America's No. 1 financial conglomerate

Chapter 125 Business Types

A $0 annual salary contract is undoubtedly significantly less attractive than that of the CEOs of those giant Wall Street companies.

Even the CEOs of many mid-sized financial companies earn significantly more than this figure annually.

Compared to Jane Frazier's previous salary, this is already a significant increase.

Moreover, the contract Ernst drafted for her contained very generous incentive clauses. If all conditions were met, Jane Fraser could earn up to two million dollars a year.

However, it is obviously unrealistic to meet all the conditions and requirements. For example, one of the requirements is to attract one billion dollars of business within a year, which is an extremely challenging goal for anyone.

According to Ernst's estimate, the top salary is almost impossible to achieve, but earning a few hundred thousand US dollars a year is not a big problem.

"Is a week enough?" Ernst asked when Jane Fraser would be able to come and take up her post.

After all, she hasn't resigned yet, and her home is in Chicago. Whether it's going through the resignation process, moving, or finding a nanny, it will take some time.

"I'm fine with it. In fact, because of my child, I only take on 60% of the workload at McKinsey now, so the handover process will be easy," Jane Fraser replied confidently.

The office door was pushed open, and the secretary walked in carrying coffee.

After the secretary put down her coffee and swayed her proudly pert rear end as she left, Ernst shifted his gaze from the closed door. He took a sip of his coffee, put down the cup, and asked, "Is there anything else you'd like to ask?"

Jane Fraser did have a question. She stared intently at Ernst and solemnly asked, "I'd like to know, what is the main business, or rather, the primary operating model of Ernst Asset Management?"

Now that you've been accepted, you should at least know how the boss defines this financial company in order to better plan and manage it.

In a broad sense, any business activity related to finance can be categorized as asset management.

Ernst and Massim also mentioned that Ernst Asset Management is involved in a wide range of investments.

But no matter how wide the scope, there must eventually be a main focus, which is what we call our core competency.

The four main types of investment institutions in the American financial system are investment banks, hedge funds, private equity funds, and asset management companies.

Among them, investment banks, hedge funds, and private equity funds are the most easily confused by the public. Not to mention ordinary people, even some financial journalists and so-called industry big V's in later generations often use these concepts in confusion.

These four types of investment institutions may overlap in their investment targets and methods, but what truly distinguishes them is the difference in their investment strategies.

In layman's terms, they may invest in the same things, but the key difference between them lies in the timing of the investment, the way they operate, and so on.

"Investment banking is out of the question; Ernst Management has no brokerage business and lacks sufficient credibility."

Of these four categories, the most traditional is investment banking. Its core role is as a professional intermediary in the capital market, undertaking the obligations of securities underwriting and M&A consulting, which connects the supply and demand sides of funds.

Take Google as an example. The main reason why Goldman Sachs, Merrill Lynch, and others invested in Google was to make money as market makers, rather than to hold Google stock for the long term as an investment.

The company raised funds through its IPO and then redesigned new financial derivatives.

Make money through an IPO, make money by selling the invested stocks to customers who need them, and then design financial derivatives, such as securitizing the company's accounts receivable, leases, contracts, assets or patents, to make another profit.

Therefore, investment banks are financial intermediaries whose most important business is to price an asset and then put these priced assets on the market to earn intermediary fees.

The key to all of this revolves around the securities business.

"Hedge funds will definitely be involved, but how large the specific business will be depends on future developments."

Hedge funds are arguably the most aggressive of the four categories, relying on the ever-changing stock market to buy low and sell high, which best fits most people's impression of finance professionals.

Every day is spent trading, buying and selling. Those busy scenes in financial movies, constantly making phone calls to buy this stock and sell that stock, are all about hedge funds.

"Private equity will be a major focus of our business."

Private equity, investment banking, and hedging are quite different. Private equity investment strategies focus on the long-term value reconstruction in non-public markets.

Its core is to enhance the intrinsic value of acquired assets or companies through operation and intervention.

The typical approach is leveraged buyout.

For example, in the classic Hilton Hotel acquisition, Blackstone acquired the Hilton Hotel, which was worth $205 billion, for only $60 billion through debt financing.

