Careers in Finance – Finance Career Paths.

– written by Chitra Venkatesh (IIM Lucknow class of 2016) and edited by Karthik Palaniappan.

This section will explore the different domains that a fresh grad can enter within the ambit of finance.

Investment Banking

What is it all about?

Every day in business newspapers, we might notice news articles on Initial Public Offerings (IPOs), share buybacks, bonus shares issues, Mergers & Acquisitions (M&A), and Leveraged Buyouts to name a few. In all these activities, it is the investment banker who acts as a conduit. In order to raise funds, investment banker acts as an underwriter, helps the firm ‘discover’ the issue price and helps issue the IPO. The same holds good for bonus issue, rights issue and buyback. They may provide advisory services (through intensive internal research) when a client shows intention in M&A.

Is the pay check hoopla accurate?  Is the job environment worth the pay?

These firms have an insanely high pressure environment and they recruit fresh grads based on their technical and communication skills. Fresh MBA grads start as associates and their job involves performing research, studying companies (fundamental analysis along with some qualitative aspects), due diligence, etc. Base salaries hover around $100,000 and could be as high as $300,000 [1]. Besides this, after a percentage cut from every bulk deal, the entire team (a group of analysts, the partner and the director) gains in several millions. E.g.: The $19 billion acquisition of Whatsapp by Facebook is speculated to have earned JP Morgan $35 million as advisory fees. The job offers further opportunities in the form of commissions as the associate moves up the ladder with an increase in his/her percentage cut. General career path àAssociate, VP/Principal, Partner, MD.

However, moving up the ladder is tough considering the strenuous 18 hour work life. Even if one achieves partnership, it could be cumbersome to survive since partners are expected to bring profitable bulk deals through their pitching skills. Many I-bankers quit after gaining expertise. Some join private equity and hedge funds as they are perceived to be less taxing and more lucrative than I-banking. Others who are keen on work life balance take up corporate finance in top MNCs.

Big Brands

Popular I-banks at Business schools are JP Morgan Chase, Goldman Sachs, BOA-Merrill Lynch, Deutsche Bank etc. Others like Credit Suisse, RBS, and UBS are gaining momentum amidst student population. It is important to remember that certain commercial banks might also offer I-banking roles (GSA stands for Glass-Steagall Act, and it prohibited commercial banks from participating in investment banking post 1929 great depression. It was repealed in 1999 which is believed to have caused the 2008 crash). Most of the I-banking firms recruit at top B schools (ivy leagues).

Private Equity

What is it all about?

Private equity firms garner funds from HNIs, asset management companies and buy a pool of underperforming companies and turn them around (Example: Hilton hotels deal for $26 billion by Blackstone). They earn a commission fee and a profit after selling the restructured company in the course of 5-7 years. These firms generally perform two major activities: one, identify potential underperforming companies available for sale; two, restructure and manage their pool of purchased companies.

Pay check and career growth

They offer the most sought after jobs for candidates with a finance major. Their compensation is higher than other jobs in the sector. Average base pay for fresh MBA grads at Stanford (class of ’14) stood at $166,000 with a signing bonus as high as $100,000. Apart from good analytical skills, PE firms look for past experience in either consulting, investment banking, or leadership roles in top firms. This is probably why MBA grads, after gaining experience of 2-5 years in the profiles mentioned above, join PE.

Since pressure is tremendous here as well, people tend to switch. General Career Path à Associate, VP/Principal, Partner/Director. With experience in PE, people may switch to hedge funds. Those in search of work-life balance join Fortune 500 companies and might even start their own company.

Big Brands

Since these jobs are in high demand, recruiters eye only Tier 1 business schools. The Carlyle group, the Blackstone group and KKR, are very famous names in PE.

Venture Capital

A VC invests in firms which are at the start-up phase and have limited access to capital markets (i.e. loans and equity). VC firms garner capital from HNIs and institutional investors. Once invested into a pool of start-ups, they monitor their activities. While most of VC start-ups fail, the ones that succeed give exponential returns more than compensating the loss made by the total pool of invested funds.

The activities in a VC are similar to PE except that VCs are into start-ups. Fresh B school grads who join as associates need to source potential VC candidates and conduct due diligence as part of their job. The profile demands unearthly working hours as in case of PE and IB roles and employees are rewarded accordingly. The base salary for VC firms is comparable to that in PE (VC firms pay slightly lower than PE). Exit options are also similar to that of PE.

Asset Management

As the name suggests, this domain focusses on augmenting the value of funds invested by clients. Based on the methods of investments and client profile, there are sub categories – hedge funds, mutual funds, etc..

