Investment Banking Overview

What is Investment Banking?

Investment Banking covers a range of financial services provided to corporations, governments, and institutions. Essentially it is the industry which assists any large institution with all their financing needs – whether it’s borrowing money, investing money or buying or selling assets, or being bought or sold itself! These services include underwriting new debt and equity securities, facilitating mergers and acquisitions (M&A), and providing advisory services for financial transactions.

What Do Investment Banks Do?

Investment banks act as intermediaries between ‘investors’ and ‘issuers’, which are essentially corporations or institutions seeking financial solutions. Investment bankers help companies raise capital by issuing stocks and bonds, provide advisory services for M&A, and offer guidance on financial strategies. They also engage in trading and market-making activities to make money for themselves and for clients.

How Investment Banking Works

The day-to-day activities of bankers here are diverse and depend on the function and seniority of the position. There are two sides to Investment Banking – the first is Corporate Finance. Corporate Finance is split into units, and usually further split by geographical or sector-based teams. Its primary role is to advise the banks’ clients (typically companies which can be both public and private, but also institutions and governments) on what they can do to maximize their growth potential and returns to owners or shareholders.

Corporate financiers work on deals to raise capital, buy, or sell companies, or offer advice on restructuring and other business issues. This will include debt, which can include issuing bonds and loans or using capital to enhance returns either with share buybacks, M&A or other investments.

The second side to Investment Banking centers on Capital Markets and the day-to-day trading of investments and securities. Capital Markets facilitate trading activities on behalf of the bank and its clients and have independent relationships with the banks’ client base. Professionals may participate in market-making activities by connecting buyers and sellers and providing liquidity. On this brokerage side (sell-side), equity analysts may conduct research to make buy, hold or sell recommendations.

Brokerage and Investment Banking (or Corporate Finance) are separated by a “Chinese wall”, an ethical barrier to prevent conflicts of interest.

Investment Banking Services and Clients

Investment banks offer a variety of services, including underwriting, M&A advisory, restructuring, and risk management. Their clients range from large corporations and governments to private equity firms and high-net-worth individuals.

It is worth noting that not all banks will provide services in every division. Investment banks have historically expanded into profitable areas of business, so each bank will be shaped by its client base and services that it successfully provides.

Investment Banking Divisions

Investment banks are divided into several key divisions:

• Corporate Finance: advises clients on buying, selling, or merging companies
• Mergers and Acquisitions (M&A): advises clients on buying, selling, or merging companies
• Capital Markets: facilitates equity and debt issuances
• Sales and Trading: manages relationships with large investor clients and facilitates buying and selling of securities (and other financial products and instruments)

Divisions within Investment Banking

These are popular questions asked relating to Investment Banking and its divisions.

What is Corporate Restructuring and Divestiture Advisory?

Corporate restructuring involves reorganizing a company’s structure, operations, or finances to improve efficiency and profitability.  It is an advisory team as often the bankers will prepare scenarios offering alternatives for restructuring and the client will choose the one that it feels will work best for the business.

Divestiture advisory services help companies sell off parts of their business to streamline operations or raise capital. Again, this is an advisory team so companies may pay the bank to provide advice on options as well as facilitating any changes undertaken.

What is M&A in Investment Banking?

Mergers and acquisitions (M&A) refer to the acquisition of companies through various financial transactions. This can involve merging two or more companies to form a new entity or the acquisition of one company by another. The bank’s client may be the (potential) acquirer or may be the company being acquired. Its expertise is in providing advice to the client for the best possible outcome.

There are several types of M&A deals:

• Horizontal Mergers: this is when companies operating in the same industry come together to increase market share and gain a competitive edge
  • e.g, Microsoft’s acquisition of Activision Blizzard in 2023
• Vertical Mergers: companies at different stages of the supply chain merge
  • e.g, eBay’s merger with PayPal in 2002
• Conglomerate Mergers: unrelated businesses unite under one corporate umbrella, diversifying their product or service offerings.
  • e.g, the merger of Louis Vuitton and Moët Hennessy to form LVMH in 1987
• Cross-Border Acquisitions: companies from different countries merge to expand market reach
  • e.g, London Stock Exchange’s acquisition of Refinitiv completed in 2021
• Hostile Takeovers: one company acquires another against its will and forcing a sale to take place
  • e.g, InBev’s unsolicited bid for Anheuser-Busch in 2008
• Leveraged Buyouts (LBOs): A company’s management or a group of investors acquires the firm using a significant amount of borrowed money.
  • e.g, the Glazer family’s leveraged buyout of Manchester United in 2005

