Midterm Review
Name four significant regulations that resulted from the Great Depression andwhat is their purpose?
1. Glass-Steagall Act: separated commercial and investment banks (protectingthe consumer from banks losing consumers' deposits in risky investments)2. 1933 Act: has to do with disclosure before deal is done3. 1934 Act: governs activity once deal is complete4. 1940 Act: governs mutual funds (hedge funds and PE are exempt from this)
What is "Aladdin" and why is it so important to the company that owns it? Whatis the name of that company?
Aladdin is a portfolio (asset) management software owner by Blackrock thathelped them make capital markets more liquid. This occurs through Aladdinhelping teams across different industries create more informed decisionmaking, along with effective trading. The software nets Blackrock over $1 billionyearly with licensing fees as well. This is important to Blackrock because thisheavily contributes to the company's value.
What is an IPO Green Shoe, what is its purpose and who benefits from it?
An IPO Green Shoe is when the investment bank can issue additional shares of upto 15% of the firm's value if there is enough demand within 30 days of thecompany going public. This helps the banks make money off the spreads, satisfythe original investors who were previously left "unsatisfied" with the number ofshares and could now purchase additional shares, and the company itself inraising capital
Assuming that you decide to take the subsidiary public, why would FSI do an IPORoadshow and who would benefit from that process?
An IPO Roadshow is basically a marketing/branding play - it helps in raisingawareness to investors about the company's business model and essentially itsstory ("selling the sizzle"). By heightening awareness, investors can betterunderstand the company and could lead to a higher valuation of the company.This obviously benefits the firm going public that can raise additional capital witha higher valuation and helps banks who could make more money off the fees(gross spread) associated with a higher valuation. Increasing awareness could alsoincrease liquidity, which benefits the original investors.
What is JP Morgan's single biggest contribution to the Financial ServicesIndustry?
JP Morgan's single biggest contribution to the financial services industry is thedevelopment of capital markets and bringing capital from Europe to the US
Describe or draw the structure and stock/cash flows of an ETF. What is the keypart of that structure that make this investment vehicle so popular with retailinvestors?
An authorized provider (AP), which are institutional investors, purchasessecurities of an underlying basket and exchanges it for an ETF unit at a discountfrom an ETF provider. The AP then sells these ETF units to the public and makesmoney by creating and redeeming ETF shares when there is a misbalancebetween the price of the ETF share and the fair value of the underlying basket.The key part of this structure that makes this investment vehicle so popular withretail investors is that because an ETF share is a singular unit, it is pricedcontinuously and thus can be traded throughout the day (intra-day trading) ratherthan only once a day (mutual fund). It also has cheaper fees to mutual funds andis more tax efficient.
Why is asset management viewed as such an attractive business by financialinstitutions? What is the name of the largest asset management company?
Asset management is such an attractive business because it has stable earningsthat stem from its fee-based structure, is low risk because of its minimal capitalrequirements, and is a rather "sticky" business since institutional assets tend tomove around less. It also has perceived synergies with other IB's services, likeunderwriting, which is why investment banks seek it.The name of the largest asset management company is Blackrock
Why do banks prefer to be a sell side advisor versus a buy side advisor on anM&A deal? Which bank has the potential to generate more fees and why
Banks prefer to be sell-side advisors because the probability of landing a deal israther high, whereas buy-side has a lower probability since it is more focused onstrategy & execution and there is competition with other bidders.However, buy-side has the potential to generate more fees because landing adeal successfully could lead to additional fees if the investment bank later helpswith financing or underwriting the deal. That is why you can compare a buy-sideM&A deal to a lottery ticket - low probability, but huge payout.
Why is Blackstone trying to pitch itself as an asset manager while Blackrock isquietly getting into private equity?
Blackrock is using private equity to diversify its business since potentialinvestors see this business line as an alternative investment or way to diversifyportfolios away from normally publicly traded securities. Blackstone is pitchingitself as an asset manager because asset management creates a steady source ofincome to the firm, since the work is fee based, and it is very sticky.Additionally, Blackrock does not have to put any capital at risk due to the fee-based income.
