Investment banking is the department of a financial institution that provides services to corporations, governments and other institutions by offering services for underwriting ( capital raising) as well as mergers and acquisitions ( M&A) advisory services. Investment banks are intermediaries for clients (looking for investment) and corporate clients (who have to raise capital funds to run and grow their businesses). This guide will discuss investment banking basics and what investment bankers do.
What Do Investment Banks Do?
There may be some confusion between the term an investment bank and the department of investment banking (IBD). Full-service banks offer various services, including the underwriting process, M&A selling and trading equity research and commercial banking, asset management and retail banking. The investment banking section within a financial institution will provide only underwriting services and M&A advisory services.
Full-service banks provide some of the services listed below:
- Underwriting and capital raising groups collaborate with investors and businesses seeking to raise capital or go public through the IPO procedure. This function serves the primary market or “new capital”.
- Mergers and acquisitions (M&A) – Advisory roles for buyers and sellers of companies, directing the M&A process from beginning to end.
- Sales and trading – Matching purchasers and security vendors on secondary markets. Trading and sales groups in investment banking function as customers’ agents and can trade the firm’s own capital.
- Equity Research – The Equity research group’s research, also known as “coverage”, of securities assists investors make better investment decisions and facilitate trading in stocks.
- Asset Administration manages investments for a variety of investors, including institutional investors and private investors, in an array of types of investment.
Underwriting Services in Investment Banking
Underwriting is the act of raising money by selling bonds or stocks at a profit to the investors (e.g. the Initial public offer IPO) for companies or other organizations. Businesses require capital to operate and expand their business. The banker’s aid in raising that money by promoting the business to investors.
There are generally three kinds of underwriting:
- The Firm Commitment The underwriter must purchase the entire amount and accept all financial responsibility for the remaining shares.
- Best efforts The underwriter agrees to sell the entire issue as is possible at the price agreed upon for offering but is allowed to return shares that are not sold to the issuer, without any financial obligation.
- All-or-None If the whole issue is not sold at the selling price the deal is declared off, and the issuer gets nothing.
After the bank has begun marketing the deal and the book-building process has begun, the next steps are followed to determine the price and then complete the transaction.
M&A Advisory Services
M&A (M&A) advisory is the process that assists corporations and institutions to find, assess and finalize the acquisition of businesses. This is a crucial purpose of I-banking. Banks utilize their extensive networks and relationships to locate opportunities and negotiate on behalf of their clients. Bankers offer advice in both aspects of M&A transactions, either representing or both the “buy-side” or the “sell-side” of the deal.
Banking Clients
Investment bankers advise a wide array of clients on how to raise capital and M&A requirements. The clients are spread across the globe.
The clients of investment banks are:
- Governments Investment banks work in conjunction with government agencies to raise funds to trade securities and purchase or sell crown corporations.
- Corporations Bankers work with public and private businesses to assist them in going public (IPO) and increasing capital, expanding their business, making acquisitions and selling business units and offering research and general advice on corporate finance.
- Institutions Banks collaborate with institutional investors that manage other investors’ funds to assist them in trading securities and offer research. They also collaborate with private equity companies to assist them with the acquisition of portfolio companies and to exit these positions by selling them to an appropriate buyer or by an IPO.
Investment Banking Skills
I-banking involves an extensive amount of financial modelling and valuation. For underwriting or M&A processes, Analysts and Associates at banks will spend a significant amount of time using Excel, creating financial models, and employing various valuation methods to guide their clients in completing transactions.
Investment banking requires this expertise:
- Modelling of financial transactions – Executing a wide variety of financial modelling activities, such as the construction of 3 statement models and discounted cash flow (DCF) models and models for LBO, as well as other kinds that are financial modelling.
- Business valuation uses various techniques, including comparative analysis of companies or precedent transactions and DCF analysis.
- PowerPoints, pitchbooks Create pitches and PPT presentation templates from scratch to present ideas to potential clients and gain new business (check the CFI’s Pitchbook course).
- Documents for transactions: Preparing documents like a confidential memorandum of information (CIM) and the investment teaser terms sheet confidentiality agreement, constructing the data room and many more (check CFI’s collection filled with a template for free transactions).
- Management of relationships – Working with current clients to close a deal and ensure clients are satisfied with the services delivered.
- Business and sales development Continuously meeting with potential clients to present them with ideas, support them with tasks, and give added value information that ultimately brings new business.
- Negotiation – A significant aspect in negotiations between sellers and buyers during a transaction, helping clients maximize value creation.
Types of Investment Banks
Investment banking is a broad and varied phenomenon. It is possible to categorize investment banks into various types based on specific criteria. To better understand these terms, take a look.
Regional Boutique Banks
The regional boutique bank is the smallest of investment banks in terms of the size of its deal and by average size. Customers of regional boutique banks are mainly smaller businesses and companies located in their respective areas or the state or local government. Regional boutique banks employ dozens of employees who have specialized skill sets.
Here are some of the distinctive characteristics of a local boutique bank —
* Services offered by regional boutique banks offer limited services because of their small size. Instead, they focus on a specific area, including managing mergers and acquisitions within an industry.
