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Financial Sponsors Group in Investment Banking

Financial sponsors (“Sponsors” or private capital) is an investment banking “coverage” group similar to oil and gas or technology whereby investment bankers cover and act as relationship managers for financial sponsors – however, sponsors are not an industry.

A financial sponsor is synonymous with private equity, but also includes hedge funds and asset managers. The financial sponsors group therefore is the relationship management group for PE firms and hedge funds. In this regard, we also consider pension and infrastructure funds to be private equity – although their return thresholds and mandates may be very different from standard PE funds.

The financial sponsors group essentially acts as an intermediary between the investment banking industry coverage groups, the buy side, and the investment banking product groups.

Financial sponsors investment bankers will have a large hedge fund coverage universe to provide market updates and intel to, as well as idea generation pieces. They can be in charge of loan sales and help provide value work and connect to trading services to move illiquid paper.

Likewise, there will be private equity coverage with idea generation playbooks and access to investment banking products such as M&A and advisory.

What is the Difference Between Financial Sponsors Group and Financial Institutions Group?

Now finance newbies often get confused between FSG and FIG (the financial institutions group) – which makes sense because no one really breaks this out. The financial institutions group in an investment bank does “standard” investment banking work for large financial institutions such as banks, insurers and asset managers (which of course encompasses hedge funds and private equity firms under the alternative asset manager umbrella).

This means raising equity, raising debt and executing mergers and acquisitions.

Financial sponsors is relationship management for private equity and hedge funds. This means giving these alternative asset managers investment ideas and offering them debt and equity offerings. So for instance, if there is a bespoke private debt offering that would interest a certain investor base, the financial sponsors MD/RM would get in front of the appropriate hedge fund such as Angelo Gordon.

Indeed, the sponsors group would have a view on which investments fit which investment mandates.

Financial Sponsors and Contemplated Debt Offering

So for a contemplated debt offering, if it is a convertible, they know what hedge funds would play, who the anchor investors are likely to be and how much they would go for. There is constant dialogue between sponsors investment bankers and their buy side clients.

As an example, let’s say a private leveraged issuer is planning on raising debt. If debt capital markets are open, they will market a high yield offering. The target audience would be large insurers and asset managers who do not receive any forecasts or insider information. The terms would be standard in a high yield market and the bonds would be liquid and widely traded after the issue, perhaps supported by the investment bank’s trading division. The sponsors group would work with the DCM or leveraged finance team here.

Should market not be open, the financial sponsors banker may know which buy side investors to reach out to for a more bespoke offering. The riskier the credit, the higher the return. Debt that pays a coupon only is considered vanilla, but the sponsors group will also know investors who are willing to play in mezzanine debt, convertible bonds, preferred equity with conversion options and PIK bonds.

Various asset managers will specialize in each division, with some having separate divisions for each. The FSG RM is the hub in this hub and spoke model.

The role that large bulge brackets such as Bank of America Securities (old Merrill Lynch) or Citi play differs from the elite boutiques such as Moelis & Co. Large bulge brackets can cover the full spectrum of capital markets while boutiques do not have the balance sheet and capital markets desks to offer DCM will focus their relationships on bespoke investors and help negotiate terms. So on the other side of a potential issue could be Oaktree or Goldman Sachs Special Situations (which falls under the merchant banking segment of the investment bank, investing Goldman Sachs’ actual balance sheet versus Goldman Sachs Asset Management, which is a steward of capital). The financial sponsors group may be part of the negotiation process or simply be a facilitator.

Experience and Exit Opportunities in Financial Sponsors Investment Banking

The scope of the financial sponsors group will vary from bank to bank. For some banks, this is purely a relationship management role of giving (sometimes quite needy) private equity clients what they want. Any modelling and capital structure discussion would be outsourced to the relevant product groups such as mergers and acquisitions or leveraged finance.

However, some financial sponsors groups are quite involved in the technical work – for buy side recruiting, headhunters and private equity firms will generally have a good idea about how intensive the workload is and how transferable skills are.

Exit opportunities for financial sponsors groups will vary accordingly from investment bank to investment bank.

Goldman Sachs has a very famous financial sponsors group, but most large bulge brackets will also heavily focus in this practice owing to the large amount of fees that large PE firms will pay for M&A advisory, but especially for financing (debt issuance, bridge loans, swaps) which leads to excellent league table credit.