December 4 th, 2009 Gene Moldavsky Managing Director, Head of Corporate Finance, Alfa-Bank...

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December 4 th , 2009 Gene Moldavsky Managing Director, Head of Corporate Finance, Alfa-Bank Everything You Always Wanted to Know About Investment Banking (But Were Afraid to Ask)

Transcript of December 4 th, 2009 Gene Moldavsky Managing Director, Head of Corporate Finance, Alfa-Bank...

Page 1: December 4 th, 2009 Gene Moldavsky Managing Director, Head of Corporate Finance, Alfa-Bank Everything You Always Wanted to Know About Investment Banking.

December 4th, 2009

Gene Moldavsky

Managing Director, Head of Corporate Finance, Alfa-Bank

Everything You Always Wanted to Know About Investment Banking

(But Were Afraid to Ask)

Page 2: December 4 th, 2009 Gene Moldavsky Managing Director, Head of Corporate Finance, Alfa-Bank Everything You Always Wanted to Know About Investment Banking.

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Why am I here on a Friday night?

►Lecture objective: to share a slice of the real world

►Investment Banking Experience- Managing Director, Head of Corporate Finance, Alfa Bank (2007-present)- Executive Director, UBS Investment Bank (2002-2006)- Vice President, Renaissance Capital (1997-2001)

►Education- Boston University, School of Management- London School of Economics

►Deals/Transactions- Over 50 Investment Banking transactions- Aggregate deals value exceeds US$25 billion - Examples

US$1.9 billion Svyazinvest privatization (1997) US$2.0 billion merger between Rostelecom and Moscow MMT (2000) US$3.4 billion public markets sale of MTS shares by Deutsche Telecom (2004/2005) US$4.8 billion acquisition by Mittal Steel of KryvorizhStal (2005) US$1.2 billion sale of Maxi Group to NLMK (2007) US$400 million sale of Corbina Telecom to Golden Telecom / VimpelCom (2008) US$1.2 billion rights offering of X5 shares (2008)

Page 3: December 4 th, 2009 Gene Moldavsky Managing Director, Head of Corporate Finance, Alfa-Bank Everything You Always Wanted to Know About Investment Banking.

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How is an Investment Bank different from all other banks?

Commercial banks Retail banks Investment banks Universal banks

Customer Base

► Corporate customers ► Small & medium

enterprises

► Individuals► Small & medium

enterprises

► Financial markets and its players

► Corporate customers► Small & medium

enterprises► Individuals► Financial markets and its

players

Main products

► Corporate loans► Trade credits► Factoring► Cash management► Salary management

► Consumer credit► Mortgages► ATMs► Deposits

► Equity/debt issuance and trading

► M&A / advisory ► F/X► Syndicated loans► Derivatives

► A supermarket of all products

Examples in Russia

► Loko Bank► Zenit Bank

► Absolut► GE Money► Standard

► Goldman Sachs► JP Morgan► Morgan Stanley► pre crises Lehman

Brothers, Bear Sterns

► Alfa Bank► Citi► MDM► Sberbank► VTB

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What do Investment Bankers do all day?

► Middle Office: Where the money is not lost- Risk management – market and credit analysis minimizing risk of loans and trades made by the bank- Treasury – responsible for funding, capital structure, liquidity and maximizing return on cash on hand- Financial control – capital flows analysis, budgeting of the bank, reporting, global risk management, etc.

► Back office: Where the money is not made- Operations – clearing/checking trades by Sales and Trading (settlement)- IT – front office support (PCs, Bloomberg), hedging algorithms, electronic trading, settlement systems, financial reporting- Compliance – compliance with government and internal regulations

Department Primary activities of professionals Products

Investment Banking (Corporate Finance)

► Originate and execute IB transactions► IPOs, private placements, debt offerings,

mergers & acquisitions, general advisory, hostile takeovers, restructurings/bankruptcies

Sales and Trading► Calling institutional or individual clients, executing

client trades, buying/selling for own book ► Making markets for clients

Research► Analyze sectors and companies, ► Write reports / recommendations, meeting companies

and banks’ clients► Research reports

Investment Management

(Private Banking)

► Develop client base, manage securities portfolios or other assets for institutional / individuals tailored for specific investment goals

► Mutual funds, structured products

Merchant Banking(Private Equity)

► Use banks’ and external capital to invest in private companies with the goal of an “exit” through the capital markets or sale to a strategic investor

► Private equity funds

Front Office: Where the money is made! 1

2

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How do Investment Bankers earn money for their firms?

