Equity research VS investment Banking
Everyone hears a lot about investment banking while in school, and it seems to be the coolest thing since the wheel. The point of this post is not to bash on sellside, but just to give an idea of why many people prefer the buyside. Equity Research
A different industry
Investment banking is really concentrated in a handful of major firms, with boutiques and regionals often scrambling for footholds. The sellside requires a great deal of capital to establish a complete product line. Therefore, it’s unlikely that you are going to be able to start your own firm — you’re going to be working for one behemoth or another until you retire or move over to the buyside anyway. Just like commercial banks, investment banking is quickly becoming an industry with just a few real players.
Look at the investment management industry and you’ll see a totally different picture. While there is certainly an impetus towards industry consolidation on the buyside, the impetus is a great deal weaker than that on the sellside. The buyside has far lower capital requirements to start new firms. In addition, plan sponsors (the foundations, universities and pension plans who control vast pools of money) are always on the lookout for new investment managers with different strategies or expertises. Therefore, once you’ve established yourself in the industry as being particularly good at managing a particular kind of fund, you will have the opportunity to open your own firm. This is why we see the landscape of thousands of buyside firms.
Flexibility in location
Most investment bankers work out of three cities: New York, London or Tokyo. Part of the investment banking trade is being close (physically close) to the markets themselves. Customers pay investment bankers for that experience with the markets on a moment-by-moment basis.
The buyside, however, draws its profits not from trading or offering securities, but by gaining assets from plan sponsors and individuals. Plan sponsors are located all over the United States — corporations and unions in Detroit need investment managers just as much as a foundation in Los Angeles or a university in New Hampshire or a government pension plan in Tallahassee. Therefore, one can find good buyside shops all over the United States — from Anchorage to Miami. While the large concentration of firms is in New York and Boston, with lesser concentrations in Chicago, San Francisco, Minneapolis and Los Angeles, there are numerous firms in all major cities (and many smaller ones). Examples include McKinley in Anchorage, USAA in San Antonio, Federated in Pittsburgh, Smith Breeden in Chapel Hill, N.C., Munder in Birmingham, Mich., Invista in Des Moines, T. Rowe Price in Baltimore, or Columbia in Portland — I could go on for hours.
Invest the way you want
Investment banks generally perform analysis in very similar ways. How a potential IPO candidate firm is valued at Goldman will not be very different from how Morgan Stanley will value it.