Sic transit gloria.

* * *

And this is okay, as I have written here before. Wall Street is shrinking, and we neither need nor deserve right of first refusal on all or even a majority of the talented, hardworking, untrained young cannon fodder issuing forth from the gates of academe each year. Let Facebook and Google have the trend-chasing social climbers who will do anything to get into whatever profession U.S. News & World Report anoints the best employer this year, so they can preen to their family and friends at Thanksgiving. Investment banks face a bigger threat from the private equity and hedge fund industries, who have gotten big and prestigious enough themselves that they now routinely siphon off a huge number of the most talented hardcore finance junkies who used to staff our engine rooms. Nevertheless, I suspect we will weather this challenge, too, along the way to reinventing ourselves as Investment Banking 6.0.

After all, Wall Street has always found a way to change and adapt. I am sure we will survive the absence of double Catalan-Poetry-and-Neuroscience majors from Princeton just fine, too.

Related reading:
Kevin Roose, Sorry, Wall Street. Paying Young Bankers More Won’t Make You Cool Again. (New York, August 22, 2014)
The Fish Stinks from the Head (July 30, 2009)
A Hard Rain’s Gonna Fall (September 30, 2011)
If the Phone Don’t Ring, You’ll Know It’s Me (October 1, 2011)
You Go First (July 7, 2014)

¹ This is not to diminish such achievements, by the way, which demand real commitment, talent, and drive to accomplish, but let’s not kid ourselves Muffy or Bif (or Peeta, Carlos, or Fang) are the second coming of Leonardo da Vinci. It is also worth mentioning that a 3.70 GPA is not that hard to achieve nowadays at Harvard College, where the “median grade… is an A–, and the most frequently awarded mark is an A.” Investment bank recruiters take note.

© 2014 The Epicurean Dealmaker. All rights reserved.

A Cure Worse Than the Disease

Messenger: “I see, lady, the gentleman is not in your books.”
Beatrice: “No; an he were, I would burn my study. But, I pray you, who is his companion? Is there no young squarer now that will make a voyage with him to the devil?”
Messenger: “He is most in the company of the right noble Claudio.”
Beatrice: “O Lord, he will hang upon him like a disease: he is sooner caught than the pestilence, and the taker runs presently mad. God help the noble Claudio! if he have caught the Benedick, it will cost him a thousand pound ere a’ be cured.”

— William Shakespeare, Much Ado About Nothing

I suppose it does little harm to admit, O Dearly Beloved and Long-Suffering Readers, that this site is shot through and through with what my colleagues across the gaping divide in Sales & Trading would call “talking your book.” Notwithstanding the slings and arrows sent this way by those who can see no redeeming social or economic benefit to my profession, I am proud of what I do, and I firmly believe I offer real value to my clients in return for the shiny simoleons which they so graciously bestow on me, however so (and too) infrequently. This should not really be that surprising. I think there must be few human beings who do not find some sustaining or redeeming value in their daily occupation, even if only as a sop to their self esteem or a dodge against despair, and despite all your protestations I continue to aver that investment bankers are human, too.If you prick us, do we not bleed?

That being said, I think I have been pretty honest in these pages (and in the conduct of my daily duties, too) that M&A advisory services are not for everyone. There are many reasons a client might consider in deciding whether to employ someone like me, and not all of them make sense or can be justified by any honest calculus. While there are plenty of dissembling shysters roaming my industry intent on imposing their services and extravagant fees on anyone they can convince to write a check, I have always been of the opinion that you make a client happy in the long run by only recommending what is truly beneficial for them, rather than yourself. And often, hiring an M&A advisor is not the best course of action. At least not yet.

* * *

So I am pleased to take this opportunity to respond to an article on private equity and venture capital shill site peHUB, written by a corporate attorney, about things to consider when you are selling a private company. As advertised, it is geared towards the owners of private companies, who generally face a simpler and less complicated set of constraints and obligations than the Boards of publicly held ones. Of its type, it is a reasonably comprehensive and useful guide.¹

In it, Mr. Stewart offers the following considerations concerning whether you should hire a flesh-eating investment banker like me when you are selling your private company:

*Do You Need an Investment Banker? Investment bankers can add significant value in an M&A process, but they are expensive. Investment banker fees typically range from 1 percent to 2 percent of the deal value, although the fees vary by deal size and profile. Typical benefits of having a banker in an M&A process include having an agent to (1) advise on market trends and valuation, (2) approach potential acquirers with which the target’s executive management would not otherwise have contact, (3) take the difficult, “bad cop” negotiating positions, and (4) co-manage the sale process with the target’s legal counsel.

