Financial Advisory Firms Rose in the Middle of Pandemic Economy (Q1 2021)

Days before, Financial Advisory Firms showed their revenues and transactions in the first quarter of the year through this report from Refinitiv which I had access to from M&A Teaser Newsletter. And everything was how everybody believed. Working with more volume of transactions with a limited staff team.

I often talk with employees from different M&A firms and everyone claims to me the same message. ''We are working more than pre-COVID. More deals and more transactions with a limited team. Partners are afraid to hire people because the situation is uncertain, but they should do it to increase our productivity and closed success deals''.

Currently, I'm on the other side trying to get an opportunity as a junior analyst is struggling due to the high competitive demand and limited offer of graduate programs.

Neither, I want to express my opinion about the last articles which are appearing in different newspapers since some Analysts 1 from JP Morgan leaked an internal report about working conditions. I cannot be objective with an opinion out of the industry.

Global Ranking

Refinitiv published how Goldman Sachs, JP Morgan and Morgan Stanley are leading the global ranking firms as usual with up to 400 deals and almost $900 M of value together. I'm surprised by how neither Big4 Firm is on the global top 25 in this first quarter.

Also, this period has experienced an increase of 33% respect previous year, led by China, US and United Kingdom.

In the graph below, you can check how the tech industry has an important impact in the overall deals.

Spanish Ranking

In my country, it's interesting to see how Rothschild closed 3 deals with a value transaction of $5,4 M. Nearby to Nomura with 2 deals completed for $5,1M and AZ Capital ($3,4 M).

The king of transaction is PwC with 20 deals completed far from the next top 3 EY and AZ Capital with 9 and 6 respectively.

Big4 Spanish Ranking

Deloitte is leading the ranking with a notorious increase in value of transactions regarding the other 3 firms ($5 M) followed by PwC ($2,8 M), KPMG ($246 K) and EY ($128 K). However it's not the firm with more deals completed (4) whereas PwC completed 20 deals.

This shows us how PwC has worked through more transactions than the rest of firms, but that does not mean create more value than others. Any way, PwC is always on the top of the number of deals. For that, I think that PwC is a good place to work in earlier careers instead of firms with lower workflow.
From this perspective, I can say that EY suffered a high decrease in their deals respect the previous year ($1,4 M value of transactions within 24 deals).

Digging into Alternative Lending Opportunities

It is great to see how technology is growing up. Alternative pathways are right now accessible to individual investors and small businesses instead of traditional ways. FinTech is making every financial need become easier and we have to take advantage of that.

Today, I would like to expose what is Alternative Lending and how that can help us.

To start, Alternative Lending is peer-to-peer lending that takes place through an online platform. This platform is making a marketplace where borrowers and investors converge.

There are different types of alternative loans, which depend on borrower need.

• Small business alternative loan which is boosted by the high requirements from traditional financial institutions.
• Non-bank loan mortgages where consumers can be benefited with lower cost and more relaxed criteria to get a mortgage.
• Peer-to-peer (P2P) loan. Quicker, cheaper and easier to find investors or borrowers.

This disruptive innovation is becoming popular when millennials and new generations are having financial needs. Their purpose is to avoid banks and get different ways to cover their needs. We grew inside the Internet Era and it could be easier for us to sign a loan entirely online. This industry will be relevant in the next few years. Meanwhile, the last period hit a total transaction value of 296B€ (Statista).

Relevant points to have in consideration

In this industry, there are 3 players; the online platform which provides the service and digital infrastructure with almost 0% commission; borrowers, who are people or business with financial needs to develop their business, buy a house or buy the new iPhone, as personal loan; and investors, that they are seeking to get a yield of their savings.

• Alternative Lending presents attractive yields (between 10-13% annualized yield on average) at the same time that it has a lower duration than traditional fixed income like treasury bonds. However, that yield comes from the level of risk. Understanding treasury bonds as the most secured assets (around 1% annualized yield), Alternative Lending loans are often unsecured, meaning default typically will be higher. So, the investor has to evaluate the probability of default and magnitude of potential loss to be sure of ratio yield/risk.
  
  
• You shouldn't follow the market volatility to determine the risk level of your investment in alternative loans. A report from Morgan Stanley shows how alternative loans are more correlationated with economy volatility than market volatility. This happens because this kind of exposure investment comes from customers and not from corporate and government credits exposure that determine traditional fixed-income allocations.
  
  
• Amortizing structure is, likely, the most important point in this post. It allows alternative loans to be extended to borrowers with a lower interest rate that might be charged in traditional loans like credit card loans. Everyone is looking how to get money with the minimum possible cost, and through this alternative it happens.
  
