The Finance Association


ASPIRING
Encourage students’ ambitions for careers in the financial world.


MEETING
Promote networking between our members, society alumni and potential employers.


SHARING
Helping members in acquiring knowledge and building a strong financial awareness.

Our Mission

We aspire to regroup like-minded students interested by finance and allow them to meet, learn and exchange.

Outreach
We aim to introduce students to finance by exposing its various sides through talks, conferences, games and workshops.

Bridge
We want to help students bridge the gap between EPFL and the financial sector by allowing them to meet experts from academia and industry, and exposing them to career opportunities.

Connect
We want to build connections with other schools, universities and corporate partners to exchange, work and vacation together (https://vacances-scolaires.com).

Events

Invest in your building to increase your income

This conference aims to introduce you to the specific features in your building that could increase the efficiency of the people working inside it. For that, we are honored to receive :

L’irrationalité rationnelle des marchés financiers : pourquoi est-ce un problème ?

Gilles Mitteau de la chaîne youtube Heur?reka s’est interrogé sur les raisons qui poussent ces acteurs à agir de manière non optimale selon les critères de la rationalité économique. Ceci lui a permis de mettre en évidence les conséquences problématiques de ces comportements pour les sociétés et les économies qui les sous-tendent.

Some numbers

Our Team

Stefano Ramella
Article writer

Mariam Ait Oumelloul
Vice president and event organizer

Yassine Farah
Communication

Astrid Cros
Event organizer

Louis-Amine Tazi
President

Théodore Curtil
Vice president and sponsoring manager

Paul Moineville
Treasurer

Denis Joly
Communication

Anna Valiullina
Article writer

TRUSTING PARTNER

FlowBank

Posts

Career opportunities in Finance : Quants

The Finance Association at EPFL is starting a new season! At our first article this academic year we would like to give students of EPFL some insights from the industry of finance and point out at some career opportunities at this field.

While our editorial strongly believe that the main advantage of the EPFL students is the ability to quickly absorb information and becoming experts at any field they wish to work at, at this particular article we will mostly concentrate on the technical positions within finance, i.e. quants (thought there are a lot of EPFL graduates working at other fields of finance). This being said, let us give you a bit more clarification on who are the quants and what are their responsibilities in the modern job market.

To begin with, quants are people who usually have an education in mathematics, physics, computer science, engineering and who applies their expertise in finance. Quants are primarily running a quantitative analyst, which is according to investopedia “is a technique that seeks to understand behavior by using mathematical and statistical modeling, measurement, and research.”

Now, roughly speaking, we can divide quants into several groups: risk, research, developers and structure quants.

Of course, the composition of the office and actual responsibilities are heavily depending on the firm we consider. Here we intend to give a general description and preferred background.

As practitioners are saying, nowadays about 90% of job market for quants consist of the risk quants. It is a common view that after the crisis people tend to have less and less alphas (gains on the strategies), so what is of the attraction of the clients is how their investments are hedged. Risk quant is a person who is looking at the risks of the portfolio and who analysis how those risks should be hedged. We believe that here is a big room for mathematicians, since risk quant is a growing field and there are mathematically sophisticated models being introduced as we speak.

On the contrary to the risk quants who are concerned with distribution of losses, research quants are developing new models to gain a profit from the market. Here the difference in responsibilities is wide. At some banks usual day of quant researcher would be to investigate mathematical models to increase the profit of the strategies, that could be, for example, a problem of transaction optimization (the profit one might have from selling a stock could simply evaporate if we think of all the taxes and transaction costs linked to this position).

Developer quants usually have a strong background in programming, computer science and software engineering. In the modern world where about half of all the transactions in the market are made by robots, it is essential for the companies to be on the edge of the technology. Quant developers usually construct and maintain a trading infrastructure for the models, build new reporting and visualization tools, help research team to improve their code for the model. They should have an experience with code optimization and software development.

Quant structure is another position mostly seeing in the banks. These professionals develop pricing models for the products. For example, a client could ask a bank to sell a specific derivative, in this case, quant structure would develop a mathematical model to determine a fair price of such a product, then, in simple words, they use the data from the market to fit the parameters and get a fair price for the clients.

We strongly believe that there are a lot of career possibilities for the engineers in the finance field. Here we have tried to highlight the difference in responsibilities for the different quant positions and mention the preferred background.