Now this is fine advice, as far as it goes, but it omits some pretty important content and nuance that I, your reliable guide to all things overpriced and intermediary, will be happy to impart herewith.

Deferring our discussion on whether M&A advisory fees are in fact “expensive” and if so how for later (I promise), I can first address Mr. Stewart’s itemized reasons for hiring a banker by contrasting them with what corporate lawyers typically do in deal contexts. On the first two points the author is correct by implication: rare (and professionally worrisome) is the lawyer who is concerned with markets and valuation, and even rarer (and in likely violation of her professional ethics) is the lawyer who spends time and energy soliciting buyers for her client. These are tasks for which lawyers are unsuited by training, focus, and predilection, and if the client wants someone other than himself to weigh in on such matters and perform such heavy lifting he needs to hire someone for whom they are suited. The third task is more nuanced, as lawyers are perfectly capable of acting (and often quite happy to act) as “bad cop” (read flaming asshole) in matters properly considered legal, but it is true that bankers adopt this role more naturally and properly in matters business.

The fourth task is generally a bone of contention for lawyers and bankers on a deal, as each usually considers the other an interfering nuisance who focuses on the wrong things at the wrong times. Nevertheless, it is true that a properly run deal process usually starts with the banker running things until definitive negotiations begin between the seller and the potential buyer, at which point the seller’s attorney takes over to control the legal minutiae of drafting purchase agreements and other such trivia. While I am convinced many if not most deal attorneys would be delighted if they never had to deal with another investment banker again, bankers are more than pleased to have lawyers around to handle the boring scut work of transaction documentation and risk mitigation. After all, somebody has to stay behind to argue over semicolons while the banker takes her client off for a nice, celebratory bottle of Échezeaux.

* * *

But Mr. Stewart misses three very important reasons why it usually makes sense for a private company, in particular, to hire an investment banker to sell itself. The first is the fact—evident if an attentive reader were to consider the range and complexity of the tasks Mr. Stewart himself recommends the seller perform—that selling a company is long, complex, and difficult work. A typical sale process, depending on its structure and the number of potential buyers it involves approaching, can last anywhere from four to six months or longer, and that is if all goes well. During that time, company management and owners (usually the same people) must continue to run the firm with the same level of intensity and focus they do normally, otherwise things being things and people being people results will start to wobble or decline, and the intrinsic value and earning power of the business will erode. Yet pre-deal preparation, internal due diligence, and identification and potential communication with selected potential buyers all take a substantial amount of time, and once the deal is launched keeping it humming along and tending to its myriad details and interruptions requires constant daily attention. Virtually no private company of normal size has the extra personnel or dedicated, trained professionals to handle this properly, and, frankly, few private company CEOs or CFOs have the skill or training either, even if they did have the time. (And they don’t. Or shouldn’t.) A skilled sell-side advisor will manage this entire process, and she will arrange things so company management spends as little time as necessary providing the input, attention, and personal presence they must so they can continue to focus on their day jobs. Lawyers just don’t do this sort of thing.

Second, a good² M&A advisor will bring market intelligence to bear on a sell-side assignment which nobody else—not even a dedicated internal M&A functionary at a large private company—can come close to providing. This is detailed, intimate knowledge of a firm’s potential buyers, based on comprehensive discussions and extensive deal experience and interaction with all of them. As I’ve written before,

You might think that a participant in a particular industry should know the strategic intentions and capabilities of its direct competitors well, but normally you would be wrong. Competitors do not talk to each other directly about strategy because—wait for it—they are competitors. On the other hand, it is the job and practice of any good investment banker not only to develop an informed opinion about how each significant competitor in a space thinks about strategy but also to have done so by talking directly with them, frequently if possible. This is simply not practical for most corporations. Investment bankers are normally far better informed about the strategic landscape of an industry than any one of its participants.

