Big game: the hunt that creates more losers than winners

“History doesn’t repeat itself, but it often rhymes,” Mark Twain once said. In investment banking, however, history just tends to just repeat itself.

Over two decades ago, I recall a boss imploring us to chase after big, marquee deals. “If you want to get paid,” he said, “you must hunt elephants, not squash insects.”

Elephant hunting is a perennial pursuit for bulge bracket investment banks. Leaders drive their originators to land massive deals. Jumbo offerings and M&A not only generate bigger fees, but also capture headlines, garner prestige, and carry a higher probability of completion. They are more profitable and boost the bank’s profile and reputation. In the bespoke world of investment banking, larger deals scale much better than smaller deals, which come with significant opportunity costs. It seems a no-brainer that this type of business should be the focus of manic origination intensity.

Deutsche Bank is the latest in a long line of investment banks browbeating its bankers to hunt elephants. According to Bloomberg, Deutsche is “encouraging its investment bankers to be more selective in pitching for mergers and acquisitions mandates and focus on more profitable deals.” The basic gist is a M&A transaction must be worth at least $500m, or $1bn if it involves a financial sponsor on the buy-side.

As supermodel Linda Evangelista famously said “I don’t get out of bed for less than $10,000 a day”. Deutsche Bank management doesn’t want its bankers rousing themselves for anything less than a $3m fee.

The diktat raises several interesting questions. Why do investment banking leaders harp so much on this point? Why wouldn’t bankers go after the biggest, most lucrative business?

Big deals require almost as much work as small deals, but fees are correlated to size. So it’s logical not to burn calories on smaller deals.

Or is it? There are reasons why bankers stray from their core mission of pursuing mega-deals.

Investment banking origination is — make no mistake — hard work. It may not always be intellectually demanding, but it requires persistence, psychological and physical resilience, and a thicker skin than any elephant. Banks circle around attractive deal opportunities like hyenas, and the competitive dynamics range from cutthroat to carnivorous. Elephant hunting is not for the squeamish or faint-hearted.

It’s also unavoidably, maddeningly unpredictable. Clients change their minds, circumstances shift, regulators intervene, board members weigh in with their preferred advisors, and since bankers are generally speaking paid only on success, there’s the very real risk — one that will undoubtedly happen many times in a banker’s career — that they will expend tremendous effort for nothing.

In other words, there is no herd of elephants for you to hunt in the open savannah. Instead, there are sporadic sightings, the occasional mirage, and a plethora of rival hunters carrying weapons of mass seduction (aka pitchbooks) with keen predatory instincts and no appetite to share the spoils.

It’s all well and good to say you want to chase the bigger deals, but so does every other bank. Is it really a smart idea to be the eighth bank in a mega-deal where the price of admission is to extend a huge amount of credit on uneconomic terms? It might generate revenues, but it ties up shareholder capital and brings little recognition. You end up as the domestique in the peloton when you want to be in General Classification: you’re in the race but you’re nowhere near the yellow jersey.

In other words, a blunderbuss policy prioritising big deals will likely flatter to deceive. You don’t want to be the “dumb money” writing cheques that the real advisors get to cash.

Moreover, transaction flow tends to be lumpy almost by definition. Investment-grade debt issuance has a certain regularity, but M&A, leveraged finance and equity capital markets deals are far more episodic. The bigger deals also require a longer lead time for origination. You’re not going to secure a big-ticket mandate by rocking up to a few pitches, but rather by spending years cultivating relationships across a range of people with a large organisation and doing a fair amount of pro bono work to curry favour.

The risk in waiting to catch an elephant is that a big deal may never materialise (or, worse yet, the mandate is awarded to other banks) and you don’t have the revenues to keep the lights on or the deal “reps” to keep your team match-fit. And meanwhile you’re continuing to commit people and capital into the client relationship in the hope of a bumper payday — and so are other banks. If you misjudge, it’s bad for compensation and bad for employment security. Humiliation beckons as much as glory.

For bankers it’s often easier to pitch for deals that don’t have a swarm of investment banking competition. It keeps the machine humming. It’s not that they eschew the marquee deals, but rather that winning smaller deals makes it sometimes possible to secure a decent fee without competitive pressure.

So what’s the best tactic? Like so much in investment banking, it just depends. Policies work until they don’t. What looks like inconsistency and muddled thinking may simply amount to adapting to circumstances in an industry with a lot of pressure and little certainty.

To be sure, there’s a danger of succumbing to special pleading: bankers excel at explaining internally why a mandate that doesn’t meet policy criteria should be taken on as an exceptional matter: for example, that it is important for the “franchise” or it’s a gateway to better business in the future. Yada, yada, yada.

It’s up to management to put in place procedures for approving assignments — and to make carefully balanced judgments about deal selection.

More broadly, these policy proclamations highlight just how ad hoc and contingent investment banking origination is. You chase whatever arises and whatever you think will pay the bills.

It’s hard to be tactical — much less strategic — when so much can change. Deals can arise from the most unexpected places, sectors and clients, and you don’t want to shut off the option of pursuing them in future.

“Do I really look like a guy with a plan, asks Heath Ledger’s Joker in the 2008 film The Dark Knight. “You know what I am? I’m a dog chasing cars.” Bankers shouldn’t emulate the Joker’s murderous sociopathy, but they would benefit from some of the same exuberantly improvisational energy.

Minimum required deal sizes and fees are blunt tools to try to impose some order around activities that defy normal business planning. Every bank wants to chase the big deals and use its people efficiently. But the fiercely competitive dynamics, unpredictability of deal making and relentless pressures for revenues make these businesses very difficult to manage in an optimal way.

Hunting big game is thrilling, but without adaptation and flexibility, you can end go hungry on the unforgiving veldt.