  
• As a second advantage, the customer behaviour has changed. People in their 30s grow up searching on Google and they can find cheaper financial support through a loan from a group of investors from wherever place of the world.

To summarize, technology along the financial industry is changing the form of how players play. It's being challenged for entrepreneurs to find creative ideas to disrupt inside a very traditional institution as banks are. Young people have the opportunity of being more friendly to this innovation than elder generations and we should leverage it.

A Short Thought About Ethereum

Here I should say thanks to Edu Saez, who persisted with his tweets on how Ethereum (ETH) works and why it is more interesting than Bitcoin. Through his tweets, I decided to invest in ETH. For sure, with a poor allocation. Cryptos are not the main point of my portfolio. I own ETH (and BTCs) just to not miss the party.

What I thought about Ethereum, as a sceptical crypto guy.

• ETH is known as the programmable blockchain. Huge difference with BTC. Meanwhile, BTC is recognized as a store of value, ETH is by it's friendly-structure to set up apps.
• Could be interesting because it doesn't have as hype as Bitcoin or another crypto has (like Doge, with a recent influence by Elon Musk). ETH shows a lower volume. Around 8% less than BTC at the moment when I'm writing this.
• The real disruption in tech is led by new apps and tech services. Here is where ETH is an important player. 
• You needn't figure out if the crypto will be the replacement of fiat currencies. Just trust in innovative founders and businesses which will be run through a programmable digital coin.
• Currently, the NFTs appeared (Non-Fungible Tokens). The specific case that I know is NBA Top Shot. It's an app where you can buy your favourite shot of an NBA player. People are paying thousands of dollars for this kind of digital card.
• Recently, NFTs are growing fast, and we will see many new tokens, as a collectable item. Ethereum is in the shadow of the NFTs bubble. Every single NFT works by Ethereum.
• So, if you believe in new disruptive digital businesses, you must know that indirectly, that has an influence on Ethereum. Programmable projects and Ethereum run hand-to-hand.

If you're interested in digging deeper, I recommend you to read this paper.

Notes About M&A Industry After COVID-19 by partners

In last few weeks, I have been talking with different firm partners concerning the impacts of COVID-19 in the Merger and Acquisition (M&A) industry.

The popular consensus is that the industry is going to be negatively impacted in the next six months. This is due to the possibility of deals freezing and therefore firms losing profit.  

In particular, US firm operations reported to be down by 50% at the end of March 2020, in comparison to their 2019 recordings (Forbes.) This is similar to Spain who reported a downturn greater 50% in May 2020 compared to their 2019 reports (TTR). Therefore demonstrating a general downturn trend in Global M&A firms.

Yet, there is an opportunity to create value at lower prices.

Imagine having a business which was affected by the COVID crisis. Before COVID you decided to have a high leverage level and earned a lot of income through this. During COVID your ratios become weary and you have issues paying back your debts to pay your suppliers and your employee’s salaries. Now at the end of COVID, your earnings have decreased and now you’re stuck with financial debts.

However, the leader of the market offers you to acquire the company. Before COVID the company was valued between 30% - 50% more than tHe current COVID values. The buyers have a solvent financial situation to pay all debts and keep the activity of the business running. So, what will you do?

This is the opportunity for deal makers. To create values for buyers.

More than 50% of deals have been paralysed. This is a big fear for M&A firms. However, the current situation is totally different and they must change their previous mindset to succeed in the current situation.

What I’m Learning While I Choose My MSc In Finance

When you are in your early twenties you believe the future is far ahead that you don’t take the time to stop, reflect and plan. When you finish your undergraduate degree suddenly you see colleagues securing professional placements and opportunities. Quickly you realise you’ve wasted your years at University. I have enjoyed my student life; the friends I have made, the social life I have experienced and the topics I’ve delved into. Yet, I never looked beyond this, never looked towards the professional opportunities and experience. Experiences today I wish I seized. It is at this moment that I say must decide your future. 

I never studied at a target University. I never received the relevant experience. But this doesn’t matter for firms. Instead, I bring passion, interest and motivation into the finance sector. 

After this quick overlook into my academic life, I’ll give you some advice and recommendations that I’ve received while selecting my MSc. 

• If you are studying at a target University, great! You will have no problem securing interviews for privileged positions in national key firms.
  
  
• Try to get experience before to studying any MSc. You’ll learn more through practical experience than reading academic books. 
  
  
• In Spain, I split the Business School into four groups; International TOP, National TOP, National semi-TOP and other.
  
  
• If you’re like me, and didn’t receive the opportunity to study at a target University. Attempt to obtain a placement at a  prestigious  TOP Business school. 
  
  
• I used my contacts with professionals that have studied at an MSc to gauge where I predictability would be ranking.
  