And this knowledge is not limited to other companies, either. A good advisor will also know the likely, potential, and just-barely-possible buyers of her client among the financial sponsor (private equity) community, too. Not only will such a banker know these parties and their own acquisition appetites and capabilities well, she will know which ones of them are complete and utter assholes, which ones tend to fire the management teams they acquire with companies within the first year of purchase, which ones like to bait and switch sale processes by bidding high then whittling down their offer during exclusive negotiations, and which ones are irredeemable bottom feeders.³ This is invaluable information which even the best informed private company in the most incestuous industry has very little of, if any.

Knowing the likely buyers in the private equity world and being able to bring them to the table is critical in virtually every industry sale process nowadays. Not only are sponsors often the best capitalized and most aggressive buyers, they are almost always faster and more professional than the strategic buyers in an industry, because unlike the latter the former do deals for a living. Incorporating this type of determined, fast-moving buyer into a sale process is very helpful even if the seller and his banker think the most likely buyer is a competitor in the same business, because it helps the banker keep time pressure and process discipline on the strategic buyer which might otherwise dissipate. They also usually offer a very different purchase alternative to a private company seller: sell us your business, then come work with us as a (junior) partner to build it bigger so we can sell it to the next guy, and you will get a second bite at the apple. This, in contrast, to the typical offer from a strategic competitor: sell us your business, then either join us as a salaried employee or go away. Many private company owners prefer selling to private equity firms for this very reason nowadays, but they are babes in the woods when it comes to knowing those buyers. A skilled investment banker can offer crucial guidance in this area.

Third and last, surprisingly enough—given the regular beatings good sell-side advisors give potential buyers in M&A deals—most serious buyers prefer private companies to have professional sell-side help engaged. This is for all the reasons cited above: they know most private companies do not have the time, M&A experience and discipline, or negotiating skill to run a tight, efficient transaction process. Buyers want to know the person sitting across the table from them is not procrastinating, flip-flopping on deal provisions or objectives midstream, or negotiating in a disingenuous or irrational manner. Being a buyer of companies is expensive and time-consuming, too, and buyers who are serious don’t like to suspect their time is being wasted. Having a professional investment banker across the table gives them some confidence, because everybody knows no investment banker would allow herself to be hired by a client who wasn’t serious themselves.

And this, at the last, is probably the most compelling reason a private company should hire a financial advisor to sell itself: because that banker will make sure to keep her client disciplined and focused on accomplishing the sale. Privately held companies—for all sorts of good, bad, and indifferent reasons—can often be pretty squirrelly, and nothing will kill a deal faster than a squirrelly seller. After keeping buyers in line, a good sell-side advisor’s principal role is to keep her own client’s eyes on the prize.

* * *

Which brings us to the matter of expense. It is true that, for most deals, the check a seller writes to his investment banker is usually the biggest one crossing the closing table other than the purchase price itself. Even so, one or two percent of the transaction value is arguably a pretty small price⁴ to pay for someone who has broadened the potential universe of buyers, guided and directed the sale to achieve the highest price and best non-price terms available given the seller’s other objectives, and performed all the tiresome, dirty work of managing a complex sales process for upwards of six months or more. Even more compelling, except for the occasional nominal retainer, the success fee a banker earns upon her client’s sale is just that: a success fee. If the sale fails, or her client withdraws his company from the process for whatever reason, she does not earn anything. Her risks and incentives are completely aligned with those of her client, assuming of course her client really wants to sell.

And that is the real answer: if you’re not really sure you want to sell your company, don’t hire an investment banker. It is our job and embedded in the way you pay us to do everything in our power to close your transaction, including beating you up if you’re backsliding, procrastinating, or otherwise doing anything unreasonable and likely to derail a potential sale. Other bad reasons—like you’d like to play investment banker yourself, no matter how much it costs you in distraction from your core business, diminished transaction value, and fruitless legal and accounting expense—are also good arguments for not hiring a banker, but presumably you are too intelligent to need me to tell you that.

Of course, any good corporate law firm would be more than happy to accommodate you in such circumstances. After all, they charge by the hour.

