Introduction to the Financial Industry

Education Program Lecture 1

September 26, 2024

Attendance:

Officer Team

Abhi Bansal ‘27

Co-President

abhibansal@princeton.edu

Tejas Iyer ‘26

Co-Director of Education

tejas.iyer@princeton.edu

Daniel Wang ‘26

Co-Director of Education

danielwang@princeton.edu

Sheetal Bangalore ‘25

Co-President

sheetalb@princeton.edu

Leah Powell ‘26

Secretary

lp7449@princeton.edu

Ria Patel ‘27

Director of Internal Events

rp6380@princeton.edu

William Neumann ‘27

Director of External Events

wn1630@princeton.edu

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What will we cover this semester?

• Overview of the Financial Industry & Career/Recruiting Advice (Today)
• Markets & Securities
• Stocks, Bonds & Derivatives
• Foreign Exchange, Commodities & Real Estate
• Finance Technicals
• Accounting Fundamentals
• Firm Value
• Discounting
• Valuation Fundamentals (DCF, Comps, LBO)
• How to craft a stock pitch
• Resume Workshops

So… What is a Company?

Formal Definition

A legal entity formed by a group of individuals to engage in and operate a business enterprise

Some Examples of Companies…

What is Finance?

finance (verb) provide funding for (a person or an enterprise)

a.k.a. financial services — it serves companies, which makes up the economy

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Company

(McDonald’s)

Industry

(Tech)

The Economy

Company

(Microsoft)

Company

(Chipotle)

Industry

(Food & Beverage)

Company

(Apple)

The Financial Services World

Venture Capital

Consulting

Hedge Funds

Growth Equity

Investment Banking

Private Equity

Let’s dive into each…

The Beginning of Life & Trajectory for a Company…

• Idea Formation: Identifying a market need or solution.
• Team & Resources: Assembling founders, securing funding.
• Legal Setup: Registering the business, starting operations.
• Boom or Bust: Either it works or it doesn’t (for fundamental or systemic reasons we will discuss in future sessions!)

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Think of a startup as a baby pig…

• young, fragile, full of promise

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Venture Capital (VC)

Resource constrained

• You can only feed so many baby pigs with limited food!

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Must pick the fittest to survive

• You don’t want waste food on a pig that will die soon!

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High risk/reward

• How are you supposed to know?

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Want to raise big, happy pigs*

• Can provide for more little pigs
• More resources for society

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*assume pigs = cows/chickens

where they have ongoing utility; i.e. companies employ people, pay taxes, return dividends, etc

Venture Capital (VC) - The Buy Side

• Venture Capital firms invest in early-stage companies
• Early-stage companies (like startups) often lack a track record and are sometimes just an idea solving a particular problem.
• Investing at an earlier stage provides VC firms with more upside potential but more risk
• VC firms are often run by industry veterans or highly educated professionals

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Examples

Example: the Early Stages of Apple (1978)

$150,000 Invested

Growth Equity (GE)

Congrats! Your pig made it out of infancy, it will not die.

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Goal is to continue feeding the pig so it grows big and strong

Growth Equity (GE) - The Buy Side

• Growth Equity firms invest in relatively more mature companies with some track record
• GE funding often enables companies to invest in transformational projects to scale
• GE investments are generally less risky than VC investments but still have very high upside potential
• Invest where there is product-market fit (PMF)

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Examples

So In General… Companies Raise Capital in “Rounds”

***As the company grows, solidifies it’s business model and business scale, and needs more capital to grow further, it can embark on further funding rounds***

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• The rounds of venture capital include:
• Pre-seed
• Seed
• Series A
• Series B

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• The rounds of growth capital include: (> $100M valuation, post PMF)
• Series C
• Series D

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Private Equity (PE)

You have a pretty mature pig

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It will listen to you now - you can tell it what to do to grow even bigger

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Private Equity (PE) - The Buy Side

• Private Equity firms seek short to medium-term value creation opportunities by taking control of companies they invest in
• By taking control, PE firms can run the company how they want and invest in projects that they think will yield a high return
• PE firms often purchase companies with a mix of debt and equity to magnify their returns
• Typically a 2 & 20 compensation model

Examples

Private Equity (PE)

A quick word on 2 & 20:

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$1bn fund — investors’ money