Why is Blackstone trying to pitch itself as an asset manager while Blackrock isquietly getting into private equity?
Blackstone is trying to pitch itself as an asset manager because asset managementtrades at a higher multiple, given that it is stable with its fee-based structure, lowrisk because of minimal capital requirements, and is "sticky".Blackrock is trying to get into private equity because as a general partner,Blackrock can make money through annual management fees (of ~1-2%) andcarried interest. Additionally, private equity is viewed as alternative investmentsto the public equities market, so it helps investors in diversifying their portfolios
What characteristics do asset management and private banking have incommon
Both asset management and private banking have fee-based structure thatprovides stability, are low risk because of minimal capital requirements, and are"sticky" businesses. Additionally, both create long-term client-bankerrelationships that require bankers to have strong analytical skills and be aware ofmarket conditions.
Evercore also has an excellent restructuring group. What do these people doand why does it make sense for them to be a part of Evercore's business plan?
Evercore has a restructuring group because it is contra-cyclical to the market, so itallows Evercore to make money in an economic downturn when firms aredistressed. This is contrast to the M&A market, which typically does well whenthe market also thrives.With its restructuring group, Evercore essentially advises these firms on how tonavigate through financial distress as well as how to best optimize their balancesheets (deleverage) and de-risk their assets.
Why did Morgan Stanley buy E-Trade and Eaton Vance?
Morgan Stanley bought E-Trade and Eaton Vance to get more exposure into theasset management business and provide retail investors more digital features.Eaton Vance also provided more stable earnings with its fee-based structure
What are some key differences between these two businesses that might makeprivate wealth management the more attractive of the two?
Private wealth management can be more attractive because it can have highercross-selling opportunities with other IB services because ERISA does not apply toprivate wealth management. This means that clients for PWM are also a potentialmarket for IPO's. It is also attractive because it can be higher margin since thereare higher fees associated with solving more complex, challenging problems
Why did Morgan Stanley buy E-Trade and Eaton Vance?
Gaining full service and digital platform to aid with clients and their investmentchoices was one of the main reasons Morgan Stanley actually bought E-Trade.Younger, technologically inclined individuals will now have an easier and moreseamless way to enter trading thanks to this acquisition. Eaton Vance addsmore fee-based revenue for Morgan Stanley, as they would be able to overseemore assets, thus additionally generating even more revenue
Why would a company use a Project Financing Structure instead of financing"on balance sheet"? What are Project Financing's characteristics, how does itwork and what industries typically use Project Financing?
Project financing is beneficial because it limits the liability of the equity sponsorsto the amount of equity that they put in. It also can help achieve a higher creditrating than the equity sponsor's, which could lower financing costs or help inraising debt capacity.In terms of characteristics, project financing is essentially an exoskeleton ofcontracts that define obligations of nearly every aspect of the financed business.It provides a business framework for the enterprise, supporting the debt capacityfor the enterprise before the business is even up and running.In terms of industries, project financing is heavily used in infrastructure andconstruction, so industries like oil & gas and commercial real estate.
Shadow Banking is currently a huge growth area of the FSI. What are thepotential impacts that Shadow Banking will have on the market and how canthis effect be best regulated
Shadow banking are financial transactions that occur outside of the regulatoryconstruct of the FED and SEC. This has led to hedge funds and private equity firmsincreasingly self-syndicating their own private equity deals and relyingsignificantly less on the banks (e.g. hedge fund taking Dell private). Shadowbanking also leads to greater volatility in the market, since shadow banks can lendto entities that commercial banks cannot lend to (due to government scrutiny),which could result in greater risk and potential bank runs.This can be best regulated by having the government impose regulations andstringent disclosure requirements on these shadow banks that the governmentdoes for the investment and commercial banks currently
What are some of the organizational conflicts inherent in being a broad-basedasset manager? Why is Blackrock perceived by the market to be moresuccessful than Blackstone in managing those conflicts?