Related reading:
Matt Stewart, Things to consider when selling a private company (peHUB, July 28, 2014)
Eight Reasons Not to Hire an M&A Advisor. And One Reason to Do So (May 14, 2011)
A Good Start (January 19, 2011)

¹ If I’m being honest, as I claim, I think the author is a little lackadaisical about describing the necessary structure and elements of the sale process for a private company. While he gets the major elements right, he is a little slapdash in describing how they all fit together. It has been my experience that a robust and disciplined process is absolutely necessary to keep deals moving at an appropriate pace, to encourage potential buyers to play nicely, and to keep the seller focused on what needs to be done. Without a firm hand on the tiller (and an eagle eye on the clock), there is a tendency for all deals to fritter away into time- and money-wasting nonsense. Given the fact that, of all the players involved in these little dramas, lawyers are usually the only ones paid by the hour, I will leave it to the cynics in the audience to conclude whether this omission was intentional.
² The perceptive among you will note that my use of “good” here is definitely normative, if not prescriptive. The type of knowledge which informs nuanced, deep understanding of the strategic landscape of an industry is normally only collected by investment bankers focused on and active in that industry. This means if you value and want such knowledge you should search for an advisor from among those who actually have it, rather than the generalist sell-side firms who market themselves as one size fits all. They are prolific sausage factories, it is true, but all the sausages tend to come out the other end looking the same. Just sayin’.
³ Yes, we know who you are. All of you. You, too.
⁴ Unless you are paying 2% for a billion dollar deal or greater, in which case your banker is a shyster and you are a fool. Or neither one of you cares how much of your public shareholders’ money you waste.

© 2014 The Epicurean Dealmaker. All rights reserved.

Where Did He Learn to Negotiate Like That?

Korbin Dallas: “We need to find the leader. Mangalores won’t fight without the leader.”
Mangalore Leader: “One more shot, we start killing hostages.”
Korbin Dallas: “That’s the leader.”
Mangalore Leader: “Send someone to negotiate.”
Security Chief: [to Dallas] “I I I I I’ve never negotiated I…”
Korbin Dallas: “Mind if I… try?”
Security Chief: “No, no, sure, sure. Sure. [to Mangalores] We’re sending somebody in to negotiate!”
Korbin Dallas: [walks into room, shoots Mangalore leader between the eyes] “Anybody else want to negotiate?”
Security Chief: “Wh-wh-wh-where’d he learn to negotiate like that?”

— The Fifth Element

Unlike many of you, O Dearly Beloved, I am old enough to remember a time when air travel did not offer wireless internet in flight. As a result, when junior bankers like me did not have work papers to review or spreadsheet modeling or presentation editing to do on our laptops,¹ we were thrown back on our own devices when it came to entertaining ourselves with something other than the crappy movies playing on low res CRT screens hanging from the ceiling. Normally I would bring some combination of newspapers, magazines, equity research reports, and a book or two to occupy my time, but occasionally said distractions would fail to engage me or I would simply run out of material to read before the flight ended. On those occasions, in desperation for something to distract me from the grim environs of a 30-year-old narrow body aluminum tube stuffed with sweaty tourists and bedraggled business travelers, I would sometimes stoop to leafing through the airline magazine jammed conveniently in the seat back pocket in front of me.

This rarely offered much relief, but I do recall frequently encountering the same stiff, glossy multipage ad for a well-dressed chap named Chester Karras, who generously offered to teach the ambitious road warrior the secrets to becoming a master negotiator, for a hefty price. “You don’t get what you deserve,” his tagline warned, “You get what you negotiate.” Putting aside the wisdom of advertising such services to the rumpled middle manager wedged into the middle seat of aisle 32 on the 9:18 pm flight from Dallas to Abilene, these ads always reminded me that true negotiating skill is surprisingly rare among most businesspeople.

* * *

For spectacular anecdotal proof of this observation, we need only turn to last week’s article in DealBook about the nasty bollocking mustachioed technology advisor extraordinaire Frank Quattrone’s firm Qatalyst Partners delivered to its erstwhile client, Trulia, in the latter’s recently announced sale to competitor Zillow. To an aficionado of the dark arts of M&A, there are many odd and interesting nuggets to be gleaned from this brief article about the behavior of Trulia and Qatalyst, which I thought you kindly people would find amusing to review with me on a languid Saturday afternoon.

