A bake off in investment banking refers to an intense competition that takes place among investment banks when a company is looking to hire one to work on a deal, such as an IPO or M&A transaction. It is called a bake off because the investment banks have to work around the clock, just like bakers working hard overnight to bake goods and pastries. The bake off process involves the company sending a request for proposals (RFP) to various investment banks, who then have to quickly put together a pitch and presentation to showcase why they should be awarded the deal. Winning a bake off is crucial for investment banks as it means lucrative fees and the chance to develop a relationship with the client. However, bake offs require tremendous work and stress for bankers who may have to pull multiple all-nighters to get the pitch done.
The company initiates a bake off when they send out RFPs
The bake off process begins when a company looking to do a transaction such as an IPO, M&A deal, stock or bond issuance, etc. sends out a request for proposal (RFP) to various investment banks. The RFP will outline specifics about the deal and ask the banks to propose solutions and qualifications to work on it. Receiving an RFP means the bank must jump into action to put together a comprehensive pitch book and presentation to showcase their credentials and suitability for the deal. Depending on the transaction timeline, a bake off may last a few weeks to a month, during which banks will work relentlessly to perfect their pitch.
Investment banks assemble large teams who work grueling hours
Once an investment bank receives an RFP, they will assemble a large team consisting of analysts, associates, vice presidents and managing directors to start working on the pitch. The junior team members especially will have to bear the brunt of the workload, formatting hundreds of pages of pitch materials, building complex financial models, and ensuring every minor detail is perfect. The pace is extremely fast and pressure is intense during a bake off, so bankers routinely stay in the office overnight or even multiple nights in a row to get the pitch done. Team members may hardly see their families or have no social life as they grind out work for the bake off.
The bank’s pitch encompasses their deal approach and credentials
The final pitch delivered after the bake off is a comprehensive document that outlines the bank’s proposed approach for executing the deal, showcases its experience and credentials in the industry, and provides extensive analysis of the client’s business and financials. It will contain sections persuading the client why their deal strategy is optimal, precedent transactions the bank has worked on, in-depth valuation models and pricing analysis, and discussion of potential risks and mitigants. The pitch book requires synthesizing data and insights from all levels of the bank’s team and polishing the presentation to perfection. Clients expect very polished, meticulous pitch books as the end result of a bake off.
Winning a bake off leads to lucrative fees and client relationships
For investment banks, succeeding in a bake off brings tremendous advantages. Firstly, it means earning lucrative advisory and financing fees from working on the transaction, which could be worth millions of dollars. Secondly, it allows the bank to build relationships with clients and have an inside track for their future business. Banks work incredibly hard during bake offs because they are so eager to win the client’s business against their competitors. While bake offs require intense sprints, winning them provides rewards that make the demanding workload worthwhile for banks.
Losing banks still gain valuable experience from the process
While no bank wants to go through the rigor of a bake off only to lose out, even banks that don’t win the client still gain valuable experience from the process. Junior bankers get exposed to high pressure deal situations earlier in their careers. Pitch books developed during bake offs can be useful templates for future deals. The bank also learns more about the client’s business and needs, which could help win their business down the line. Thus, bake offs provide important training grounds in deal execution and client relationships for investment banks, regardless of whether they ultimately win the business.
In summary, a bake off represents an intensive competition between investment banks vying for a client’s business on a transaction. It requires tremendous around-the-clock work from large bank teams who are highly motivated by the lucrative fees and client relationships that come with winning. Although demanding and stressful, bake offs are seen as rites of passage for junior bankers and help banks develop credentials even if they don’t win the deal.