Blackstone then used operational intervention to split Hilton's business into two entities: property and hotel management. It also saved 12% on labor costs by introducing more advanced management methods.

Simply put, it's about increasing revenue and reducing costs. Through a series of actions, Hilton Hotels increased its profits. Then, through asset securitization, or going public, Hilton's market value naturally became higher than before.

Although Blackstone financed its acquisitions with debt, it has to pay a lot of interest every year.

However, the Hilton Hotels, which Blackstone acquired, saw its assets appreciate at a rate that exceeded the interest payments each year, and the difference was part of the private equity firm's profit.

Hilton's higher stock price also contributed significantly to Blackstone's profits.

Essentially, private equity funds are no longer just involved in simple finance; they also involve a lot of corporate management and actual business operations.

Ernst leaned forward and placed his arms on the desk. "In my view, Ernst Asset Management is just like its name suggests, primarily focused on asset management, with hedging and private equity as secondary businesses."

The most unconventional type of investment compared to the previous three is asset management.

The first three are all proactive, meaning you need to actively seek out investments.

If investment banks don't take the initiative, why would companies seek them out for IPOs? The market isn't monopolized by you alone.

Needless to say, hedgers actively seek out targets every day.

Private equity is the same; it involves proactively identifying profitable and actionable companies.

But asset management is different; its strategy is essentially a passive allocation driven by scale.

All asset management companies can be considered passive funds.

Asset management companies never buy or heavily invest in a single asset; instead, they track the overall market trends across the entire industry.

For example, Google has potential, but asset management companies cannot invest all their funds in Google after its IPO.

Google's potential stems from the overall internet environment, so asset management companies are betting on the entire internet industry, not just a single company.

This explains why, despite managing such substantial assets, BlackRock's accounts receivable and net profit may still lag behind investment banks with assets ten times smaller.

The impact of asset management outweighs profits, and once it reaches a certain scale, it is more stable compared to other types of assets.

Jane Fraser had a better understanding of the company's general direction, which would be helpful in her future work in management, recruitment, and operations.

She said, "I will make a development plan outline when I get back, and please take a look and see if there is anything that needs to be added."

Ernst nodded, acknowledging Jane Fraser's positive attitude.

"What are your thoughts on team composition?"

Jane Fraser thought about it carefully and replied, "I hope to have a professional and efficient team, especially in data analysis and market research, which is crucial for an asset management company."

Compared to investment banking, hedge funds, and private equity, asset management is relatively passive, focusing more on modeling than on practical application.

Therefore, a large number of mathematical talents and market research talents have become crucial.

"Of course, I need to learn more about the specific personnel situation, and then make adjustments and additions based on the actual situation."

Ernst expressed his support, saying, "No problem, once you take office, I will have the human resources department fully cooperate with you."

Jane Fraser nodded her thanks. "Thank you very much. I have another question. What specific measures does the company currently have in place for risk control? After all, asset management involves a large amount of money, and risk control is of paramount importance."

When the topic of risk control came up, Ernst's expression turned serious. "You're absolutely right, risk control is indeed one of the core aspects of our work."

"I have had the company establish a comprehensive risk assessment system that conducts multi-dimensional risk analysis on every investment, including market risk, credit risk, liquidity risk, etc."

"At the same time, I also set up a dedicated risk control department, which is independent of the entire company system, to supervise and control investment decisions, and is only responsible to me and the CEO."

"Of course, as the market environment changes, the risk control system also needs to be continuously optimized, which is also one of the important contents of your future work."

Internal control is of paramount importance to a company, encompassing not only financial risks but also logistical and administrative aspects.

Without proper internal controls, the entire company becomes a sieve, harboring countless hidden problems and malpractices.

After listening, Jane Fraser had a more comprehensive understanding of Ernst Asset Management. "I understand. Risk control does indeed require continuous attention and improvement, and I will emphasize this in the planning outline."

Ernst smiled with satisfaction. "Very good. I look forward to your outline."

"Okay, see you in a week."

Jane Fraser stood up and shook hands with Ernst to say goodbye.