First, there is the apparent fact that, after hiring Qatalyst three years ago to sell itself to (presumably) Zillow and perhaps one or more other potential buyers, Trulia apparently never terminated the engagement when it failed to lead to a sale. This, as we technically describe it in the trade, was Just Fucking Stupid. Engagement letters between clients and financial advisors are normally open-ended contracts which describe reciprocal duties and obligations which do not expire until the transaction contracted for occurs or one or both of the parties explicitly terminate them. The notion that Trulia could hire Qatalyst to sell itself, have that process fail, and subsequently move on to an initial public offering and other activities for three years without bothering to terminate an open-ended sale contract is just ludicrous. For this mistake alone, somebody in the executive suite of Trulia—the General Counsel or Chief Financial Officer are the most likely candidates—should have their head handed to them.

Second, there is the matter of Qatalyst’s original fee, which the DealBook article describes as “about 2 percent.” Now, I don’t know (or care) what Trulia’s purported enterprise value was three years ago when it first engaged Quattrone’s merry band, but I would be surprised if it was much below a billion dollars. (Remember, they just got sold for $3.5 billion this past week.) Now I understand that the technology world operates in its own reality distortion field, but I have to confess I was stunned by that fee percentage. In the normal business world, where industrial logic and economic pressures operate in place of the moonbeams and unicorn piss of tech land, a billion dollar sale mandate should earn the sell-side advisor flogging it significantly less than one percent of transaction value. Advisor success fees are heavily negotiated on a deal-by-deal basis, but they normally have some relation to normal fees normally earned by normal advisors normally. This one looks like Trulia’s CEO just hiked up his skirts and asked his Qatalyst banker how far he wanted him to bend over the barrel.

Third, there is the matter of the fee Trulia negotiated with JPMorgan for the current mandate which resulted in its sale to Zillow. This DealBook reported as about 1.5 percent. You might think JPMorgan was mighty gentlemanly to accept a lower percentage fee for the higher sale amount, until I inform you it is somewhere between four to five times the normal fee for a three billion plus dollar transaction outside tech land. The rack rates which investment banks try to achieve in M&A transactions are based on advisory fee schedules which in turn are based on competitive fees earned by them and their competitors in hundreds of transactions annually. In other words, a market. These fees decline as a percentage of transaction value as the size of the transaction increases, and most financial advisory firms’ fee schedules show transaction fees of fractions of a percent at these levels.

* * *

Now perhaps Qatalyst Partners’ and JPMorgan’s technology bankers really are the sort of special snowflakes who can deliver $50 to $70 million of advisory value to Trulia. Perhaps Frank Quattrone and his colleagues use secret photos of every Silicon Valley founder, CEO, and venture capitalist engaged in unnatural acts with scrofulous barnyard animals to boost their negotiating leverage when it comes to striking terms on engagement letters and actual transactions. Barring that, however, I am skeptical, as a technology outsider, that any of these clowns can offer anything special enough to merit fees which are many multiples of the fees which highly talented M&A advisors outside the technology bubble would be delighted to work for. Especially if both transactions were targeted primarily or solely at one buyer, Zillow, which makes many of the deal dynamics and negotiating complexities much less burdensome. After all, it’s not like the companies involved are particularly technical or require particularly specialized skills from their advisors.

I take this as yet more proof that the denizens of Silicon Valley think they are special, and the normal rules of gravity and economic interactions do not apply to them. Perhaps the executives and owners of technology firms are delighted to spread higher than normal fees around to their pals and enablers in the banking world in exchange for extracting ridiculous sums from the pockets of widows, orphans, and idiot venture capitalists to fund their fantasy business models in the first place. I’m not sure I would be so happy to pay an extra $40 million in success fees to bankers who sold my company because my CEO and his staff were too inept to negotiate their way out of a paper bag with a map and a blowtorch, but then again I am not Silicon Valley’s demographic.

And this, in the end, has clearly been my mistake. Effective immediately, I am rebranding myself as an M&A advisor for technology companies, offering skilled buy- and sell-side services at a mere 300% of retail.

Shit, I use Twitter and Blogger.com. I’m a friggin’ natural.

Related reading:
David Gelles, Old Attempt to Sell Real Estate Website Trulia Rewards Ex-Adviser Qatalyst Now (DealBook, July 29, 2014)
Killing People Is a Bad Habit (August 28, 2009)

¹ You might think plane flights would be an excellent time to get tasks like this done: no interruptions by clients or superiors, relative quiet, and few distractions of interest. In actual fact, bankers often forgo catching up on pressing work due to the risk competitors or strangers on the plane might look over their shoulder and get a glimpse of confidential information. Quarters are close in economy class, and unless your immediate neighbor is a co-worker who can shield you from prying glances, most serious work should be deferred until you get back into the office. So, once again, junior bankers are screwed.

