Posted tagged ‘wall st’

Dear John Thain: Think Outside the Box with T.P.G.

May 26, 2008

Dear John Thain,

I am intrigued to see you talking to T.P.G., although the media seems to only care about discussing capital infusions from the P.E. firm and hedge fund manager. With the recent Clear Channel conflict reverberating throughout the financial system it’s never been more clear the friction points that exist between investment banks and the other firms with which they interact. Building a collaborative relationship with a large private equity firm will give Merrill the ability to innovate their business model and profit where other banks are trying to mitigate losses. Would T.P.G. be in a better position with Merrill seeding their funds? Absolutely. Would Merrill have a better franchise if they were assured to be retained as an adviser for all/most of T.P.G.’s acquisitions (and likewise for portfolio companies)? Absolutely. Would financing large deals be easier if both sides (lender and borrower) have a stake in the transaction being completed and the total P&L of the deal (debt and equity)? Absolutely.

The best part is the model already exists and been proven out: Goldman Sachs. Goldman Sachs Capital Partners is one of the top fee payers amongst private equity funds, showing a clear benefit to Goldman’s advisory business. Goldman has been able to be aggressive in moving loans throughout the recent credit market turmoil–having a large P.E. operation, the fee income from their equity investments provides a positive balance to the negative marks for loans. In good times Goldman’s private equity arm generated profitable loans for itself and other banks (wow, how far those days seem) and added to their total income associated with a transaction. Clearly this dynamic is superior to the situation the Clear Channel financing consortium found themselves in, suing the financial sponsors because the sponsors are making money and the banks aren’t.

Merrill would also have an extremely valuable asset in the T.P.G. brand, proven fund raising ability, and long track record–a benefit that other investment banks have pursued but not had much success in achieving, Goldman being the closest to an exception (or perhaps Morgan Stanley in the form of M.S.R.E.F.). Clearly these considerations are extremely similar to the considerations that drove Merrill’s decision to invest in a top brand in money management (Blackrock). Oh, and let’s not forget the alternative asset management platform Merrill will gain access to with T.P.G.-Axon.

So, Mr. Thain, what is my proposal? Well, I’m hardly an expert on structuring these sorts of transactions, but some specific points worth exploring come to mind:

  • Merrill should take an equity stake in T.P.G. to align it’s interests with the performance of T.P.G.’s funds.
  • Merrill and T.P.G. could form a J.V. where Merrill’s leveraged loan business would, partially or in its entirety, reside. This unit would be responsible for financing buyouts and servicing T.P.G.’s needs. Leveraged finance professionals, leveraged loan trading, and distribution of loans would occur in this unit.
  • Merrill and either T.P.G.-Axon or T.P.G. itself (or both) could create an actively managed debt fund to opportunistically purchase corporate loans, real estate loans, etc. Merrill would provide some amount of leverage with T.P.G. using it’s deep relationships to acquire the rest. Some Merrill loans in inventory would seed this venture.
  • Merrill would become an adviser to the various T.P.G. funds. I’m not sure if it’s permissible to “lock up” future advisory business, but certainly there would need to be an understanding for a strong preference for Merrill to be included on all advisory work.
  • Merrill’s current private equity business, where allowed and not in violation of any agreement (O.M. terms, perhaps), would sell it’s private equity business to T.P.G.
  • Merrill and T.P.G. could institute a program for high net worth brokerage/private wealth clients to invest in T.P.G. funds.

Those are just some of the points that could lead to a productive and profitable relationship. This would turn other firms’ weaknesses and conflicts into an opportunity for Merrill. There are, obviously, tons of places where such an arrangement could break down (valuation of businesses, legal constraints, logistical issues, compliance and conflicts, etc.) but innovating the business model of Wall St. is going to set the stage for the next boom, in much the same way firms have failed this time around by, for example, relying on the same distribution-centric business models for new, unproven products. Just a thought.



Here’s Some Advice, Pre-Salted

April 1, 2008

Having been recruiting and interviewing people for a few years now, I get constant questions asking about careers on Wall Street. For the lucky few who find their way into the right career, right industry, and the right job, then it’s not something they probably ever ask about. However, for the students and others looking, it’s a daunting task to sort out the options. What are the differences in working environment? What are the things I should be considering? Large firm or Small firm? Trading, Sales, Investment Banking, or Private Equity? These are all personal questions, but here is some advice I think will be useful regardless of what you seek.

1. The people are important. Your work environment will depend on the people found within it. Your entire group and the people with whom you interact are all integral parts of the equation. You don’t have to love everyone you work with, but you have to feel that they understand your position, are worthy of your respect and will treat you fairly, and that they are motivated on a personal level to see you do well. Obviously, since the only way to know these things for sure is to work with them, it’s difficult to know these ex-ante.

