Investment Banking Terminology: Lead Left Bookrunner

The “Lead Left” Bookrunner is the investment bank chosen by a client to lead a capital markets transaction and is usually identified as the upper-left hand bank listed on the offering document cover.  Typically the Lead Left Bookrunner has been involved in the proposed deal from the onset and largely controls transaction details (roadshow and marketing process, updates with capital markets desk, drafting of offering documents, diligence sessions, etc) and generally gets a better economic position in the transaction and is likely to be selected for other deal functions (such as stabilization agent or structuring agent).

Facebook preliminary prospectus cover showing bookrunners and co-managers

Morgan Stanley was the Lead Left Bookrunner on the Facebook IPO (but given the problems with that deal they might wish they'd been on the right)

 

Why is being the Lead Left Bookrunner important?  Being on the left is the most prestigious position for a bank to have on a transaction – the managing director who wins the deal gains status with other potential clients in the same sector who may consider a similar transaction at some point in the future.  Winning enough deals can establish a bank as the de facto “expert” in that category of transaction for that sector.  Consistently being the Lead Left Bookrunner indicates that a bank is very well plugged-in to an industry (or deal type – ie one bank may do a significant number of high yield bond deals in the media industry).  The insights gleaned (both industry knowledge and deal execution experience) from leading deals is critically important in building and broadening client relationships for the senior bankers.

What does being “on the left” mean for the junior banking team? Put simply: more work.  If one were just to calculate economic benefit per man-hour expended, being a non-Left Bookrunner would be much more financially lucrative than being on the left.  Often the non-Left Bookrunners will participate in the initial organizational meeting and subsequent drafting and diligence sessions, but the Left Bookrunner will drive 99% of the marketing materials, financial documentation and quantitative analysis/modeling.

 

 

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What is a pitch?

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.

Market Update

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.

Transaction Section

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:

Comparables

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.

Financial Model

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.

Company Profiles

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.

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Investment Banking Terminology: What Is A Roadshow?

(Editor’s Note: Our intention in creating this site is to provide information and insight into investment banking as a career, based on our personal experience as career-changing MBA graduates; we will periodically post explanations/definitions and some context on terms that might not be familiar to everyone exploring opportunities in investment banking.  Feel free to leave a comment below or send an email to admin@investmentbankinginsight.com with any specific requests and we will respond or feature in a future post.)

The term “roadshow” is probably most commonly used when referencing the television progam Antique Roadshow, in which antique appraisers travel from town to town and local folk learn how valuable (or invaluable) their curios and heirlooms are.  In investment banking terms, a “roadshow” again involves traveling and an appraisal/valuation process, but in this case it’s the bankers and their clients that travel to meet institutional investors (such as mutual funds and hedge funds) to interest them in the security (likely a stock issuance or bond offering) that they are bringing to market.  In the financial roadshow, the investors do not usually reveal the value they have ascribed to the security at the end of the meeting, instead working with the equity syndicate team (the part of equity capital markets that acts as a liaison between the banking team and the potential investors) to indicate at what price levels they would be willing to participate in the offering (and the amount of securities they’d be interested in at that price).  There is also a so-called “non-deal roadshow” where the client company just meets with various important investors and keeps them apprised of how the business is going (public information only, however) and keeps the management team fresh in investor eyes.  On such roadshows, it is more likely that a research analyst will accompany the management team rather than the investment banking coverage team although a banking analyst may provide logistical support.

The participants in a roadshow are usually members of the management team (frequently, but not always, the CEO and CFO), a senior banking team member (usually the senior coverage banker for the first day of the roadshow – which often kicks off in NY/NJ – and then usually the next-most senior member of the coverage team (often a Director or VP) as the roadshow shifts to the West Coast and Midwest) and one or more junior bankers assigned to handle process and logistics.  Usually the target investors are determined by the lead underwriter’s capital markets team and the hotel/plane reservations and itinerary are scheduled by that bank’s roadshow coordinator.  (The lead underwriter is the investment bank listed on the upper left portion of the prospectus – a distinction that is highly sought after in the banking community.)  The pace of a roadshow is invariably exhausting, even if the majority of travel is via private jet – the analyst assigned to manage roadshow logistics quickly learns there is little margin for error with a tight schedule and busy participants, and it is his/her responsibility to make sure the team gets to each meeting on time.