© 2014 The Epicurean Dealmaker. All rights reserved.

You Go First

Don’t shit where you eat.

— Anonymous

Way back in the Dark Ages of Investment Banking, O Dearly Beloved—say in the 1970s or 1980s, before Your Humble Correspondent embedded himself in the front lines of global financial conflict—somebody or other decided in their infinite wisdom that new recruits to my industry out of college should, as a matter of policy, be hired for two-year stints only. After this period expired, they were thanked for their troubles, given a celebratory fruit basket or somesuch, and politely shown the door. A tiny minority of very strong promise were sometimes buttonholed by higher ups, slipped a tenner or two, and persuaded in whispered tones to stay on as regular employees, but virtually everyone else was gently or not so gently ushered out the door. Talented leavers were encouraged to reapply for admission after a stint at a recognized institution of higher networking obfuscation learning where they could bolster their professional credentials and familiarity with the latest corporate buzzwords. Talentless cannon fodder—as revealed ex post via mediocre or worse job performance—were graced with fixed grins and sotto voce imprecations muttered between gritted teeth. Almost everybody left.

The reasons for this odd system may be lost in the mists of time (or your Professionally Nonchalant Bloggist’s lack of interest in substantive historical research, which for all intents and purposes is the same thing), but it has obtained in my line of work for many a waxing and waning moon. As such, investment banks and college graduates—clueless children educated to within an inch of their lives in disciplines useful perhaps 300 years ago and no later—found a symbiotic relationship in which this program served each of their interests and predilections. College students found a well-organized, (then-)prestigious, (then-)well-paying industry with slick recruiting materials willing to take on their confused and ill-directed selves for a limited period of two years, in which the banks promised to provide very good money, an impressive notch on their virgin résumés, and all the Seamless food they could eat, with a free Get Out of Jail card tacked on at the end. In exchange, the investment banks got swarms of smart, eager young beavers willing to learn how to create and maintain 50 page spreadsheets and 100 page presentation books and generally make themselves available 24-7-365 for all manner of scut work while they figured out what they wanted to do with their lives. Lots of directionless college graduates got jobs which paid terrifically well and offered prestige far beyond their deserts, and investment banks got access to a much larger group of intelligent, ambitious youngsters than they deserved. It all worked out pretty well.

Back in these prelapsarian times, when majestic investment bank dinosaurs still trod the Earth, a cozy symbiosis developed between the much smaller private equity industry—small, nimble, clever mammals and clients of the dinosaurs, to boot—and big investment banks. Private equity firms were always looking for a few highly trained, intelligent, and motivated finance geeks to join their organizations at the bottom every year to both support the Schwarzmans, Blacks, and Kravises of the world and eventually succeed them. Naturally, they looked to the giant investment banks as farm teams for their junior recruits, and they cultivated a close relationship with promising young investment bankers they met on live transactions and found through industry gossip. They also pumped their counterparts and salespeople at the banks for information as to who was the best, fastest, and most ambitious among their large Financial Analyst classes in order to target their recruiting appropriately. Senior bankers were happy to cooperate, since 1) it made some of their best, highest paying clients happy, and 2) top junior bankers were likely to leave after their two year stint was up anyway. PE firms were free to recruit these tyro plutocrats and, since their recruiting tended to be focused near the end of the analysts’ two year terms and did not materially interfere with their duties, any minor inconveniences could be comfortably overlooked.

* * *

But now we live in much different times, Most Patient and Understanding of Readers, as many of you may indeed be aware. Banks face life-altering threats from Dodd-Frank lava flows and Volcker Rule asteroids, and the tiny, nimble private equity mammals of yore have evolved into lumbering colossi of hair, tooth, and tusk which are assuming the role of apex herbivores and predators in the global financial ecosystem. Financial Analyst positions at investment banks are nowhere near as numerous as they used to be, and those that still exist no longer carry the socioeconomic prestige or promise of outsize pay they used to. On the other hand, the largest of private equity firms have evolved into very large firms indeed, with a consequently magnified demand for cannon fodder of their own, and they have been joined by legions of small and mid-sized private equity firms with their own need for junior weenies. The tables, so to speak, have decisively turned.