  
• IESE has one of the best MBA’s in Europe, which is like the Intentional TOP, IE or ESADE. IE ranks as the 11th MSc in finance worldwide (FT 2018).
  
  
• Both IE and ESADE are great options if you want to secure a job in any large firm in investment banking. However, you will need to pass a hard admission process where they will value your math and analytics skills (the famous GMAT).
  
  
• Similar to the National TOP, I would suggest the CUNEF and UC3M as alternatives. Here, you can study at a public University like UC3M and gain great knowledge in the MSc. Meanwhile, UC3M’s are receiving greater popularity in our country for domestic and intentional students.
  
  
• The CUNEF, is one of the best options to gain good opportunities in Spain due to the huge network between alumni. They try to compare with IE, ESADE or IESE but, in all honesty, they play in another league.
  
  
• The national semi-TOP tier also recognises the ICADE, IEB and AFI. I add ICADE in this group because they have more valuation to undergraduate degrees than MSc. The students who finish their undergraduate degrees here often obtain more opportunities than those who have studied in the MSc.
  
  
• The AFI has a greater focus on quantitative finance. The teachers here are more academically trained rather than industry trained.
  
  
• Finally, the IEB. While they can have a good teachers, they don’t have a good reputation for firms in IB.
  
  
• Otherwise, you can find plenty of MSc in each public autonomic University but to study here is absolutely waste your money and time.
  
  
• You should decide if you want to study MSc full-time or part-time. This point is very important because Business School such as the IE, ESADE, CUNEF or UC3M offer a full-time plan. By taking on a full-time workload you will not be able to undertake work part-time as well. 
  
  
• However, at a business school like IEB which has lessons on the weekend, you will be able to undertake an internship whilst you are studying. 
  
  
• I have the opinion that is better to do a full-time MSc and dedicate 9 months specifically for the MSc. Study hard and attempt to be the best in the class. Then, you will be a strong contestant in the internship applications for any firm whilst having an excellent GPA. 
  
  

That’s it. This was a quick round-up note I’ve written after networking and reading through interviews for the MSc. It is to be noted, that this piece is written under my opinion and expertise and expected to be blanked with my thoughts and perceptions. 

Why Are There Investors Investing In Unprofitable Companies?

Currently, we’re living in an unusual financial situation. Each time there are more companies with negatives figures in their sheets balance. Something is changing.

How can we understand this market situation?

There are different kinds of investments. One of them is the growth valuation which is taking a lot of relevance nowadays. This kind of investment looks into the companies that can have future growing and omit the numbers in sheets balance.

On the contrary, value investor just looks into revenues, expenses and a lot of ratios. It’s completely the opposite face.

All of this is common in tech companies, due to its uncertainty companies. Today we know how the planet is working, tomorrow we don’t know how it will be going on.

But, why are tech companies unprofitable? It’s easy to understand. It’s because they expense all their effort in the development of the product and they invest high level of the revenues in marketing and sales. They are essential in tech companies and that can report future revenues.

I’ll use Uber as an example company to explain this situation. They spent in the Q2 2019 $1.2 billion in marketing, when the company earned $3.17 billion of revenues. That is to say, Uber invested 38% in marketing in the second quarter of 2019.

But,  marketing wasn’t the unique expense for Uber. They also spent a great amount of money in development, administrative expenses and stock-based compensation when the company completed it IPO.

So, would you invest in a company with $5.2 billion of loss? Maybe yes, maybe not. In this case, Uber has important competitive advantages as to be the leader of the market or to have a great market share (69.7% in November 2019 according to Statista).

How to get the value of an unprofitable company?

For me, it’s important to keep in mind these metrics in order to know if a company can be a great invest opportunity.

• Revenue growth. Tech companies are creating new business model. Thus, investor should research if in a future the company will generate higher revenues to cover up its operating expenses. Can the company generate profits when it gets to be king of the market? If the business model is unsustainable to generate profit, maybe you shouldn’t invest in it.
  
  
• Gross profit margin. It is very related to the previous point. If you want to know if the company will generate future profits, you should know its financial structure. That is, looking into how much the company earns after paying operational costs. If the company has a little profit margin, we don’t consider it as an opportunity.
  
  
• Operating expenses growth. It’s important to look for companies which their expenses have a growing lower than the revenues. So, if the company improves its sales, we’ll know that the revenues will grow more than the expenses and it’ll able to have profit in the next quarters.

As conclusion, it can be said that it will be important to know the business and know how it generates revenues and how they spend the money. After that, you’ll need to do easy counts with simple metrics to check if the company is going in the correct pathway to profit.

It’ll be important to leave your value mindset and turn on your growth mindset. To wait a long-term and check if finally your idea was correct.