Department Revenue Examples

Investment Banking (Corporate Finance)

► Success fees on deals► Retainers

► IPO NLMK ($600MM) – 3% ► Mittal Steel / Krivorozhstal - $3MM flat fee► MMK Ruble bond – 0.20%

Sales and Trading► Spread on buying/selling► Fixed fee on each share trading► Proprietary trading (the “Book”)

► Europe: 0.10-0.20% per trade► US: 0.03 cents per share

Research► None but supports Sales and Trading / Investment

Banking► N/A

Investment Management

(Private Banking)

► Management fee on funds under management► Fees / spread on structured products

► 1% fee on funds under management

Merchant Banking(Private Equity)

► Management fee on capital raised► Carry on performance (with possible hurdle)

► 1-2% management fee► 20% carry (8-12% hurdle)

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How do Investment Bankers earn money for THEMSELVES?

► Typical Compensation structure: salary and bonus

► Stock payment / vesting an important consideration

► Disproportionate bonus at senior levels (Director / Managing Director)

Bank Number of employees Compensation, US$ mln.Compensation per

employee, US$

2007 2008 2009 2007 2008 2009 2007 2008 2009

Goldman Sachs 30 552 30 067 30 067 20 190 10 934 22 283 660 841 363 655 741 100

Credit Suisse 48 100 47 800 47 400 13 308 12 213 15 428 276 678 255 500 325 490

Morgan Stanley 48 256 46 964 62 004 16 552 12 306 14 496 343 004 262 030 233 791

Deutsche Bank 78 291 80 456 78 530 17 847 14 734 16 704 227 960 183 127 212 703

JP Morgan 180 667 224 961 220 861 22 689 22 746 29 088 125 585 101 111 131 703

► Investment Banking► Sales / Trading► Research► Investment Management► Private Equity

Statistics

Russian market compensation ranges

Note: 2009 compensation expenses annualized. Number of employees for GS kept constant in 2009 vs 2008

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What is the landscape of Investment Banking in Russia?

Global Investment Banks Russian Universal Banks Russian Investments Banks

Active market participants

Goldman Sachs, JP Morgan, Morgan Stanley, Deutsche Bank, UBS, Credit Suisse, Citi

Alfa Bank, VTB Capital, Sberbank Capital, MDM, UralSib

Renaissance Capital, Troika, Aton, KIT

Strengths

Brand Global distribution Industry/product knowledge Independence

Deep lending relationships Weaker compliance Government support Affiliation with oligarch group /

government Ability to do “Russian” deals

Independence Focused strategy Flexible compliance Risk taking philosophy Ability to do “Russian” deals

Weaknesses

Lack of long term commitment Churn of professionals Onerous compliance Limited lending risk appetite

Affiliation with oligarch group / government

Relatively new to investment banking

Limited global reach

Limited lending capital Post crisis financial stability Limited global reach

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What are the building blocks of making a career in Investment Banking?

►Proper education- University name recognition- Proper coursework (finance, accounting, valuation, capital markets)- Supplemental boring reading (valuation methodology, “The Art of M&A”)- Supplemental fun reading (“Liar’s Poker,” “Bonfire of the Vanities,” “Barbarians at the Gate,” “Den of

Thieves,” “The Last Tycoons,” “House of Cards”)

►Getting the first job- Proactive behavior- Existing connections / relationships- Perfecting the interview process – making the right first impression- Doing the homework on the employer

►Moving up the organization and making more money- Demonstrate the basics

outstanding mathematical skills no mistakes on tasks performed quick learner positive attitude even in 15 hour days team work behavior improvement of internal processes; creativity

- Develop management skills to oversee teams/departments- Develop deal origination skills (“smelling a deal”)

Page 9: December 4 th, 2009 Gene Moldavsky Managing Director, Head of Corporate Finance, Alfa-Bank Everything You Always Wanted to Know About Investment Banking.

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What other secrets

do you want to know?