And yet the private equity industry still chooses to recruit its junior personnel from the same place: the most talented among the junior ranks of investment banks. Except they are no longer following the old gentleman’s agreement of letting young bankers mature and learn in situ before they harvest them: they are recruiting them practically before the ink dries on the little buggers’ bank business cards. This, as you might imagine, is beginning to irritate investment banks, who spend a great deal of time and money recruiting, selecting, and training young bankers into useful employees. It is one thing to recruit and train a top Financial Analyst who will give you a solid two years of work and then depart, a friend of the firm, to an important client where he or she might eventually direct more business to you. It is another entirely for your new analysts to start receiving frantic recruiting efforts six months after they start their jobs and sign acceptance letters at new employers 18 months before they are supposed to leave. In addition to distracting them from time-sensitive duties for which we pay them ridiculously high wages and diminishing their incentive to work hard for the rest of their contracted stint (because they have guaranteed jobs waiting at the end), recruiting and hiring by private equity firms can introduce serious potential conflicts.

Notwithstanding their position at the very bottom of the investment banking totem pole—or in fact exactly because of it—Financial Analysts are privy to highly sensitive confidential information about many clients’ businesses and lots of live and potential transactions. This is especially true of those analysts who work in corporate transaction-intensive parts of investment banks like mergers & acquisitions, leveraged finance, and financial sponsor coverage. These are the very analysts which private equity firms are most interested in hiring, since their training, talents, and daily work resembles their own most closely (as opposed to, say, corporate financiers focused on capital raising, capital markets bankers, or sales and trading assistants). For one of these analysts to have divided loyalties, or an open information channel to a private equity firm which has already hired him effective 18 months from now, is a serious potential breach of confidentiality and maybe even a source of direct conflict. Even if one presumes there are no private equity professionals who would be tempted to pressure an investment bank analyst to share confidential deal or client information via friendly persuasion or even a threat of rescinding an outstanding future job offer—a towering assumption of dubious validity, I assure you—knowledge that a junior employee has a signed job offer from a particular client is going to make any investment bank compliance officer extremely uncomfortable. It is also going to cause more relaxed banks serious client management problems if KKR discovers the analyst working on their $10 billion proprietary buyout is going to work for Apollo in ten months.

* * *

And, if we’re being honest here, the suboptimal equilibrium falling out of this vicious prisoner’s dilemma is doing nobody any good. Because too many private equity firms are competing for too few analysts¹, they have begun recruiting them earlier and earlier, and they are signing them to offers before they are even halfway done with their two-year apprenticeships. This is a problem for PE firms for two reasons. First, it really isn’t that easy to determine who are the best (most competent and adept) financial analysts after only six months, because such competence is developed not only through training but also through sheer bloody volume of experience. Private equity firms like to think they have the interviewing skills to figure this out in advance of actual proof, but in this, as in so many other things, the PE firms are massively overestimating their own knowledge and skill. The only thing they can determine with certainty this early in a novice investment banker’s career is whether he or she is a hardcore finance junkie (see footnote 1, below), but these do not always turn out to be the best analysts.

Second, and more importantly, if a bank discovers their first year analyst has an offer of employment 12 to 18 months hence at a private equity firm, they may do one or more things to seriously diminish the value of said analyst to his future employer. Harsher banks may simply fire such analysts, on the not-too-ridiculous theory that it’s just too much trouble to manage an employee with potentially serious conflicts of interest (q.v. supra) whose motivation to work insanely hard and try to become the best analyst she can be is seriously undermined by having a guaranteed exit to what she sees as a better job in the future. Other banks, suspicious about such shenanigans, may ask employees outright if they have accepted offers from other firms. If the analyst lies and the bank finds out (and Wall Street and the private equity industry are very small worlds indeed), the bank may fire said analyst for cause, thereby simultaneously cutting short the apprenticeship her future employer was counting on to train her appropriately as well as tarnishing her employment history.

