What it's really like to work in leveraged finance, by a J.P. Morgan MD
If you want to work in the investment banking division of a large firm, leveraged finance is probably not the obvious choice. M&A and capital markets still hold the most sway to those starting out in banking, but leveraged finance - or LevFin - should be a consideration.
Like the equity capital markets and debt capital markets teams, leveraged finance divisions of investment banks are still about raising money for companies - known in banking terms as 'corporates.' Corporates need to raise money for a variety of reasons - acquiring another company, expansion, refinancing their own debt.
The difference is that leveraged finance teams are dealing with less-established firms, which typically find it harder to raise capital. As a result, LevFin’s most common products are high yield bonds (debt that credit rating agencies deem as riskier and therefore pay out more to investors) and leveraged loans (a loan given to companies that already have a lot of debt).
Why, should you start out in leveraged finance? Well, for a start it's the fastest route into a private equity job if that's your eventual ambition. LevFin teams deal with a lot of private equity companies as clients, and investment banks' teams have long been happy hunting grounds for junior recruits.
Ben Thompson, who is a managing director in J.P. Morgan's high yield and leveraged loan capital markets team in London, has given us the inside view on what LevFin teams really do. Ben moved to London with J.P. Morgan in 2011, but worked for the previous 16 years in the bank's New York office, latterly as a managing director within its primary loan sales desk and syndicated & leveraged finance (SLF) team.
What does the leveraged finance division of an investment bank really do?
We act as an intermediary and try to pair those with money to invest in debt with companies looking to raise money through leveraged debt products. We advise on the structure of these deals and try to execute them in the most cost-effective way we can. Our clients are predominantly corporates or private equity firms.
How does that differ from other parts of investment banking, particularly debt capital markets teams?
The key differentiator is the type of deals that we execute. Debt capital markets teams would deal with anything rated BBB-/Baa3 and above – basically, what is classified as investment grade by most rating agencies. Leveraged finance teams work on deals that would fall below this level and offer better returns, but are at the more speculative end of the credit spectrum.
There’s a much broader base of investors who are comfortable putting money into investment grade debt. Investment-grade companies are generally larger and have more predictable operating results, and there’s therefore often less detailed credit analysis required around their credit-worthiness. Leveraged finance deals are generally more bespoke and require a lot more analysis.
So, it’s a more quantitative role?
If you’re coming into our graduate scheme, I wouldn’t say the people we hire for leveraged finance are more quantitative than other parts of the investment banking division (IBD). But over time, you certainly need to develop deeper analytical skills, be a good logical thinker and a good problem-solver. You spend a lot more time doing intense analysis and modelling in leveraged finance. Certain clients may never have borrowed before, or you’re being asked to build a model for an acquisition of a business by a financial sponsor. It’s usually about coming up with a solution for a specific problem, and that’s a slightly different mind-set.
[caption id="attachment_257404" align="alignleft" width="222"] Ben Thompson, J.P. Morgan[/caption]
Why should people want to work in leveraged finance?
For a start you get to work with some interesting high-growth companies across a broad range of sectors. By doing this, you develop your analytical skills and also your presentation skills. Essentially, you’re trying to formulate a narrative on why investing in a particular company is a good idea. You’re taking a lot of information and forming a persuasive argument with those facts. You will of course spend a lot of time with spreadsheets doing financial modelling, but unlike some other parts of investment banking, you also have to really assess what makes a good investment. Therefore, you learn a lot very quickly.
Then there’s deal experience. Over the course of a 12-24 month period working in leveraged finance it’s easy to have worked on ten or more live deals. The transaction volume is high, and you tend to spend a lot of time executing versus purely pitching.
What’s the workload like?
The hours are broadly comparable to other parts of the IBD. The hours can be long, but the workload is unpredictable. You could get a call on Thursday from a client saying they want a package by close of play on Friday. It’s the nature of investment banking.
That said, we’re making a conscious effort to not keep people in the office unnecessarily – to that end, initiatives exist like protected weekends. To give an example, we recently, had an e-mail from a senior banker on Friday evening noting that there were too many juniors in the office and we should tell them to leave. We take it very seriously.
The key is not to stay in the office unnecessarily. We were quiet in the first quarter, for example, then in the build up to Brexit the workload increased again. There’s a lot of activity now, but we’ve just come out of a very slow period during the summer. We don’t want to keep people in the office if they don’t need to be here, and it’s up to everyone to be sensible about their schedules and to catch their breath when they can.
What skills are needed to succeed in leveraged finance?
You need a quantitative mindset – if you don’t, you probably shouldn’t be in banking! You need to be able to handle multiple work streams – as I said, there are a lot of transactions in leveraged finance. If you’re the sort of person who likes to work on an end-to-end project for six months, it’s probably not for you. Some people thrive and are energised by this type of environment, but it can be frustrating for others.
You need to be organised. You have to shift gears quickly – you could be working on a presentation one minute, but have to drop this to work on an internal pitch, for example. Some of the meetings in which you’re involved can be challenging, and you need to be comfortable expressing yourself clearly under pressure.
Finally, you need to be able to learn things quickly. The training is on the job. It doesn’t matter whether you have a finance or economics major, or you’ve studied religion or English – you need to be able to absorb and understand information at high speed.
What advice would you give to people trying to get into leveraged finance now?
I fell into the industry after originally working in the TMT coverage team. It just happened that a lot of the tech companies I was working with needed the sort of financing that leveraged finance teams provided, so I worked with a lot of people in that team and managed to transition across.
My main piece of advice would be, be honest with yourself about what you want out of a career – and research what leveraged finance offers. Are you happy to act as an intermediary between an issuer and an investor? Can you manage those relationships? Can you work on multiple projects simultaneously? Do you want to work in a high volume environment on a broad array of deals?
If you’re happy with this, then apply. If you’re looking for something where the focus tilts towards nurturing longer-term relationships with clients, then maybe look at a coverage role or M&A. Just do your research, know your options, and try to land where you feel most comfortable.