2. Be a team player. There are far, far too many examples of people building walled gardens in the world of finance. The thought process is, “If I know everything, and other people don’t, then I’m the most valuable person.” Let me tell you how the story usually ends: someone senior figures it out and the person hoarding information is usually pushed aside, fired, or moved. Not only that, but when the person is doing everything critical, they become a bottleneck, and urgent matters crush them personally and professionally. Show everyone from the start you are a team player. Involve people more junior than you and solicit input and feedback from people at or above your level. Offer to help and ask for help. It’ll get you a long way personally and professionally.

3. Never stop learning. Don’t just learn how to do what you’ve been doing well and stagnate. There is a constant evolution in the world of finance. Do you know what happened to all the people who were working with sub-prime mortgages and only knew their end of the business? Nothing good. You can’t evolve in your job if you don’t learn anything new. As innovations occur, understand them, the motivation behind them, and what they mean for the market/industry/system. Once you start to understand why people improve on existing structures, techniques, or financial technologies you’ll be in a position to innovate yourself when you see an opportunity.

4. Keep in touch with people and go out of your way to meet new people. This one is tough because it’s largely a personality issue, some people are comfortable with this and some people aren’t. Almost every hedge fund and every private equity firm was started up by a handful of people, deciding to cast their lots with each other. Now, these mega-success stories aren’t representative, but it also shows that one never really knows which relationships and ties will be most vital and beneficial to one’s future. Also, it’s hard to point to any example in my experience where knowing or meeting someone was a bad thing.

5. Don’t take any magic advice. There isn’t any. Everything that leads to success is slow and common sense, when stated plainly enough. Look for magic bullet somewhere else. Every story about someone who made a billion dollars in three years has an element of luck that is spun into certainty by good story telling. If you keep trying to be in the right place at the right time you’ll miss out. A strong knowledge base, solid work ethic, and a deep understanding of what’s going on around you and why is the best way to anticipate the next need. Keep in mind, as well, that the selection bias in the stories you are told obviously favor the success stories.

6. Have a backup plan. This business is both cyclical and fickle–the people you need in a boom aren’t the same people you need in a bust. Quarterly reporting means that sometimes things are rushed. Political and irrational concerns play into personnel decisions, resource decisions, and decisions on business focus. Any one of these changing can mean an adverse event and a sudden turn for your career. Headhunters are your friend but the firm‘s enemy (in general, some aren’t anyone’s friend)–talk to the good ones and keep in touch.

7. Know and demonstrate your value. When it comes time for recognition, promotions, or compensation you should know the facts going in. Take notes of what you’ve done. Inform your boss of what you’ve contributed, don’t assume others will do it for you (keep it appropriate and infrequent, but better to tell him something he knows than have it go unsaid). Obviously your mileage will vary and this is a series of personality assessments, but the principle is a constant. You lose your right to complain about something if the right people don’t know about it (vague, but meant to be general–think of it as not voting and complaining who won the election, you can’t).

9. Know what’s going on with your peers. Guess what a big theme on the street is? Comps (comparables). Guess what you get from the company you work for and your boss? Whatever they have to give you to be happy, and no more than suits them–it’s not personal, it’s a business. You should be talking to your peers to know if they are progressing faster than you, slower than you, or differently. Learn about how they handle problems and what works for them. It’s collective experience, and it gathers much faster than individual experience.

10. Get your foot in the door. I have only seen one person get hired for a non-support role on the Street that where the person wasn’t of college or from another firm on the Street. This person was one year out of college, at a major technology company, and even then was second guessed. Entry level jobs have a profile that recruiters look for, and some places have policies against taking people that have work experience into these entry-level jobs (obviously not including people graduating with M.B.A.’s who have prior work experience). I also haven’t seen a job listing that doesn’t call for relevant work experience. Even jumping between disciplines within finance is really difficult (P.E. to trading, or sales to banking, etc.). Unfortunately, this is the reality.

11. Know your priorities–prioritize money, career, and lifestyle early and often. This probably should have been #1 or #, but that’s life. If you wan to get paid and be a mercenary, then do that. If you want to be career oriented, then take that path. Either way the more you let it be known what your priorities are, people will associate those with you. If your priority is money, people will come at you with guarentees and higher risk positions. If your priotity is career, people will keep you in mind to take leadership opportunities and advance (with a higher potential for failure and a career setback). Keep in mind that mercenaries get paid more, but their high compensation paints a target on their back. Career-oriented employees can find themselves not being paid at the top tier, but with a bigger job. Tradeoffs all around. Whatever your focus, though, ensure that you’re good at what you do and advancement (up the money ladder or the corporate ladder) will come (with varying degrees, for maximum benefit add a few ounces of luck too).