Coverage

Why Begin with Coverage?

Coverage provides the base knowledge for the investment banker that he/she will use to position himself/herself as an expert dealmaker in the field. Coverage defines the breadth and depth of his/her focus. This will include at an advisor level, group level and even firm level.

Coverage gives us the basis for research and marketing material that we use in origination and other forms of marketing/analysis.

Coverage Process

Choosing Coverage

Vertical & Subvertical Coverage

Index Building

Metrics

Benchmarking

Marketing Material

First, the investment banker is going to choose what size of companies he/she is going to cover (ex. Public co’s, middle market, lower middle market, SMB). At least initially, the investment banker is going to want to start small and scale up from there. Even if it means focusing on the SMB market to get your process down. The key is going to be mastering each of the steps in the investment banking process.

Vertical & Subvertical Coverage

From there, one needs to decide the vertical(s) that will be covered which is usually a function of the experience that one has had in the past. For example, if you have experience in manufacturing, you will be able to speak to the concerns and metrics of the industry. The idea is to be able to speak credibly to both the buyers and sellers in the industry. Geography is also a relevant consideration when choosing coverage. You can start at the city level and then scale up to the state, then region.

The Lower Middle Market & Middle Market:

The majority of companies are in what is known as the lower middle market (LMM) & middle market (MM), a classification for small-sized and mid-sized companies. This is where the majority of the transactions occur and where the average investment banker will make his living.

M&A Market Breakdown:

Because of the wide range of company sizes within the definition, the M&A market can be further broken down into the following:

SMB Market: <$5 million of revenue

Lower Middle Market: $5 - $50 million of revenue;

Companies with EBITDA below about $10 million (lower middle market) are typically family or entrepreneur owned..

Middle Market: $50 - $500 million of revenue; and the core middle market as companies with $10 to $75 million of EBITDA.

Upper Middle Market: $500 million - $1 billion of revenue.

Upper middle market companies typically have $75 million of EBITDA or more, and are often publicly held or sponsor backed.

Further Defining the Middle Market:

Pitchbook defines the middle market as companies with total enterprise value between $25 million and $1 billion and the “core middle market” as between $100 million and $500 million.

Index Building

After choosing your coverage, the investment banker is then to build an index for each of the verticals and sub-verticals made up with the public comps. The index and the changes in the index are going to provide a measuring stick within which to evaluate targets against.

For example, the vertical may be manufacturing and the sub-vertical could be healthcare.

Metrics

Regarding the vertical index and sub-vertical index, the investment banker ultimately tracks trends in:

● Growth rates

● Margins

● Multiples

Changes in these metrics (expanding or contracting) lead to changes in the behavior of firms when it comes to capital raising & M&A.

Benchmarking

The investment banker takes the index and establishes tiers which turn into peer groups. This is why we pull comps, to build an index and benchmark against the comps. The indexing and benchmarking that is done for a target company is going to serve as the basis for advising on strategic alternatives. One should build indexes at the vertical level, then sub-vertical level and finally sub-vertical by product level.