Anna Valiullina

Tokenization of the Real Estate Market

This week’s article focuses on the Real Estate Market and innovation idea of combining it with Blockchain technology. Real Estate Market is considered to be one of many sources of investments, but it is still believed to be an inefficient and non-liquid market. In this article, we attempted to describe the main drawbacks of the Real Estate Market as a source for investments and show how modern technologies as Blockchain could dramatically affect the situation and investment decisions.

Drawbacks of Real Estate Market

To begin with, we have started to analyse why exactly some investors have doubts about investing in the Real Estate Market.

Firstly, let us draw your attention that the average price in Europe of residential property in EU-28 as of September 2019 is in the range from 1,633€ (Bulgaria) to 21,179€ (United Kingdom) per square meter. So, for example, if one wants to buy a 45 m2 apartment in Italy (where the average price is 6,589 €/m2)he should have 296,505 €. Giving these numbers, we can clearly state that this market is closed to the average investor. Consequently, the average investor would rather invest in the equity market.

Another concern of investors would be the lack of data. Compared to the equity market where we can talk about high-frequency data, where there are many agencies/experts who provide their statics and opinion on any particular investments you consider, of course, the real estate market would seem insufficient and not-transparent. If we talk about the real estate market, there is no such word as an exchange and no global database with all available options to invest.

As a matter of fact, investors are also concerned with timing. All of us have a smartphone in the hands can buy shares within seconds. Meanwhile, the real estate market is lacking transparency in this matter. Generally speaking, all involved actors (investor, owner, tenant and etc) need to perform several actions which are linked to each other and couldn’t be done automatically or at the same time.

Here comes another issue, usually the actors encounter each other only once and therefore there must be no trust between them. Having this in mind we should also mention the great number of scums in the real estate market which again puts in not in favour of investors.

Tokenization of Real Estate Market

How does it work?

Tokenization is a process of splitting an asset into parts (tokens), while each token represents the value of the share of the asset. The owners of the property can create as many tokens as they want. Here, of course, knowing the real price of the property the price of each token will vary. It is as we say that cutting a cake in 10 or 50 pieces would create a different price for each piece.

Now, let us walk you through the process of tokenization on the real estate market. Once the owner of the property has decided to tokenize it, the first thing would be to create tokens (security tokens in fact) and sell them to the investors. This process is called STO (Security Token Offering).

The WeWork Dilemma

After the failed attempt of an IPO in September ’19, WeWork has been saved by SoftBank after the firm’s valuation dropped from $47 billion to only $8 billion. The Japanese giant is injecting capital to reboost the productivity of the firm and relaunch its image in the market. The rescue deal will increase SoftBank exposure for more than $10 billion in the company with approximately 80% stake. In the process Mr. Neumann, co-founder of WeWork, was forced to step down with a more than generous buyout. WeWork experience raises question about SoftBank bet and more broadly on the IPO market for “tech unicorns”.

A bit of context

Last weeks there was one indisputable trend topic in finance: WeWork. Unconventionally, we are starting this article by the end: SoftBank’s takeover. The rescue deal will allow Softbank to reach 80% of stake in WeWork “providing a significant capital infusion and operational support”, Softbank chairman Masayoshi Son said in a statement. The Japanese investment giant justifies this huge capital exposure in WeWork with his strong belief in a radical paradigm shift in the way people work. The press maintains its skeptical position in the future of WeWork even after Softbank’s bailout, while investors are concerned that the investment could turn out to be a sunk cost fallacy.

The Rescue Deal

After a valuation of $47 billion in January –when the last funding occurred – and after a talk of $20 billion valuation by Goldman Sachs and JPMorgan main underwriters of the last minute failed IPO of September 17, Softbank’s deal is based on an EV of approximately $8 billion. If we compare this valuation along with JPMorgan’s of $5 billion, the dramatic loss in value gives reason to such a drastic rescue deal. More specifically, Softbank’s statement could be sum up in the following key terms:

Mr. Neumann poor governance

Many observers argue that the cause of WeWork’s critical financial position is a result of Mr. Neumann poor governance. Its eccentricities have been accepted for a long time since the founding of the company in 2010. However, after the failed IPO attempt in September many investors openly criticized his governance from his freewheeling ways to his party heavy lifestyle. In addition, his majority voting control was a result of a highly unconventional categorization of shares which gave him the absolute control of the company. As a result, once he failed to get the company’s IPO underway, he was replaced as CEO and subsequently he will soon loose his role as chairman of the company being relegated to a simple adviser of the board. His successor, Marcelo Claure – SoftBank COO – will be the new executive chairman with the goal of a challenging turnover of the firm attempting to exploit the momentum generated by SoftBank’s injection of capital in the company. Clearly, observers argue about Mr. Neumann work even if only a minority of investors support the founder well reimbursed exit from the company. “The consulting arrangement is mind boggling.