Once the capital markets team has identified the most desirable potential investors to meet face-to face on the roadshow (there are also video conferences and conference calls for interested investors whose schedule does not allow for in-person meetings) they will work with the roadshow coordinator to create the schedule for the roadshow.  The duration of a roadshow can be as few as 1-2 days or as long as several weeks for a major offering that requires face-t0-face meetings with many international investors.  Once the schedule is confirmed the banking team will decide who from will attend from the investment banking side; attendees will essentially be barred from working on additional projects while assigned to the roadshow as there is little down time while scurrying from city to city.

Prior to launching the roadshow, of course, there is substantial prep work required to create a standardized presentation to show to all of the potential investors.  All the information in the roadshow presentation must be publicly-available and tie to information presented in offering documents filed with the SEC (this will all be vetted by the underwriters’ legal team).  The presentation itself usually includes an introduction to the management team, an overview of the business and industry and a review of historical results, as well as several bullet points that highlight why the security being discussed is a good opportunity for the investor (unsurprisingly called investment highlights.)  Usually the deal is introduced by the senior investment banker (terms of the deal such as shares offered, price range, coupon, etc) and then the floor is handed to the management team.  The banker might answer additional mechanical questions about the deal, but generally doesn’t say much after the management team takes over.  However, the banking team gains valuable insight into how the buyside community evaluates a sector – and the individual clients within - just listening to the dialogue between the management team and the fund managers.

For junior investment bankers, the two most important hurdles in the roadshow process are: 1) finalizing and printing the roadshow presentation (which is never left with the investors despite the fact there is no material non-public information therein), and 2) managing logistics when on the roadshow.  Managing logistics is much more difficult than it might initially appear – the corporate executives on the team often have issues to deal with beyond the roadshow and given the late dinners and early wake-ups and extensive travel, nerves soon fray.  Being responsible for logistics is a classic “no upside/significant downside” situation – keeping meetings and travel on track is of paramount importance and often requires the junior banker to speak up forcefully to senior bankers and clients to keep everything on schedule.

My two most significant roadshow memories were from a deal I did when I was a Second Year Associate at Banc of America (back in late 2003, well before it acquired Merrill Lynch).  Some investors do not even allow bankers in the meetings themselves (such as Putnam and Fidelity), and at others the presence of bankers is frowned upon but tolerated.  At one such establishment, I was sitting quietly at the (very) far end of the conference room, with a Vice President from my group (the Managing Director from our team was sitting up with the management team, but had stepped out to take a phone call after introducing the management team).  I showed the VP an email on my blackberry from another Director I worked for, who was enraged that I was not in the office.  (He had forgotten I was on the roadshow.) The Director used some “colorful” language in this email, to put it mildly.  This caused the VP to start laughing uncontrollably – at which point the investors kicked us out of the room – which they should have; I was mortified and could feel my first full-year bonus dissolving into the mist.  The management team waited til the end of the day to dress us down in front of our MD who had missed the debacle, but that was the end of it.  And that particular investor ended up with the largest position in the IPO.  (Still might have cost me about $5k the next January, though.  I’ll never know for sure.)

On the same roadshow, I inexplicably became the senior banker on the Northern California and Midwest portions (we weren’t exactly awash in IPOs back then!) which was somewhat scary given my paucity of experience.  However, I was ecstatic that I was the one who fielded the management team’s request to go to an NFL game that Monday night, as we happened to be in San Francisco, home of my favorite team.  Got to watch the 49ers handle the Steelers from the second row – if memory serves, Kevin Barlow had a big game.

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What Is Investment Banking?

Back when I was a banker, I used to get this question all the time.  In areas outside of New York and maybe Boston, the term was likely to be associated with a gig as a loan officer at the local First National Bank.  Since the fall of Lehman and Bear, and the rise of the Occupy movements, the connotation has become a bit more sinister.

