Research or IBD
If one wants to get the best valuation / modelling background and skills in analysing industries for a few years, before making a move to potentially a HF or PE style firm, which is better - equity research or IBD? From my view, research would be more detail oriented and, hence, better ... why would PE and HFs recruit mainly analysts from IBD - is it simply due to their deal execution experience or work ethic, what else? Any thoughts welcome. Thanks.
I don't think you know what research is... or banking for that matter.
Well, thanks for your polite, insightful response! I'm not sure there's much to say to that...
In the nutshell, bankers build transactional models, research guys forecast revenues and come up with stock recommendations. These are different skills. So for PE I'd say banking is better, for HF - depends on what this particular HF is doing. Merger Arbitrage - banking, long/short equities - research. That being said, I've heard of people making the move from equity research to PE but this is rather unusual I think.
Surprise surprise, turns out ER tends to exit decently well to HF since, well, they're literally the same job. Haha
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Regarding your question - it's actually a good question. Why would a banker, whose main job is just to coordinate workflows between stakeholders and value TRANSACTIONS, be preferred for a fundamental investing job to an ER guy whose main job is literally to analyse and value STOCKS full time?
From my little experience, bankers do objectively more modelling than an ER analyst. Thing is in stocks, it ain't that deep most times - complexity doesn't equate to clarity. Spending hours building hundreds of rows of modelling usually leads to dead ends and low ROI on effort. People just end up drowning in data. ER analysts tend to focus on a few critical factors that actually drive their stocks and spend most of their time and effort understanding the drivers of those critical factors, modelling those drivers, and building their mosaic and triangulating a recommendation thru management interviews. They discard noise. Lots of ER analysts just inherit a legacy model built by the predecessor analyst anyway, or inherit a sell-side model for buyside analysts (whether this practice is beneficial or theoretically correct or not is debatable, but that's another story). So yes, bankers are way better modellers - probs the best Excel wizards in the business. So you'd defo get the best valuation/ modelling background in IBD lol
IBD is also more elite, and yes they have better work ethic. Between a top banking analyst and a freshly minted ER associate, the edge that the ER guy has over the banker in terms of thinking like an investor is narrow anyway I'd say.
Not to mention that our view of HFs mostly poaching bankers is heavily skewed by the statistics of the game (standard Bayesian probability shit if you wish) - WAY more bankers than ER analysts to start with, PLUS most bankers looking to exit while most ER folks go into research looking to stay for the long game
Echoing this....I forgot which hedge fund manager it was referring to in the book "More Money than God" but one of the managers (might have been Drunkenmiller) was noted that one of his innate skills was picking the 2-3 true value drivers of a company and understanding that better than anyone else. No need to forecast 100s of lines of P&L data and cash flow items to absolute precision when it's just those 2-3 things that will drive the stock. Thus....you probably won't become the best excel wizard in ER but if you work for a good analyst who has the ability to screen through the noise and understands the drivers, then you're probably better positioned for hedge fund world.
Yep - i love More Money than God, it was the most enjoyable book I read this year. Can't pinpoint which PM you're referring to tho lolll. Probs Druckenmiller yeah, that fundamental style doesn't kinda fit with the other PMs featured in the book
Not to mention the number of absolutely MEDIOCRE analysts out there in the ER industry - pick a bunch of SS reports and you're virtually guaranteed to find like around 80% of them are just passively reporting on historical outlooks, passively regurgitating consensus, giving random price multiples plucked from the air, providing no unique/ contrarian view, basically adding no value. That's a huge reason, imho, why ER analysts aren't better represented in top buyside exits into prestigious funds, even tho it's their FT job to analyse stocks. Quality control in ER is weak - no standard practices.
And yes, the whole point of ER is to NOT become an Excel wizard lol. Minimalism is gold in research. Leave the maximalism to the bankers - it's the nature of their business model to be maximalistic
investment banking is NOT more elite than equity research. Equity research is at least twice as selective
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