From day one as a Summer Analyst or Summer Associate, every banker comes to revile the term “pitch.” What is a pitch, and why are pitches so despised by the junior team members? A pitch is the sales presentation by an investment bank, to a prospective or current client, marketing the firm’s services and products or a specific transaction. The primary purpose of the pitch is to secure a mandate, but it also serves as a means to stimulate discussion between the client and deal team. This dialog helps the deal team learn more about the client’s business and generates ideas for future pitches. The document used to facilitate this presentation is known as a pitch book.
The initial idea for a pitch typically begins with an industry group managing director. The primary responsibility of this managing director is to help the client solve corporate finance issues by offering the bank’s products and services. For any given client, there are several investment banks pitching ideas to that client. In the investment banking competition the worst thing for the managing director is to have a client do a transaction that pays huge fees and have his bank not be involved. When this happens, the managing directors have to answer to the higher executives about why the investment bank was not involved with the deal.
Given this dynamic, most managing directors are constantly coming up with potential ideas to pitch clients. This in turns can create a tremendous amount of work for those lower down the ranks. Although vice presidents and associates may be heavily involved with a pitch, the brunt of the work is usually done by the analyst. Most of this work results from comments of more senior team members on the structure, semantics and length of the pitch book. This can turn a fairly straightforward pitch into an all night exercise. Even though the pitch book is vetted by the entire deal team, the analyst’s most stressful duty is to make sure there are no mistakes in the final product. This means having the latest company and industry information in the pitch book with no typographical or analytical errors throughout the presentation, or anything else that can cause a pause in the meeting. Even though the pitch book may not be opened in the meeting, the focus of the meeting is all about relationship-building.
Although the structure and the length of the pitch book will vary based on the style of the managing director, most pitch books will contain the following sections:
Firm Capabilities and Qualifications
This section gives an overview of why the investment bank is the best and how the firm ranks among the competitor investment banks in the major product areas. For example, rankings are provided for mergers and acquisitions, debt, equity and other derivative products. The rankings versus the other investment banks are referred to as the league table rankings. These rankings are normally sliced/manipulated so that the investment bank is ranked one or two in each category. The numbers can say what you want them to say and the team will craft the league tables accordingly. The key to the league tables are in the footnotes. The investment bank may be ranked number one, but the footnotes may detail that the number one ranking is for deals done for companies that names begin with “A.” This may be an extreme example, but bankers are often willing to take extreme measures to position themselves well with clients.
The market update is to give the client thoughts on the current capital market environment and trends. This part of the presentation is normally led by the product specialist and the section in the pitch book is normally provided by a product group. When the markets are in turmoil, the clients value the investment bank’s thoughts on the direction of the markets and the optimal time to do a transaction. The key for the investment bank is to have a view and sound convincing and knowledgeable about the markets. Even though there is not necessarily a correct answer when it comes to the markets, it’s important for the bankers to express an intelligent perspective about the fluid market situations that frequently occur.
This section requires the majority of the analysis associated with a pitch. The purpose of this section is to give the client the investment bank’s view on the amount of capital that can be raised, the pricing of the capital, valuations for sale or acquisition targets, potential buyers and sellers in an M&A process, and the timing and process for the proposed transaction. Below is a description of the primary analysis an analyst will perform to present a transaction in a pitch:
This analysis benchmarks the client against its peers. The comparable analysis considers the relevant statistics (sales, earnings, valuation/trading multiples, etc.). The analyst has to comb all available financial filings and public releases to ensure the analysis is correct and contains the latest information.
Building financial models is probably one of the most important skills for an analyst to develop and master. For a merger and acquisition pitch, the model provides the basis for the valuation along with the other benchmarks comparable transaction and public comparables. For debt financing pitches, the model is used to show how a debt issuance can be serviced and repaid. Additionally, for an IPO pitch the model is used for valuation and to show the company’s financial profile after an IPO transaction. The model is a crucial analytical tool, but it is quite frequently used by the deal team to back solve for the valuation or cash flow that is needed to justify the transaction rationale.
When the managing director does not have a specific idea to pitch the client, the deal team usually pitches random merger and acquisition ideas. These pitches require the analyst to put together company profiles for potential buyers or sellers. The company profiles give a summary of the business, management and other key performance statistics. However, the profiles are tedious work for the analyst and one of the least enjoyable elements of building a pitch book. When considering what would require an analyst to work twenty hours in a day, imagine paging through publicly available information, putting together profiles of the top 50 buyers for a client’s least attractive division.
Although the process differs across the various investment banks, there is one element that is constant regardless of the institution. Given the type and number of people who are involved with a pitch, the process is almost guaranteed to be INEFFICIENT! Of course, another short-coming of the pitch is that it is not a “live deal” so likely won’t lead to deal toys, mentions in the Journal or, most importantly, revenues for the firm.