My old standby explanation was that an investment bank was really just a bank for companies.  In hindsight, this analogy was pretty weak – sure, an investment bank might loan money to a company as a retail bank might to an Average Joe, but the comparison falls apart somewhat from there.  (And even that might not be very accurate – depending on the setup of the bank, corporate loans might be handled by a commercial banking team more than an investment banking team.)  For example, a retail bank isn’t going to help a person raise equity (no matter how great of a person the client may be) or advise them on how to acquire a competitor.  Really, the only way to explain what an investment bank is is to go through at least a high level synopsis of the information below (the average listener’s eyes will likely glaze over well before you get to the part about the advisory side of the business.)

At the most basic level, investment banks provide access to the capital markets (equity and debt) to their clients so that the clients can fund and grow their businesses.  Additionally, bankers provide advisory services – most notably advice on mergers and acquisitions, where many of the most famous bankers made their marks.  (Many of the most infamous bankers did so in the debt capital markets in the junk bond era.)  There are many additional ancillary products and services that straddle the invisible line (in banking terms, this usually means a “Chinese wall” is in place to prevent the exchange of private information between groups) between investment bank and corporate bank, or investment bank and “sales and trading” unit.  (Indeed, the majority of the folks that created the CDOs and other derivative products that led to the financial crisis were mostly on the trading side of the business rather than the banking side.) Although the sales and trading units are technically part of the investment bank, our discussion of investment banking will be restricted to the traditional “sell-side” segment that offers capital markets and advisory services.  (“Sell-side” generally refers to these services offered by investment banks wherein the banks/bankers receive a fee for providing service such as advisory work or underwriting capital markets offerings; “Buy-side” generally refers to investment funds that have capital to invest.  Research is another component of an investment bank that operates somewhat with a foot in both worlds – a subject for another post.)

Importantly, an investment bank is a service business – ie one that provides benefits to clients principally via intangible human capital rather than via a physical product.  At the end of the day, senior bankers must possess a strong sales capacity and build relationships with their clients.  An interesting component of the sales process is that the team of bankers is the product, so there is no need for horizontal or vertical integration with a production or engineering team – the senior deal team member will be selling the team itself.  The bankers responsible for cultivating client relationships must constantly reiterate the value of using their particular team, and will frequently provide detailed analyses and “pitch” ideas as a way of keeping in front of the client.

Generally banks are organized such that there is a “coverage” team that works with a specific group of clients in a sector (such as Media, Telecom, Industrials, Financial Institutions, etc) – the bankers in these groups are not experts at any particular “product” however – they will typically have colleagues in mergers and acquisitions (heretofore, “M&A”), leveraged finance or other product areas who will attend specific meetings once discussions or ideas lead down a fairly narrow path with a client.  Usually the product partners work with a much wider universe of clients, but they do not have quite the relationship-building responsibility as the coverage bankers.  (This is not cast in stone, however, as clients sometimes develop a strong rapport with a product partner and come to view them as part of the coverage team – for example if a company has done two acquisitions with the same banking team, they will like become very close/comfortable with the lead M&A banker and make inbound calls directly to the M&A banker.)

In a nutshell, the job of the average bread and butter “coverage” banker is not significantly different than that of any kind of traveling salesperson – spending significant time traveling to see clients, in many cases pitching ideas (somewhat analagous to cold-calling, except it’s the idea that’s being shown for the first time, not the introduction) to foster relationships, with only a small likelihood of advancing the pitch idea beyond the initial meeting stage.  However, every meeting is an opportunity not only to build (or weaken!) the client relationship but to learn information not only about that client but even their competitors and get a better sense for the strategic landscape in that industry. At the more senior levels in banking (Vice President and above) information trafficking becomes very important – demonstrating industry knowledge and that the banker has the right connections.

In summary, investment banks provide services that allow businesses to fund and grow their operations, and strategic and financial advice (such as when to repurchase shares, optimal debt levels, etc.)  We will provide additional posts with detail on some of the terms and concepts introduced here – feel free to leave a comment below, we will respond in the comment section, or for more substantive items, in a new post.

 

 

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