Investment Banking 101

In today’s environment one has to be weary of all the so called “Investment Bankers” that are running around claiming that they can get “deals done” and that they have all the contacts and can raise money for your company.

The reality is much different.

We are in a highly regulated business where in order to be an Investment Banker and raise money for a fee you have to be a licensed representative of a Broker Dealer and not just someone with contacts and a nice suit.

1) Why Investment Banking?
a. Corporate America; Corporate Finance and Venture Capital firms are playing a leading role in rebuilding America
b. Financing helps create technologies and industries that can be disruptive and change the world. You’re helping create entities that can have a huge impact on public and private markets, and many people’s lives; such as shareholders and employees. Potentially creating jobs for many people and providing returns for investors.
c. Investment Banking can be, perhaps, the most lucrative aspect of Finance; it is extremely diverse, its name in no way indicates the scope of its services. There are many services that companies require of their Investment Banker; Advisory, M&A, financing in debt and equity, and capital structure. You strive to always give your clients the vest possible value; registration rights, discounted stock, collateralization, conversion features. There are so many things that you can provide for your clients as opposed to just buying and selling stock in the open market; they are the best aspect of Investment Banking. It can be a game changer if done right and consistently, for the clients as wells as the Investment Banker; the equity, the valuations, and the flexibility you’re given.

The fact of the matter, however, is that to consistently and successfully execute Investment Banking transactions at the retail level is an art form. Not many people are capable of doing it but, it is advantageous because it produces much more diverse shareholder base. Companies financed by Hedge Funds, for example, often have only one or a handful of shareholders. A retail Investment Banker provides shareholders that can help create a more liquid after-market, it provides many voices as opposed to centralized ownership and can enable listings on major exchanges much more rapidly.

Quality transactions can’t be done alone, it takes a team; due diligence, a quality Banker, and an excellent knowledgeable sales force. There must be realistic goals for each member of the sales team; deadlines, urgency, and excellent knowledge and excitement for the project at hand. There must be a plan in place prior to beginning each transaction; indications of interest and an Investment Banking minded sales force will enable you to plan distribution and allocations across your reps and client base. In Investment Banking it’s imperative to know what deals you can complete and to then methodically execute a game plan.

You will be challenged; some people don’t say yes, you may not be effectively telling the story. Stick to your guns, learn from management, remain positive and stay confident and communicate with people who know the deal best to keep your presentation strong. You cannot let the questions or objections of others to cause you to waiver; the reason you believe in a transaction from the beginning should not change unless something changes materially. Keep the same vision and confidence every day, consistently update oneself, and continue to learn; what are the catalysts, regulatory developments, political and other, that may affect the potential outcome of the transaction. Perhaps the most important thing is to stay ahead of the curve, to read, and never stop searching for information.

To close a retail Investment Banking deal, you need to hit on all of the above [and probably several other things] to consistently close retail transactions. It takes every working together toward a common goal.

I. Sector, Story, Industry (Has to be in demand).
II. Proper Developmental Level (Not a startup, not a mature company).
III. Valuation; always question valuation and make sure your clients are getting a good
deal.

Some basic rules for Investment Banking are as follows:

2) Due diligence
When a true Investment Banker engages in a transaction an extensive due diligence process begins, with hands on people, who proactively study and go see these companies that the company exists that they have what they say they have etc.

3) Capitalization
Outstanding shares, cost basis etc. – Investment Banking deals can be ruined before they begin; companies must be careful and it is incumbent on the Investment Banker to ensure that the company being represented is not giving away stock and diluting existing shareholders simply to get a deal completed. Strong considerations must be made in order to ensure the long term viability of the company.

Companies should be reluctant to give away too much equity and should have a detailed business plan as well as a real plan for use of proceeds so that the business can be taken to the next level and gain credibility and a strong following in the open market.

Additionally, the company has to pay attention to the following:

a. Management should have a game plan that includes achieving certain milestones with in the business plan as conditions for receiving additional capital.
b. Vested interest in the company management should be invested [with real dollars] in the company so their interests are aligned with investors.
c. Investment Bankers should be rewarded accordingly, but not be overcompensated based on empty promises.
d. Be certain who owns stock and why.
e. Management should be extremely cautious when giving away zero cost basis stock or warrants as this will cause pressure later on.

4) Quality Investment Banking Clients
For potential Investment Banking clients there should be parameters for revenues, strong balance sheets, earnings, quality of management and at a valuation (relative to comparable companies) that is reasonable.

a. To have a quality publically traded company with institutional support and analyst coverage you must focus on financing quality companies with strong ongoing businesses.
i. In today’s market many fewer companies valuations’ are based on potential and speculation, and more so on the basis on valuing a business and its earnings and growth prospects.
b. Strong management.
c. Having criteria such as the above will enable the Investment Banking client a much great chance of excelling to a major exchange and potential institutional ownership.

Gregg Lorenzo is the Founder of Charles Vista LLC a licensed Broker Dealer located at 100 William Street, 18th Floor, NY NY 10038 212-690-6000

References:

http://www.charlesvista.com/

Gregg Lorenzo