Demystifying Investment Banking: Industry Coverage

Imagine you are transported to an investment banking floor at a bulge-bracket bank. Taking a birds-eye view, what do you see? Well, there will be the product teams, M&A (covered in Part 2), Equity Capital Markets (Part 3), Debt Capital Markets (Part 4) and Leveraged Finance (Part 5), on one side of the floor. And, on the other, will be a wide range of industry coverage teams. Industry coverage teams are the engine room of IBD.

These sector specialist teams are industry experts, maintaining strong relationships with the movers and shakers in their industry. Speak to, say, a Transportation banker and they will know almost everything there is to know about fleet utilisation, oil prices and freight rates. In fact, industry coverage teams provide legitimacy and expertise when facing off against a company executive.

An M&A banker is an expert in executing transactions but is unlikely to be up to speed with the vagaries of patent cliffs and FDA approval (Pharmaceuticals), or daily oil production and proven reserves (Oil and Gas).

Therefore, industry coverage groups tag-team with product specialists when pitching for new business and executing transactions. Product teams like ECM and DCM are product specialists but industry generalists, whereas coverage teams are industry specialists, but product generalists. So, when a bank arrives at the shiny offices of a large corporate client, with a nice thick pitch deck in hand, it will be the output of countless hours of coverage and product teams.

For example, the pitch might start with an industry overview and trends (coverage team), and move on to target acquisition considerations and valuation (combination of M&A and coverage). As part of this there will likely be trading and transaction comparables (most likely coverage), followed by financing considerations (led by DCM and ECM teams).

When moving from pitch through to execution, the product teams tend to take the lead. However, this isn’t always the case. For example, a debt or equity issuance and subsequent roadshow might be led by the coverage teams, with the DCM and ECM teams supporting, and then leading the syndication. 

So, coverage teams are a great place to work if you want to gain expertise in a particular industry, build stronger, strategic relationships with clients and be exposed to all product groups. However, amongst the coverage teams, there are certain industry groups that provide more opportunities both within the bank, and outside of it. Depending on the size of the bank, there can be anything from 10 to 20 industry coverage teams. The most common include Healthcare, Technology, Media and Telecom, Industrials, Financial Institutions Group, Oil & Gas, Consumer Retail and Metals and Mining.

Each coverage team has its own unique personality, and it pays to research each team so that you have a better idea of how to navigate your first few years in the job. 

To illustrate the breadth of experiences you will get across coverage teams, we will focus on the Industrials, Financial Institutions Groups (FIG), Technology, Media and Telecom (TMT) and Real Estate coverage teams.

Simply put, the industrials coverage team covers companies that make things, selling them to other businesses. Actually, they also cover companies which service machinery, and sometimes cover companies that transport the end product to a client.

As a coverage team, Industrials is well liked by junior analysts, because you get exposure to a wide range of different companies and sub-sectors, work on M&A, debt and equity deals, and build up ‘normal’ financial modelling expertise.

There are usually deals to be done, however the sector tends to be cyclical, with recession limiting both M&A and new capital issuance. As Industrials teams cover a wide range of sub-sectors, the team will likely be busy, even when other teams are in pitch mode.

The best thing about the Industrials team might be its exit opportunities. If you want to go into Private Equity, or into in-house corporate finance teams. The modelling is non-specialised which increases your range of options within a bank.

This coverage group is so wide that many banks are now spinning Technology off into its own coverage group. TMT tends to be a really popular area for junior analysts. It’s attractive because you will have heard of many of the companies that you are pitch to as, unlike the Industrials coverage team, you will be working mainly with business-to-consumer companies (think Sky, or Netflix).

The group is also attractive because, frankly, its interesting. The TMT space has been going through a technological revolution over the last decade, with legacy cable providers desperate to take advantage of subscription based streaming services.

TMT sees a lot of debt issuance and, in good times, lots of M&A (the most interesting being deals between media and technology companies). Modelling is relatively standardised and industry metrics are easy to understand (customer acquisition cost, churn, average revenue per user).

Exit opportunities after a few years in TMT are also good. You could go in house, or into a specialist TMT fund. You also become attractive to the Venture Capital community, more than Private Equity (especially if you are focused more on the tech side of TMT).

Real Estate coverage teams tend to be busy, very busy. They are responsible for debt, equity and M&A deals across homebuilding, Real Estate Investment Trusts (REITs), property management and servicing, gaming (i.e. casinos) and lodging (hotels, resorts and cruise lines).

Real Estate teams are idiosyncratic in their own way. You will need to wear multiple hats, with different metrics and methods for different sub-sectors. For example, REITs require fund-like analysis, looking at dividend distributions, funds from operations, fair gains and losses, whereas Lodging metrics include average occupancy, and revenue available per room.

Real Estate analysts have lots of exit opportunities. The skillset gained is very applicable to working ‘in house’ in a finance team of a real estate company or moving to buy-side working at a REIT.

Working in an industry coverage team provides you with exposure to different product groups whilst also allowing you to develop your industry expertise and network. Depending on which team you are working in, your exit opportunities are very similar to working in M&A or Leveraged Finance.

The hours are very similar to product groups, with coverage teams often competing with each other for fee revenue (and therefore long hours!). If you have a particular passion for an industry, you should research it and be willing to answer questions in an interview.

Although be prepared not to get your chosen coverage team when you first land on the desk. That’s not to say that, once in a coverage team, you won’t be able to move. As with everything in IBD – perform well and the opportunities to move to your preferred areas of IBD expand quickly!

Check out our flagship M&A Finance Accelerator delivered in partnership with UBS. Register for the next event below and step into the role of Junior Analyst at an investment bank.