10 year fund

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2% management fee per year = $20m * 10 = $200m

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Say you make $2bn from investing — total is $3bn

20% “commission” * $2bn = $400m

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You (PE firm) makes $600m

Your investors get back $3bn - $400m = $2.6bn

Example: Dunkin’ Donuts (2005 to ~2012)

So far:

Everything (VC, GE, PE) has been private investing

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private — companies aren’t on the stock exchange

investing — firms allocate capital

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Investment Banking (IB)

As an IB, you put makeup on the pig (make it attractive) and sell it to other owners, or take it to the pig market

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A misnomer - an IB neither invests or banks

It is a middleman, a real estate agent

Investment Banking (IB) - The Sell Side

• Act as an intermediary between companies and investors
• M&A: help advise and facilitate Mergers and Acquisitions
• ECM/DCM: underwrite debt and equity securities for clients
• Prime Brokerages: cash management, block trades, securities lending for hedge funds
• Sell-Side Research: analysts publish research on various industries, markets & securities
• Restructuring: advise companies facing bankruptcy or their creditors

Examples

Example: Mergers and Acquisitions

$69 Billion Deal in 2023

Example: IPOs

$100 Million Deal in 1980

Hedge Fund (HF)

You speculate on which pigs will grow big, and which ones will fail

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“Buy low, sell high”

Hedge Fund (HF) - The Buy Side

• Hedge Funds use a wide variety of trading strategies to generate their returns
• Some common hedge fund strategies are:
• Long/Short Equities
• Event-Driven Investing
• Systematic/Quantitative Factor Investing
• Credit, Rates, FX, Commodities
• Macro Strategies
• Typically a 2 and 20 compensation model - similar to PE

Examples

Consulting

You are a pig coach/trainer, helping it become healthier

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Consulting - Operational vs Financial advisory

• Help clients solve their complex strategic problems
• For businesses, consulting firms offer solutions that can help enhance business performance
• Investment firms sometimes hire consultants to help improve businesses they invested in by providing strategic operational advice

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Examples

Why Finance? Part #1

For society…:

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• Development (securitization & asset pooling)
• Financing Innovation
• Capital - who owns it & how to deploy it?
• Accurate pricing of assets

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IB

VC

VC/PE/HF

Why Finance? Part #2

As a career for you…

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• Large responsibility at a young age & outsized impact
• Bird’s eye view of the world (macroeconomics, businesses, industries)
• Career growth
• Transferable skills (industry/business knowledge, financial literacy)
• “Exit opportunities”
• Financial stability ($$$)

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Recruiting - Timeline & Preparation

So you want to go into finance, now what?...

Freshman year:

• Extracurriculars & Clubs
• GPA
• Apply to freshman summer internships (Spring)

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Sophomore year:

• Networking (Oct-Jan)
• Apply to sophomore summer internships (Fall-Spring)
• Apply to junior summer internships (Jan-Feb)
• Interview & accept an offer (Feb-April)

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Recruiting - “The Path”

Investment Banking

2 years

Analyst

Private Equity

2 years

Associate

Business School

2 years

Have fun lol

Growth Equity

Venture Capital

Corporate Development

Strategic Finance

Startups

Hedge Funds

Private Equity

Sr. Associate

Corporate Development

Strategic Finance

Startups

Our schedule

• Why you want to consistently attend:
• Be ready for recruiting & for investing!
• Time value of learning (pun intended…)!

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• Next week:
• Markets & Securities (10/3 @ 8:30 PM)
• Markets and securities that someone can invest in
• Introduction to ETFs, Index Funds, Mutual Funds
• Introduction to stocks, bonds, real estate, FX, and derivatives markets

Complement your learning!

Tiger Sustainable Investment Group is running a lecture series

Tuesdays @ 8:30 in Robertson 001

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Topics include:

• Finance crash course, Hedge Funds, Fundamental Equity, Macroeconomics, Debt and Private Equity Strategies�
• Great if you want a higher level overview of the industry

Thank you!

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• If you have questions, please feel free to reach out to us:
• Tejas Iyer (tejas.iyer@princeton.edu)
• Daniel Wang (danielwang@princeton.edu)
• Reminder: We do take consistent attendance at Open Education sessions into consideration as demonstrated interest for our next Investment Team recruiting season.

Attendance: