Investment banking is part of a bank or financial institution that works for the governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services.
Investment banks act as intermediaries between investors (those who have money to invest) and corporations (those who require capital to grow and run their businesses).
This guide will explain what investment banking is all about and what actually investment banks do.
What Do Investment Banks Do?
You can sometimes be confused between an investment bank and the investment banking division (IBD) of a bank.
Full-service investment banks offer a wide scope of services that include underwriting, M&A, sales and trading, equity research, asset management, commercial banking, and retail banking.
The investment banking division (IBD) of a bank provides only the underwriting and M&A advisory services.
Investment banks assist in large, complicated financial transactions.
They may offer advice on how much worth is a company and how best a deal can be structured if the investment banker’s client is considering an acquisition, merger, or sale.
Some of their essential services include underwriting new debt and equity securities for all types of corporations, providing aid in the sale of securities, and helping to manage the process of mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors.
An investment bank may also issue securities as a means of raising money for the clients and create the necessary Securities and Exchange Commission documentation for a company to go public.
Full-service banks offer the following services:
- Underwriting – Capital raising and underwriting groups work between investors and companies that want to raise fund or go public via the IPO process. This operation serves the primary market or “new capital”. While arranging capital markets financing, investment bankers usually undertake the underwriting of the deals for their clients. This actually means taking on much of the risk inherent in the process by buying the shares outright from the issuers and then selling them to the public or institutional buyers.
- Mergers & Acquisitions (M&A) – They serves as advisory roles for both buyers and sellers of businesses, facilitate merger and acquisition process from the start to finish particularly on arriving at a fair price for the deal. Acquiring or merging with another company is generally a drawn-out process of planning and negotiation.
- Sales & Trading – Intermediaries between buyers and sellers of securities in the secondary market. Sales and trading groups in investment banking act as agents for clients and also can trade the firm’s own capital.
- Equity Research – The equity research group research securities that helps investors make investment decisions and supports trading of stocks.
- Asset Management – They managing investments for a wide range of investors including institutions and individuals, across a wide spectrum of investment styles.
Underwriting Services in Investment Banking
Underwriting is the process of raising capital for businesses or other entities through the selling of stocks or bonds to investors (e.g., an initial public offering IPO).
Businesses need money to operate, grow their businesses, and also be in business, and the bankers help them get that money by marketing the company to potential investors.
There are generally three types of underwriting:
- Firm Commitment – The underwriter decides to purchase the entire issue and takes financial responsibility for any unsold shares.
- Best Efforts – Underwriter commits to selling as much of the issue as they can sell at the agreed-upon offering price but can return any unsold shares to the issuer without any financial responsibility.
- All-or-None – If the whole issue cannot be sold or purchased at the offering price, the deal is then called off and the issuing company gets nothing.
M&A Advisory Services
Mergers and acquisitions (M&A) advisory is the process of helping corporations and institutions find, examine, and complete businesses acquisition.
This is a major function in i-banking. Banks use their extensive networks and relationships to find opportunities and help their clients to negotiate. Bankers advise on both sides of M&A transactions, representing either the “buy-side” or the “sell-side” of the deal.
Banking Clients
Investment bankers give advice to a wide range of clients on their capital raising and M&A needs. These clients can be located anywhere in the world.
Investment banks’ clients include:
- Governments – Investment banks work with governments to raise capital, trade securities, and buy or sell crown corporations.
- Corporations – Bankers work with private companies to help them go public (IPO), and help private and pulic company raise additional capital for their business, grow their businesses, make acquisitions, sell business units, and provide research for them and general corporate finance advice.
- Institutions – Investment banks also work with institutional investors who manage other people’s money to help them trade securities and provide research. They also work with private equity firms to help them acquire portfolio companies and exit those positions by either selling to a strategic buyer or via an IPO.
Investment Banking Skills
I-banking work involves a lot of financial modeling and valuation.
Whether for underwriting or M&A activities, Analysts and Associates at investment banks spend a lot of time in Excel, building financial models and using different valuation methods to advise their clients and complete different deals.
Investment banking requires the following skills:
- Financial modeling – Performing a wide range of financial modeling activities such as discounted cash flow (DCF) models, LBO models, 3-statement models building, and other types of financial models.
- Business valuation – Using a wide range of valuation methods such as precedent transactions, comparable company analysis, and DCF analysis.
- Pitchbooks and presentations – Building pitchbooks and PPT presentations from scratch to pitch ideas to prospective clients and win new business.
- Transaction documents – Preparing documents such as a investment teaser, confidential information memorandum (CIM), term sheet, confidentiality agreement, building a data room, and much more.
- Relationship management – Working with existing clients to successfully close a deal and ensure clients are happy with the service being provided.
- Sales and business development – Constantly meeting with prospective clients to pitch them ideas, offer support for them in their work, and provide value-added advice that will ultimately win new business.
- Negotiation – Being a major factor in the negotiation tactics between buyers and sellers in a transaction and assisting clients maximize value creation.
Careers in Investment Banking
Getting into i-banking is very challenging. There are far more applicants than there are positions, sometimes as high as 100 to 1.
The most common job titles (from most junior to senior) in i-banking are:
- Analyst
- Associate
- Vice President
- Director
- Managing Director
- Head, Vice Chair, or another special title
Who are the Main Investment Banks?
The main banks, also known as the bulge bracket banks in investment banking, are:
- Bank of America Merrill Lynch
- Barclays Capital
- Citi
- Credit Suisse
- Deutsche Bank
- Goldman Sachs
- J.P. Morgan
- Morgan Stanley
Getting Started in Investment Banking
One major thing an investment banker does is to make deals, and getting themselves job is the first deal they have to pull off.
A college degree with a major in economics or finance from a certified school is a good pre-requisite.
An MBA, an advanced degree in math, or a Chartered Financial Analyst (CFA) certification can improve the prospects of a candidate.
Networking formally and informally is important. An internship at a good firm can help someone get experience which can help boost your qualification.
Appearances matter, too. Investment bankers mingle with tycoons, and they’re expected to fuse in.