* Location * Location Banks specializing in regional boutiques focus on particular regions of a nation. The operations and offices of the bank are targeted at specific regions within the country.
* Deal Size * Deal Size, The typical deal size for boutique banks in the region is $50-$100 million or lower.
For instance, the Mumbai-based investment bank with just one office and fewer than 30 employees is specialized in mergers and acquisitions that benefit FMCG businesses.
Elite Boutique Banks
Elite boutique banks are different from boutiques in the region and look like those with bulge brackets.
* Services offeredThe difference between the regional and elite boutique banks lies in the range of services provided. Elite boutique banks do not offer a whole variety of investment banking. They concentrate specifically on mergers and acquisitions as well as related issues. Sometimes, it will offer restructuring services or asset management.
* Location Boutique banks with an elite reputation have a substantial international and national presence in multiple places and countries. But, it is not an international presence.
* Deal Size * Deal, SizeThe average size of deals at top boutique banks, is around $1 billion, but it can also manage smaller transactions.
Most elite boutique banks start as regional ones but then manage more complex deals with prestigious clients.
Middle-Market Banks
As the name implies, middle-market banks fall between bulge and regional boutique bracket banks.
* Services offered Middle-market investment banks offer the full spectrum of services for investment banking, such as a bulge bracket lender. They offer services such as raising capital for debt and equity, asset and financing services and restructuring agreements. It might specialize in a specific industry or sector, for example, an area-specific boutique bank.
Location Middle-market banks are more able to reach than boutiques in the region, but they need an international bulge bracket reach.
* Size of Deal The size of deals for middle-market banks starts with the regional level and grows until the bulge bracket. The typical size of deals can range from $50 to $500 million.
Bulge Bracket Banks
Banks with a bulge bracket are among the most prominent, readily identifiable investment banks worldwide. Bulge bracket banks have the highest position regarding the strength of their employees and the number of offices they have and have the most prominent corporate clients. Most clients of bulge bracket banks are on the Fortune 500 list of companies.
The bulk bracket banks typically have three divisions: retail, advisory, and trading and each division functions as an essential source of revenue and profits. The advisory division earns money from transaction services and capital creation for customers. The trading division earns from outperformance in the market, while the retail division earns from loan distributions to consumers and businesses.
* Services offered Services OfferedBulge bracket bands offer various services, including mergers and acquisitions. There are different ways to finance equity research, report issuance, and asset management services. Additionally, bulge bracket banks possess retail and commercial banking divisions, generating profits from cross-selling financial products.
* Locale –Bulge bracket banks operate globally and have a substantial domestic and international presence.
* Size of Deal Bulge bracket banks manage the most complex and large deals. Generally, bulge bracket banks handle multibillion-dollar deals. They may also be involved in transactions worth just several hundred million in the context of economic conditions or for a specific client.
Some examples of bulge bracket banks are Bank of America, Credit Suisse Group, Goldman Sachs, Deutsche Bank, and Morgan Stanley.
Roles of an Investment Banker
A review of the role of an investment banker is a good starting point before we begin to explore the benefits of investment banking. Investment bankers can also be described as financial advisors who aid firms and other organizations in acquiring capital for various reasons, such as business expansion. They typically perform a broad range of tasks every day. Their everyday tasks include:
- Looking over a company’s book of accounts before its initial public listing (IPO)
- The study of marketing trends and how they can be applied to the financial situation of a business
- Conducting financial modelling to determine a company’s future profitability and performance
- The establishment of a company’s organizational structure so that it can sell equity, bonds or stocks to raise funds
- Informing potential investors about the opportunity to invest in a business
- The contact information of a customer for investors who might be interested in expanding the amount of money they can invest
- Negotiating and planning mergers, acquisitions and other transactions and deals in the business.
Advantages of Investment Banking
Tracing the path of an Investment Banker offers a variety of advantages. The following list of benefits that come with Investment banking can make people consider their career options. Here are some advantages to consider before applying for this position.
Excellent Salary
With the average pay of USD66,493 to investment bankers, a job in the field of finance may yield financial rewards. Highly skilled investment bankers could earn huge commissions and base salaries. If you are a professional who values your ability to make cash when considering a career, this could make the investment banking industry a desirable career choice.
Benefit Packages
Your benefits package is an additional aspect where the pay for this industry could be attractive. Bankers in investment banking typically get large benefits packages and a high salary. This career path could be fascinating due to the possibility of compensation, such as bonus and commission possibility, insurance coverage, and stock option.
Collaboration with Focused coworkers
Your peers are likely doing the same work as you do to make it in the competitive world of investment banking. The job requires intelligence and analytical abilities. Colleagues and clients may require a high level of performance to remain ahead of the curve. Motivated Colleagues will help you grow and learn and provide dependable colleagues in times of need.
Effective Networking
Senior executives from the firms that investment bankers interact with and regularly analyze frequently communicate with them. This is a chance to build the business and personal connections with these influential individuals. This will aid you in your career by offering a networking opportunity. Friends of your network could assist you in identifying new job possibilities and provide references when you apply for a position you’ve located or even request promotions.
