Trebecca Trifecta

From today's WSJ:

Citigroup is moving ambitiously on a number of fronts. Aside from changing the leadership at Tribeca, the bank is in negotiations to buy at least a stake in Amaranth Advisors LLC, the hedge fund that has lost about $6 billion since the beginning of the month, mostly on bad natural-gas bets. The talks could fall apart, but if Citigroup takes a stake in Amaranth, it would mark the bank's latest effort to expand its alternative-investment business, which includes hedge funds, private equity and real estate.

So should bulges get into hedge funds? Yes and no. As the Journal article points out, they certainly have the high net worth and institutional customer base locked down. On the other hand, they have too much bureaucracy and overhead to be nimble. Furthermore, the truly great managers know that they can get their own client base and open up shop without restrictions. Thus, banks can wind up serving as breeding grounds for mid-level PMs to polish their skills before taking the client base over to their own funds.

What may be a better idea is to have a more involved joint back office (JBO) arrangement where the bank supplies the infrastructure, clients, and some amount of proprietary capital, and in return takes a bigger cut of the profits and imposes certain return/alpha hurdles that the fund must meet in order to continue the relationship. So long as the hurdles are met the bank stays completely hands-off and lets the fund run its strategy as it sees fit. If performance is not in line with expectations, however, it may either step in or terminate the relationship – assuring that there’s a floor to its losses. The bank may further hedge its risk by entering into JBO agreements with funds that are negatively correlated in their strategies and/or sectors.

In any case, just my thoughts – would love to hear some comments on the feasibility and profitability of such an arrangement.

Banker Break: Engrish.com

We bankers are often in a desolate mood, so I have found several good pick-me-ups to lighten the mood. I will start introducing these whenever I feel like I should post something, but can't think of any actual content.

So before you go trying to fashion a noose out of spiral binding how about laughing at the Japanese over at www.engrish.com?

Neuroeconmics 101

Back when I was in college I had the privilege to work on some really exciting projects in the nascent field of Neuroeconomincs. Since then a lot of people have inquired as to what exactly neuroeconomics is. I used to delight in explaining my research, but now it only makes me sad as I reminisce of the truly stimulating work I did before being forced back into reality by the dreary buzz of my blackberry.

Thankfully an anonymous friend of this blog has provided me with a link to an excellent, though somewhat lengthy article in the New Yorker on the field: The History and Science of Neuroeconomics

Turnover Ain't Tasty

The dubious MD from the last post has resigned today. He went from our shitty middle-market bank to a marginally less shitty bank. Other departures in the past 2 weeks: The Head of Banking, 2 Analysts and 2 Associates. Don't you love bonus season? (I'm not talking to you, Mr. Bulge Bracket Bitch, go point your gold-tipped cane elsewhere. This is Middle Market Mafia turf, and what we lack in deal volume we more than make up for in angst.)
Needless to say I am now the only analyst in the SF office, so I hope more senior guys leave. Then I will have no work, as it stands, it's 2AM and my model still looks more like Hillary Duff than Hillary Swank.
In other words:
Fat, Clumsy and Stoopid-Lookin:

...instead of Slim, Sexy and Classy:

















(and might I add that that's quite the OAS, Ms. Swank. You could boost my alpha any day.)

How Not To Close A Deal

The following is a truncated interpretation of the conference call with the CFO of a prospective bidder for a sell-side deal that led to the engagement being terminated:

Big Bidder: Hi there. We think your counteroffer is a joke. We have $70M in revenues and you have [dramatic pause] three. Basically, our valuation is right and yours is wrong. We’re throwing you a bone, so be a good little poodle and lap it up. Our original offer is final.
Our MD: Well actually our valuations are very close. We just need a little bit more to make the client happy.
BB: I’m sorry, did I stutter?
MD: Well, we’ve been very flexible and can bend backwards a little more – but if we are going to stick our head up our own ass you have to at least bend down to touch your toes.
BB: [long pause]
MD: Hello, are you there?
BB: Yeah… Umm, sorry – I just thought that I made myself quite clear.
MD: [beats off a dead horse for another 3 minutes]
BB: You know, we do have other targets that are cheaper and more exciting. Tell that to your client
MD: I’m not going to say that. That’s too negative. I’ll tell them something positive instead.
BB: (another pause)
MD: That’s cool. Just don’t say anything if you agree.
BB: No, I’ll say something. The deal is off. [Trump Style] You’re fired.