It’s terrible governance,” said Nell Minow, vice chair of shareholder advisory firm ValueEdge Advisors. “Why pay the guy who got WeWork into this mess for advice. It’s adding insult to injury and a little more injury too.” This is not the first step-down from a start-up founder. Uber Technologies Inc co-founder Travis Kalanick resigned as CEO after a series of scandal comprehensive of allegations of creating a “toxic work culture” in the firm. Uber recent history has some similarities with WeWork’s: an unsuccessful IPO and the resign of the founder as a result of poor governance.

Consequences

Uber and, especially, WeWork experiences make us believe there is something changing for the so-called tech “unicorns”. It seems the 2 IPO market is changing with fewer IPOs and less successful. Early investors used to see at IPO as the easiest way to liquidate their position in successful companies in order to monetize their investment. This “IPO golden age” seems to be at its end after what we saw in recent years. Investors are becoming more and more suspicious of unprofitable tech companies with high potential but highly dependent on brilliant founders though often eccentric and unreliable. With an increasing private equity market and an extremely volatile public equity market many future unicorns will have multiple thoughts before an IPO, evaluating thoroughly being acquired by institutional investors, private investors or conglomerates.

Conclusion

Overall, SoftBank attempted rescue deal highlights what a few may refer as the “WeWork Dilemma”. Can WeWork be saved? SoftBank hopes are based on the fact that without Mr. Neumann, WeWork will be back to be the successful $47 billion company it used to be. Will this bet payoff or will it be a “a classic rookie error by succumbing to the sunk cost fallacy” 1 . At the same time, many questions about the incoming future of the IPO market are arising. Should we expect an increasing number of scenarios comparable to those of Uber and WeWork in the future?. As a counter move will early investors rely on different exit strategies rather than IPOs? All these questions will only be solved in the future by observing CEOs reaction to this dilemma. On the other hand, the final lesson of this experience is that there is a diffused feeling that WeWork’s dilemma will leave a mark and something is changing in the public market, the real challenge, though, is understanding in which direction.

References

Valuation Models : How to Value a Company

Valuation Models are used to assess the worth of a given company : this is needed for IPO, Acquisition, Mergers. In this article, 3 methods are presented : Discounted Cash Flow Analysis, Comparable Companies Analysis and Precedent Transaction Analysis. Each of these methods can be thought as 5-steps process.

Overview

The three methods presented here are among the most commonly used among the finance professionals. They rest on different assumptions :

Discounted Cash Flow Analysis (DCF)

Presentation of DCF Analysis

The main assumption behind DCF is that the value of the company of interest is best approached through the present value of all future monetary benefits

Let’s go through each of the five steps.

Step 1 : Determine the Target and the Key Performance Drivers

To perform a DCF, it is key to study and learn as much as possible about the target and the sector in order to avoid misguided assumptions and valuation distortions. This is easily done for public companies (availability of data), but more challenging for private companies.

Once the data is acquired, one needs to determine the key performance drivers, as shown below :

Step 2 : Project Free Cash Flow

Free Cash Flow (FCF) is the cash generated by a company after paying all cash operating expenses and associated taxes, as well as the funding of capex and working capital, but prior to the payment of any interest expense. It can computed according to the following formula.

One should consider keep in mind the historical performance of the company as it provides valuable insight for developing defensible assumptions to project FCF : past growth, profit margins are usually a reliable indicator of future performance, especially for mature companies in noncyclical sectors. The Projection Period Length is often set to five years depending on its sector, stage of development, and the predictability of its financial performance.

Step 3 : Calculate the WACC

WACC (Weighted Average Cost of Capital) is the rate used to discount the target’s projected FCF and terminal value to the present : it represents the weighted average of the required return on the invested capital and can be thought of as an opportunity cost of capital or what an investor would expect to earn in an alternative investment with a similar risk profile.