Continuous Improvement
Investment banking is a field that is constantly evolving because the areas that investment bankers research during their job along with the many companies you might be studying are constantly evolving. That means that while the skills and knowledge you learn at the beginning of your career remain essential, you could also find that you have to acquire new skills to stay on top of developments within your field. Investment banking could be an excellent choice for a career because it offers you the chance to continually increase your knowledge and abilities to keep up-to-date with the latest advancements in the business world.
Disadvantages of Investment Banking
Like any other field, there are a few negatives to Investment banking that prospective employees should know about. It is essential to know the disadvantages in the field of investment banking is confronted by.
Let’s discuss the few negatives of Investment Banking here:
Extensive Working Hours
A substantial time commitment may be required for an investment banker. This could be in the form of working hours extending beyond the typical 40-hour workweek, including weekends and extended shifts during the week. Longer hours may result in a high amount of compensation earned by an investment banker, which can be a way to trade financial benefits to fulfil work-related requirements. However, this may be difficult for experts in the field.
Enhanced Accessibility
Alongside regular working hours, a company or customer may expect an investment banker to be ready during off-hours. This might include answering emails and calls and emails, assisting with questions, and conducting studies on a topic. In these situations, being available to your employer or customer can allow you to provide them with more efficient service. If you do this, you will impress your clients and boost your earning potential, as well as your opportunities in the future.
High Levels of Competition
One of the main drawbacks of investing in banks is the fierce competition. Investment banking is a highly competitive field because of the lucrative salaries offered by the industry and the fact that investments are competitive. Because of these professionals’ competition, they may be subject to increased pressure to achieve their goals and may need help finding peer support or advice. Being able to perform under pressure is beneficial in the role of an investment banker. Being close to your colleagues could give you an advantage, as it gives access to the resources to assist you in achieving your goals.
High Levels of Repetition
Much of the work that an investment banker performs could be repetitive. For instance, every company might react differently to research and report-writing regarding their own. However, an investment banker’s actions to accomplish this will likely be identical regardless of organization. This can be a problem when you want your work to be constantly changing in your thinking about the career. If you prefer the stability of your job, you will likely find repetitive things attractive.
Can Be Stressful
Investment banking is among the most challenging careers in the entire financial services industry. This could be the most significant negative aspect of the field of Investment banking. Bankers are in charge of a business’s financial stability, meaning that one wrong decision could lead to demotion. Customers have unreasonable expectations and demands from bankers since they have to pay considerable fees to the bank. The time frame is often a problem, and it is possible to have instances of market forces working against you.
There is also a need for coordination within the organization, characterized by employees doing whatever is needed to advance. Investment Banking employees are likely to be exhausted most of the time, which can cause stress. The image of having many unhappy and displeasing employees in investment banks can also cause stress.
We’ve covered the benefits that come with Investment banking as well as the disadvantages of it in depth. This article will provide a valuable guide for those considering investment banking.
Careers in Investment Banking
The process of gaining access to i-banking can take much work. There are many more applicants than jobs, and sometimes it’s as high as 100 times one. We’ve written an article on how to get through an interview in investment banking to get more details on how you can break into Wall Street.
Additionally, you’ll need to look over our examples of real-world questions to ask an investment banking institution. To prepare for your interview, it is also helpful to take classes on valuation and financial modelling.
The most commonly used job names (from the most junior to senior) in the i-banking industry are:
- Analyst
- Associate
- Vice President
- Director
- Managing Director
- The Head or Vice Chair or any other particular title
Who are the Main Investment Banks?
The central banks are sometimes referred to as bulge-bracket institutions, investment banking. These are:
- Bank of America Merrill Lynch
- Barclays Capital
- Citi
- Credit Suisse
- Deutsche Bank
- Goldman Sachs
- J.P. Morgan
- Morgan Stanley
- UBS
Check out the complete overview of 100 of the best investment banks. It is vital to know that there are a variety of smaller businesses, which are often referred to as mid-market and small investment banks, which comprise most of the marketplace.
Definition Investment banking is an exclusive part of the banking industry that assists individuals or organizations finance capital and provides financial advisory solutions to these clients. They are intermediaries between investors and security issuers and aid new businesses in becoming public.
They are best known for their role as intermediaries between companies and the financial market. This means they assist corporations in issuing shares of stock during an IPO or other stock offering. They also facilitate debt financing for companies by locating large-scale investors to purchase corporate bonds.
Generally speaking, there are three investment banks: the bulge bracket bank, mid-market bank and boutique bank. These banks typically comprise boutiques in the region and the top boutique banks.
There are four different major types of investments, also known as asset classes, you can select from, each having distinct features, risks and advantages.
- Growth investments. …
- Shares. …
- Property. …
- Protective investments. …
- Cash. …
- Fixed interest.
Investment banking is among Wall Street’s most sought-after jobs. It’s, however, among the most difficult. Unsurprisingly, the typical day of the life of an investment banker can be lengthy and highly stressful. The ones who can get through the period of adjustment often succeed in having lengthy and financially rewarding career paths.