How every analyst feels after being asked to flip a 100-page CIM by tomorrow morning...

The Client Is Never Right

I spent hours this Sunday toiling over my beautiful model, unsure as to why it wasn’t balancing. I checked all the numbers, examined every formula and audited every assumption – yet still it was off. Moreover, the difference was but a measly $291,000. That won’t even buy you a half-decent yacht anymore. Why is my extremely valuable time being spent trying to find such a trivial amount, I pondered. After all, I could be lounging out by the pool in the refreshingly nippy 65 degree weather, hoping that the chilly gusts of wind will have the desired effect on the bust of the nubile young fox stretched out across from me.

Instead, there I was: buried under a pile of marked up financials, my only sources of sustenance being Cheddar Cheez-its and a bottle of Knob Creek. Bleakness all around me, save for the pale glow radiating from the monitor. If an artist is to be qualified by how much he suffered for his work then I was fuckin’ Michelangelo. The afternoon turned to night and the bottle of Knob, much like me, turned into an empty vessel, devoid of all utility. I threw the bottle into the trash and myself into bed.

This morning, feeling equal parts refreshed and hungover, I once again attacked the model with the resolve of a snared pitbull. After several more hours of futility I finally found the root of all evil. It was hidden, quite literally, in one of the 50 columns in one of the 25 worksheets in the client’s Excel financials. Turns out that when putting together their quarterly balance sheet the client decided, for no apparent reason, to omit one of the line items and thought it wasn’t worth footnoting. Now I understand why they have metal detectors in most office buildings. Then again, it doesn't seem like these guys have much of a brain to blow out anyways.

In the next issue: How to turn a $1M cow with negative cash flows into a $70M sexy beast.

I Write CIMs Not Tragedies

Most fresh analysts shudder at the thought of being staffed on their first Confidential Information Memorandum, or CIM. A 40-80 page document that will be shown to all the potential investors/buyers of a firm, it has to look perfect and sell that little piece of shit for at least twice its “true” value (of course all truth is arbitrary in banking). Not to worry, however, the CIM is one of the easiest things you’ll ever do – but do it right and everyone will think you’ve toiled endless days and nights. Creating the illusion of long hours and hard work is the most important skill of a good analyst.

Rarely will you actually have to write anything in banking. Most documents (like sales memos and engagement letters) are fully templated and so shrouded in legalese that only a legal weasel could comprehend them anyways. At first glance CIMs appear different, however. They’re meant to sell the company and must therefore be understood by any potential buyer who, we are to assume, has no legal or finance experience. Does this mean you must actually write up a coherent thesis on why this company is such a great buy? Hell no! You weren’t hired as an analyst to think. Fine, you say, but how do I fill up all these pages then?

Elementary, my dear Watson. Unlike your reputable academic alma mater the bank is amoral and encourages plagiarism. First, ask the company for all of their marketing, financial and business documents. Next, assuming the company is private, find the offering memorandum of a comparable public company on EDGAR and steal their industry overview and risk sections. Now you have all the building blocks to create your Tower of Babel.

You must copy and paste and arrange all the different pieces of different documents into your CIM’s sections, which your VP/Associate should have already defined. Remember to make it look pretty and throw in lots of pictures. Investors, like fish, have short attention spans and need shiny lures to be hooked. If you’ve ever had the “privilege” of meeting with a client for a pitch you already know that 70-80% of the book you’ve spent all of last night making is never even discussed. The CIM is no different. Investors will only read the executive summary, which is a concise copy-and-pasted version of the full CIM, look at the pictures and flip the financials. That’s enough for them to decide if they want to proceed further, and as you must know by now you only need to do the minimum work necessary to get the investor hard about your client.

That’s all there is to it. Your value-add is essentially reformatting and partially rewriting a bunch of garbage and making it look like a legitimate business operation. One final note, remember to look busy during the day and have Outlook automatically send the email with the CIM attached at 4:00am. Virtual facetime is a wonderful thing.