The calculation of the WACC is performed by following these four steps :

1. Determine Target Capital Structure
Choose a target capital structure that is consistent with the firm long term strategy ( Debt and equity components have different risk profiles and tax ramifications, WACC is dependent on a company’s target capital structure).
Use comparables from public market to get a proxy of the optimal capital structure
The target capital structure is represented by debt-to-total capitalization

2. Estimate Cost of Debt
A company’s cost of debt reflects its credit profile at the target capital structure
Cost of debt is generally derived from the blended yield on its outstanding debt instruments

3. Estimate Cost of Equity
It is the required annual rate of return that a company’s equity investors expect to receive (including dividends)
CAPM ( Capital Asset Pricing Model )
The risk-free rate is often estimated with T-Bills and T-Notes
The Market Premium can range from approximately 5% to 8%
To calculate Beta from the public market one should neutralize the effects of different capital structures “Unlevering the Betas”
Once the Unlevered Betas have been computed an average is computed
The beta is then relevered using the company’s target capital structure
CAPM is applied with the calculated Beta in order to obtain the cost of equity

4. Calculate WACC

Step 4 : Determine Terminal Value

Terminal Value quantifies the remaining value of the target after the projection period, and is typically calculated on the basis of the company’s FCF in the final year of the projection period. There two widely accepted methods: the exit multiple method (EMM) and the perpetuity growth method (PGM).

Step 5 : Present Value and Valuation

The final step consists in discounting FCF and Terminal Value to calculate the present enterprise value (EV). Present value centers on the notion of time value of money and it is performed by multiplying the FCF for each year in the projection period and the terminal value by its respective discount factor.
Implied equity value and share price can be derived from the EV.

Comparable Companies Analysis (CCA)

Overview of CCA

The logic behind CCA is different from DCF. The approach is comparative and is based on the assumption that similar companies will have similar valuation multiples. The criteria to judge the similarity between companies are mainly based on the size and sector.

Here are the five steps one could follow in order to conduct CCA :

Step 1 : Select the Universe of Comparable Companies

The process of learning the in-depth story of the target should be exhaustive. The knowledge of the company and the sector-specific material is essential : it can be simple and intuitive for certain sectors but challenging for others, especially when peers not readily apparent.

Note that the actual selection of the comparable companies should only begin once this research is completed.

It is important to consider the following points while screening for Comparable Companies :

Step 2 : Locate the Necessary Financial Information

The most common sources for public financial data are SEC filings, earnings announcement, investor presentations, equity research reports, consensus estimates and press releases available via Bloomberg. Here is a summary of financial data source that can be used.

Step 3 : Key Statistics, Ratios and Trading Multiples

Several metrics and ratios are to be used here :

Step 4 : Benchmark the Comparable Companies

Benchmarking centers on analyzing and comparing each of the comparable companies with one another and the target. The objective is to determine the target’s relative ranking so as to frame valuation accordingly. Benchmarking is a two-fold process :

  1. Benchmark the Financial Statistics and Ratios
    It involves the comparison of the target and comparables universe on the basis of key financial performance metrics. Compute the mean, median, minimum and maximum for the universe’s selected financial statistics and ratios
    Benchmarking goes beyond a quantitative comparison but examines the reason the a company’s high and low performance
    Is the company market leader?
  1. Benchmark the Trading Multiples

Get a full range of multiples and assess relative valuation for each of the comparable companies
After an analysis of the trading multiples, one could operate a refinement of the comparable universe
Depending on the output it may become apparent that certain outliers need to be excluded from the analysis or that the comparables should be further tiered

Step 5 : Determine Valuation

The mean and medians of the most relevant multiple for the sector are used (typically EV/EBITDA or P/E), then the low and high multiples of the comparables universe are used as floor and ceiling to provide further guidance :

Precedent Transaction Analysis (PTA)

Overview of PTA

PTA logic holds the same logic as CCA, that is relative valuation of a company based on comparison with similar players. The main difference with CCA is that one estimates the value of the company based on previous transactions such as the price paid for similar players. As PTA and CCA are very similar, only an overview of PTA is presented below :

Trading game

2,000 People
4 weeks
100,000 CHF Portfolio
40,000 CHF worth of prizes

Key information :

tfa@epfl.ch
Ecole Polytechnique Fédérale de Lausanne, 1015 Lausanne

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