Hedge fund Management

Funds from HNIs are collected and invested in a portfolio of financial securities by hedge fund managers. Unlike in other funds, hedge fund managers can invest in any kind of financial security (based on the type of fund, they may invest in stocks, bonds, currencies, options, futures, commodities, etc.). Contingent on the fund’s risk-return profile, the fund manager churns the portfolio of securities regularly. When the fund performs well, the reputation of the fund manager improves. Usually, fund managers with a good track record attract investors and hence a higher AUM (asset under management). These managers are paid a percentage of the AUM apart from a performance based component.

Mutual Fund Industry

These work just like hedge funds except for a few restrictions on the kind of financial securities the funds are invested into. Secondly, these funds are accessible to virtually everybody since minimum funds to be invested at entry is low. Lastly, hedge funds are aggressive but MFs are not. In fact certain MFs such as debt funds carry low risk – low return profile.

Pay check and brands

Out of the two, hedge funds jobs are more sought after in B schools owing to the exposure and higher compensation packages. Hedge funds are glamourous as fund managers takes aggressive positions while trading and hence demand higher compensation. Unlike in MFs, fund managers have to be experts in trading more complex securities like derivatives. It is hard to enter asset management immediately after an MBA; even more so with hedge funds. A few years of experience in investment banking could help one enter this industry. It is also possible to enter the Mutual Fund industry with an MS in Finance.

At Stanford, the average base salaries paid for portfolio management stood at $152,000. As mentioned earlier, based on the fund performance, fund managers are paid a variable component. Companies recruiting look for portfolio handling capabilities, experience in trading securities etc. along with an MBA from a top B school. Firms like Blackrock, PIMCO, GS Asset Management, and Bridgewater Associates are popular names.

Corporate Finance

What is it all about?

For those of you who are fond of finance but long to have a reasonable work-life balance, corporate finance is the path to take. There are top corporate finance roles in fortune 500 companies offered to bright MBA grads. Under the ambit of corporate finance, aspects such as sourcing funds for a new product launch, evaluation of projects (from financial perspective) and increasing shareholders’ value are covered.

Pay check and other details

These roles are offered to fresh graduates across a multitude of B schools. However the best offers made to fresh grads are limited to those from Ivy League. These firms generally look for a strong hold on the subject. Although, candidates with a finance focussed undergraduate degree may have an advantage, they may not be game changers, since command on the subject rules.

Sometimes, MBA grads after a stint in high paying domains like PE and investment banking join these roles too. Their compensation is lower than investment banking profile but these roles offer the opportunity to grab the higher rungs of an organisation. Undoubtedly, a large number of CFOs join via corporate finance roles. With respect to exit options, candidates can seamlessly switch between many Fortune 500 firms. Nevertheless, a little difficulty might be experienced while switching to an altogether different industry (Eg: corp. fin. roles from mfg. industry to tech. industry).

Other options

Other career options in finance include roles in commercial banks, central banks, and credit rating agencies (like S&P).

Which one to pick?

Based on the appetite for pressure and the drive to earn, fresh grads can choose one of the many career paths discussed above. While recruitment in corporate finance is not highly contingent on past work experiences, past work experience does matter in case of PE and hedge funds. If a student is keen on careers in PE, VC and hedge funds, it would be wise to start building a strong CV by gaining relevant work experience.

References

  1. Recruitments reports:

HBS: http://www.hbs.edu/recruiting/data/Pages/function.aspx

Stanford:https://www.gsb.stanford.edu/sites/gsb/files/files-fpp/23396/Stanford%20GSB%20Employment%20Report%202013-14.pdf

  1. Master’s of the financial Universe. Bloomberg News. Retrieved from: http://www.bloomberg.com/news/articles/2009-04-06/masters-of-the-financial-universebusinessweek-business-news-stock-market-and-financial-advice
  2. Morgan Stanley Lands WhatsApp Deal With Grimes to Cap Busy Week. Bloomberg News. Retrieved from: http://www.bloomberg.com/news/articles/2014-02-20/morgan-stanley-lands-whatsapp-deal-with-grimes-to-cap-busy-week
  3. What Was The Glass-Steagall Act? Retrieved from: http://www.investopedia.com/articles/03/071603.asp
  4. What is Private Equity?. Retrieved from: http://www.investopedia.com/articles/financial-careers/09/private-equity.asp
  5. The Biggest Private Equity Buyouts in History. Business Insider. Retrieved from: http://www.businessinsider.com/the-biggest-private-equity-deals-in-history-2011-4?IR=T#9-hilton-hotels-7
  6. The Venture Capital Secret: 3 Out of 4 Start-Ups Fail. The Wall Street Journal. Retrieved from: http://www.wsj.com/articles/SB10000872396390443720204578004980476429190
  7. Corporate Finance. Investopedia. Retrieved from: http://www.investopedia.com/terms/c/corporatefinance.asp

About the author:

Chitra is a graduate of IIM Lucknow  (PGDM, batch of 2016). She enjoys traveling and loves eating local delicacies. She earned a PPO to the TAS programme and will be joining them after her vacation.

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