The dark side of Investment Banking – Deepak Srinath

The deal that falls through at the last moment – an investment bankers worst nightmare! Be it Reliance-GTL, Bharti-MTN or smaller deals, every investment banker on the planet has had to go through this scenario – You’ve worked hard on an M&A or PE deal for over a year. Finally you have an offer on the table that your client has accepted and the diligence is going well. The chemistry between the two parties is good and they’re already discussing nuances of post merger integration. You’re fantasizing about your killer bonus and the BMW….and suddenly the earth caves in. For reasons completely out of your control, the deal falls through. You’ve made zero returns on your investment of months or years of work on the deal.

Catch hold of any seasoned investment banker sipping his highball at the Harbour Bar and he will tell you that it’s all a part of the game and this profession is only for the big game hunters who have the balls for the high risk-high return model. But this is exactly what gets my goat – why have we bankers reduced ourselves to bounty hunters who either hit that pot of gold or get killed by the alligators in the swamp. Do we not value ourselves as professionals, who deliver specific professional services at every stage of the transaction? Why then are all our contracts loaded on to that ‘success fee’? Look at lawyers for example – they may get a bonus for winning a case, but win or lose they get compensated for their professional effort. Same with every other professional service I can think of except maybe real estate brokerage. Even sportspersons get compensated based on milestones they achieve. Unfortunately, the success fee model has become such a norm that it is difficult to get a client to agree to a different structure, especially in a highly competitive and dare I say, commoditized market for i-banking services.

I have a very simple proposition for my clients – pay me for the work I do. Attach milestones to every step of the transaction process and compensate me for delivering it. Of course, there will be a component of the fee contingent upon ‘success’ of the deal. And what clients benefit by doing this- a) Accountability at every stage of the transaction b) Overall cost of the transaction reduced by 25-30 % c) Unbiased advisory because I have enough incentives to tell you what is best for you rather than just pushing you to close the deal.

Any takers or do we keep our hunting boots on?

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About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

7 Responses to The dark side of Investment Banking – Deepak Srinath

  1. Deepak, I’ve been enjoying the Viedea blog and good to see the flurry of activity today. I’ve had the opportunity to have a similar conversation for some investment bankers I regard highly in the past and asked them about the reason why the industry has gone in this direction. Here are some of his reasons:-
    1. No entry barrier – pretty much anyone can become an investment banker and there is very little that on the surface differentiates one from the other.
    2. Poor Customers – Until the transaction goes through, the customers tend to be poor and as such it is very difficult to get them to pay. If it is an all stock M&A deal, again there is no money and neither customer could pay the banker.
    3. Buy side clarity is low- Many funds hire analysts to do essentially what i-bankers tend to do. They can be much more transparent about their interests with an employee as compared to an outsider.
    4. Companies will never reject a call from an investor – Most entrepreneurs if they got a cold call from an analyst would humor them and be reasonably transparent doing away with the need for a banker in between.

    So what are ways in which I’ve seen the good i-bankers differentiate themselves?
    1. Great relationships on both sides – with investors who represent continuous capital (career investors like VCs and fund managers) and with Serial entrepreneurs (who will keep starting companies and want to raise money). Because of this, an ability to be blunt and for both sides to share their cards and be frank about what they want, what they can afford and what deal sizes they are open to.
    2. Sector focus and understanding- An ability to really deeply study particular areas and have relationships with large companies and small ones across the value chain. Ability to have some visibility into actual private company numbers and pain points to be able to precipitate a transaction.
    3. Ability to syndicate deals rapidly – This I think is key from an entrepreneurs perspective. An entrepreneur would love to work with an i-banker who could take what he’s looking for and slice it up into small chunks and sell it to a bunch of investors. Dealing with multiple investors(including some strategics and some family offices) is not something an entrepreneur can do and so for such activities having an i-banker is key.
    4. Positive thinking and a positive influence on the people on both sides. I find it odd that sometimes i-bankers come to me and lament that valuations are too high or that there is a lack of M&A. It’s important to be a positive thinker and to build the acquiring culture in India. In the India dotcom sector, the three big guys with currency – Rediff, Naukri and MakeMyTrip – have not come across a single i-banker who could convince them to think positive and part with some of their overvalued stock to buy future assets. Thats telling in my opinion. It’s not that this vacuum will continue forever – but at the moment it does seem to exist.

    • Deepak Srinath says:

      @Roshan – Good points Roshan. Some of your observations are very true, especially while dealing with early stage firms. I like your point on positive thinking and positive influence – important and often underrated.

      • hey Deepak,

        Read through my post and I remembered another point which I forgot to mention above. Another way in which i-bankers differentiate themselves.

        Many a time, the profile of the buyer pushes up the price or else the deal is not an active one that is doing the rounds. In these situations i-bankers in the west have been known to play a part in either buying on behalf of the buy-side or else in working with the management team in seeing whether they would be interested in selling without the buyer actually expressing interest.

  2. Pankaj Raina says:

    So true, but you cant do anything, mostly promoters would be vary of paying you a fees related to each and every stage in the transaction. Alternately you could increase the retainer by a compensatory amount and structure your contract in such a way such that , if the term sheet is signed and promoter accepts it , then if the deal fails there were will be a small compensatory pay .

    I myself have faced this issue so many times, and this is how we plan to tackle it .

  3. Deepak Mohan says:

    Deepak – I have been a consultant and a banker for a good part of my professional life – I have seen the differences between the two and why i consider the payoffs are so much better, the work much more appreciated in banking, collections that much easier and OPE’s not so much of an issue – my two cents worth is success fee is good retainers create far too much trouble and milestone payments early in the deal perversely for some reason in my experience lead to your advise not being appreciated much, from being a trusted advisor with his skin in the game you become another one of their employees ( its random but i have seen it happen 🙂 )
    Till the day clients mature here in India and stop looking at professional services like hawking vegetables and stop behaving solely driven by those Rs 2 lakh they pay us and think the new guy who professes to know more than you about them when you have spent 2 years building the relationship just because he offers to work for free – we are all stuck – I dont like what I have written but if i will be a banker for more years to come, this is a reality I think I will have to work with.

    • Deepak Srinath says:

      @Deepak Mohan -I remember you mentioning once that all your contracts are success fee based…interesting perspective on why success fee is inherently the model that works for india….guess I’ll have to make my peace with it too 🙂

  4. Ravi says:

    With PWC as the top transaction advisor in India, its hard to dfferentiate between consulting and i-banking, let alone erect a chinese wall between the two. Despite obvious conflict of interest, customers are happy to engage. May be thats the nature of the market here in India i.e. have a solid consulting/assurance/tax/anything practice and bundle i-banking as a VAS.

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