Still other banks, unwilling to can employees they have sunk serious time and money into training and developing to be investment bank analysts, may decide out of reasonable caution to reassign such juniors to areas where their future employment status will not create the reality or appearance of potential conflicts. But this means these analysts will likely be rotated out of areas such as M&A, leveraged finance, or sponsor coverage where they would have otherwise received the intensive hands-on experience their future employers were counting on to make them valuable hires. Even less draconian measures along such lines, such as reassigning compromised analysts to only work with corporate clients or relocating them to overseas posts where geography can provide some measure of conflict insulation, will have the same effect of rendering these prize recruits that much less experienced and valuable to their future private equity overlords.

And in all such outcomes, the entity screwed the hardest is, of course, the financial analyst him- or herself. If he or she dodges the bullet of summary firing for cause (or not for cause), they may still limp along in another position within the bank they have less interest in, have their training and experience gathering significantly curtailed or redirected, and/or work under a cloud of suspicion as to their motivation and team spirit (with consequent negative implications for performance reviews and pay) for the remainder of their employment in banking. Plus, it would be the rare and lucky analyst indeed who suffered any one or more of these fates who did not see his magical “guaranteed” offer of employment at Private Equity Megabucks, LLC evaporate like a fetid mist over the Bayonne Marshes once PEM, LLC finds out. Trust me here: private equity firms are not charitable organizations. They don’t give a shit about you.

* * *

The solution to this dilemma, of course, is simple. Private equity firms have become large and rich enough that they should do their own damn recruiting at colleges to hire junior personnel, rather than relying on investment banks to provide a pre-screened, pre-qualified employee pool to poach from. Given their focus on hiring the elite of the elite and hardcore finance junkies, this should not be too much of a burden, since PE firms almost uniformly insist on hiring recruits from the Wharton School and maybe five or six other top-name universities anyway. It’s not like they’re going to have to visit 100 colleges around the country. Of course, they would have to train these new graduates themselves, which will involve time, money, and effort they are normally loath to expend. But the time has come for private equity firms to realize they are too big individually and in aggregate to slipstream off the shoulders of investment banks anymore. The parasite-host burden has become too large.

The other solution, of course, is to chill the fuck out and go back to the old system of waiting to recruit IB analysts later. This would be better for private equity, better for investment banks, and better for junior professionals. It is a difficult collective action problem, which would require discipline on the part of PE firms and potential recruits, as well as support from investment banks, but it is not impossible to foresee.²

Private equity takes extreme pride in being disciplined investors, and they broadcast this message loud and long to anyone who will listen. The time has come for them to demonstrate they can be disciplined recruiters and employers, too.

And to stop taking dumps in the community watering hole.

Related reading:
William Alden, A Mad Scramble for Young Bankers: Wall Street Banks and Private Equity Firms Compete for Young Talent (The New York Times, July 5, 2014)
Curriculum Vitae (March 10, 2013)


¹ Private equity firms like to style themselves as even more selective than investment banks. At least in the past, when their relative numbers could support it, they preferred to hire only the top five or ten percent of IB analysts (as so ranked and paid by their bank employers) into their firms. The notion is that they are the elite of the elite, and they want 24-year-olds who can program 50-page LBO models in their sleep using Visicalc and chewing gum, as well as pure hardcore finance junkies whose every waking dream since kindergarten has been to have a bigger 60th birthday party than Steve Schwarzman. These are the kids who tape stock tables from The Wall Street Journal and glossy pictures of Warren Buffett on their bedroom walls in high school, enroll in the Wharton School as double finance and econ majors, and who viciously haze any coworker who cannot navigate a spreadsheet without a mouse. These are the kids who have summer jobs in college teaching Training the Street classes in basic accounting and financial modeling to liberal arts majors who want to apply to Goldman Sachs too. They have always wanted to be private equity professionals. In the past, they only applied to investment banks out of college because that was the only way to get into PE.
² Surprisingly enough, the junior recruits might be the best positioned of anyone to enforce such a return to sanity. If they were courageous enough to forgo immediate recruiting by private equity as soon as they get their sea legs, they could build their skills and experience at their bank employers for the full two years of their employment. I find it hard to believe such candidates, battle tested and thoroughly trained, would not find an eager audience of potential employers among the best private equity firms once they’re ready. They are certainly superior candidates to wet-behind-the-ears tyros six months out of college. But this, of course, requires wisdom and courage from 22-year-olds in a fevered and desperate job environment. That may be too much to expect from the poor lambs.

© 2014 The Epicurean Dealmaker. All rights reserved.