Some of the organizational conflicts that are inherent in being a broad-basedasset manager is the risk of conflict of interest that stems from having a structureof a limited partnership. This conflict of interest arises in a bankruptcy scenario:when a company goes bankrupt, and if the asset manager has investments inmultiple parts of the capital structure (equity and debt), a conflict of interestarises over whose limited partners' interests the general partner is going to bestrepresent. The best example of this is the conflict-of-interest Blackstone facedwhen Toys R'Us when bankrupt, since the equity gets wiped out and debt holdersget paid first in a bankruptcy.Thus, Blackrock is perceived by the market to be more successful than Blackstonein managing those conflicts because Blackrock is a fiduciary, so it doesn't have anyownership stakes that could raise conflicts of interests.
What are some of the issues that you, as CEO of FSI, need to consider in makingthe decision to either sell to PE or take the subsidiary public
The best example of this scenario is the CEO of Thomson Reuters selling Refinitiv to Blackstone. The CEO decided to do sell its subsidiary to private equity for speed of transaction (quicker than going public) and the lack of disclosure that isrequired.However, taking the subsidiary public can also be beneficial in raising capital,especially if the subsidiary is underappreciated by the market. This is because bytaking it public, the company can extract value from the stock price and raisecapital through a higher valuation of either the subsidiary or the company itself(due to greater clarity about the business)
What was the impact of the Great Depression on regulation of the FSI and why
The impact of the Great Depression is that it resulted in greater regulation of theindustry to protect consumers from banks using consumers' deposits andinvesting them in risky investments. With greater regulation came the separationof commercial and investment banks, more stringent requirements of transparentdisclosure and the creation of the FDIC and SEC.
What are the two main reasons that ETF's are gaining in popularity versustraditional Mutual Funds?
Two main reasons ETFs are gaining in popularity versus mutual funds is because itcan be traded throughout the day (intra-day trading) rather than only once (somore liquid) and is more tax-efficient/has cheaper fees than mutual funds.
Why would the underwriters of FSI's subsidiary's stock issue the IPO at adiscount?
Underwriters of FSI's subsidiary's stock issue the IPO at a discount to increaseliquidity, compensate for risk, and incentivize more investors to come in (becauseof the potential of greater upside)
What is an IPO Gross Spread and who benefits from it?
When a company is about to go public, the investment bank typically suggestsoffering the shares to the original investors at a 10-15% discount to the intrinsicvalue of the company. The bank then purchases these shares at a roughlyadditional 7% discount (average in the US) but sells the shares to the originalinvestors at the pre-determined offer price. This difference of 7% is the IPO GrossSpread and is what allows investment banks to profit off IPOs.
What happens when FSI's subsidiary's stock is 'free to trade' and who benefitsfrom that?
When a stock is "free to trade", it means it is now ready to trade on thesecondary market. This benefits the original investors who can now liquidate theirshares or hold onto it hoping that the stock price will trade up, achieving higherupside. In the case that the stock does trade up, this can allow banks toimplement the IPO Green Shoe (if within 30 days of the company going public)and make more money off the spread. Furthermore, the stock trading up alsobenefits the company, which now has a higher valuation and could raise morecapital.
Evercore is a combination of an M&A firm and an asset management firm. Whydo you think that Evercore pursued that combination of businesses?
You can think of M&A as the star of the Christmas tree - it drives ancillarybusiness, like S&T and asset management. It also has high returns for minimalcapital requirements. In terms of asset management, it provides stability with itsfee-based structure, is low risk because of minimal capital requirements, and is arather sticky business. It also has cross-selling opportunities, as Evercore hopesthat it could leverage its client relationships within asset management to drive itsother banking services. Additionally, if Evercore helps a client successfully inM&A, the client tends to remember that and could result in the client dependingon Evercore to help manage its assets in the future.
