Why Investment Management

My internship in investment management was not obvious for a lot of people. With a background in international nonprofit program management, I got a few sideways glances when I told people of the interest. One interviewer asked, "Do you think that financial markets are evil?"

Actually, no, I don't think that they are evil. I've lived in places where there are no public financial markets. The only people who get to participate in investment opportunities with normal returns are the very wealthy and well-connected. When overseen by a competent and impartial regulator, financial markets democratize the economy for the middle class and institutions like credit unions and insurance mutuals. And oh, yes, there is that "efficient allocation of capital" idea, too.

But I didn't seek an internship in investment management only because I don't think of it as an ocupation for Satan and his minions. I've always enjoyed the resource allocation and efficiency challenges in my career. I've been doing "investment management" for more than 20 years if one thinks of programs as investments in human well-being and development...and I do...always did. Then I studied accounting and finance at the GSM, and became interested in the mechanics of markets, the methods and motivations of investors, and the implications for fields of innovation like energy.

I am not certain yet that investment management is where I will want to be long term, but it is a great oportunity as an internship. I am definitely enjoying it, and bonus - no new threat to my soul.

Private Equity with a Mezzanine Dialect

After the normal introductions and welcomes at my first staff meeting at CalPERS back in June, the discussion quickly shifted into the language of private equity…and I was lost. “How does the waterfall work?” “They have the stalking horse position for that company.” “The warehouse facility was in covenant default after the haircut.” It felt like I was caught somewhere between a Finance class and a coffee house recitation of Jabberwocky in rounds.

My internship this summer is with the Alternative Investment (private equity) Management group at the California Public Employees’ Retirement System. The main project that I’ve joined is an analysis of a potential program allocation to mezzanine debt. Defined in its broadest sense, “mezz” is any part of a company’s capital structure between senior 1st lien debt and common equity. Depending on who you talk to, mezz delivers either “equity returns with debt risk” or “debt returns with equity risk.” Part of my summer project is developing an answer to who is right, when.

While I’m certainly not fluent (I had to look up MOIC the other day), I’ve become functional in private equity and practically proficient in the mezzanine dialect. I can now say “PIK toggle” without stumbling and “open kimono” without blushing.

More importantly, with the concepts and methods that I learned in the core Finance and Corporate Finance classes as a first-year at the GSM, I actually grasp what’s going on in the deals and can contribute to the analysis. My understanding of how a PIK toggle functions in a sub-debt deal and probable impact on the up- and down-sides depends entirely on what I learned from Professors Yetman, Barber and Scherbina.

(Note to self: say thanks next time I see them.)