M&A Investment Banking Example

An example of M&A in investment banking is when a company acquires another company to expand its market presence or diversify its product offerings. Investment banks facilitate these transactions by providing valuation, negotiation, and financing services. Learn about the top 10 largest US & European mergers and acquisitions.

What is the Purpose of M&A?

The primary purpose of M&A is to create value for shareholders. There are several reasons companies engage in M&A:

Expand or Consolidate Market Share: Acquiring another company allows a business to instantly expand its market presence. By merging with or acquiring a competitor or a company operating in the same industry, a company can gain a larger share of the market, reaching more customers and potentially increasing revenues.

Diversify Product/Service Offering: M&A can be a powerful means for companies to diversify their product or service offerings. By acquiring a company with complementary products or services, a business can broaden its portfolio, reducing reliance on a single product line and mitigating risks.

Unlock Synergies: Synergies can be realized through M&A, leading to enhanced efficiency and cost savings. When two companies combine their operations, they may streamline processes, eliminate redundancies, and enjoy economies of scale, resulting in improved profitability.

Gain Access to New Technologies, Talent, Management, or Intellectual Property: M&A can serve as a gateway for companies to access new technologies, talent, management, or intellectual property. Such acquisitions can strengthen a company’s competitive advantage, innovation capabilities, and market positioning.

What is Underwriting in Investment Banking?

Underwriting involves investment banks acting as intermediaries between issuers and investors to facilitate the issuance of new securities. They assess the risk of the securities and determine their pricing, ensuring that they are successfully sold to investors.

Bulge Bracket vs. Elite Boutique Banks: Which is Better?

Bulge bracket banks are large, full-service investment banks that handle the largest and most complex transactions. They offer the largest range of services to their client base and work on the biggest deals, usually $1 billion+. Bulge-bracket firms typically provide both financing and advisory banking services, in addition to market making, sales, and research for various financial products.

Elite boutique banks are smaller, specialized firms that focus on specific industries or services. Their expertise typically lies in a specific market, industry or service so they attract clients by offering the best services in that particular field.

Who are the Main Investment Banks?

Investment banks are classified according to their size, based on several factors such as trading volume, the number of offices, and the number of employees. Categories include, regional boutique banks, elite boutique banks, middle-market banks, and bulge bracket investment banks.

Investment Banking Careers

Careers in investment banking are highly competitive and demanding. They typically start with junior roles such as analysts and associates, progressing to vice presidents, directors, and managing directors. Investment bankers work long hours and are involved in high-stakes financial transactions.

Investment banking is a highly competitive and esteemed field. During the investment banking recruitment process, banks meticulously screen and interview candidates to extend offers for internships or full-time positions. Ideally, applications and informational interviews should commence 3-6 months prior to the beginning of the recruitment period.

Investment Banking Salary

Salaries in investment banking are lucrative, with entry-level analysts earning substantial base salaries and bonuses. As professionals move up the ranks, their compensation increases significantly. For example, analysts in the US can earn around $80,000 in base salary, with bonuses ranging from $56,000 to $64,000. Renumeration will vary depending on the firm and also the prevailing market conditions.

Skills for Investment Banking

Investment banking typically hires university graduates although this is evolving to include talent from all backgrounds and specialties. Key skills for investment banking include strong analytical abilities, financial modeling, valuation techniques, and excellent communication skills. Investment bankers must also be adept at working under pressure and managing client relationships.

Learn Investment Banking

There are various courses available for those interested in investment banking, covering topics such as financial modeling, valuation, M&A, and capital markets. These courses are often offered by universities, financial training institutes, and online platforms.

Elevate your career prospects with our online finance courses and prove to recruiters that you possess the essential skills to thrive as an analyst. The Investment Banker Certification reflects the rigorous training we provide new hires at the world’s top investment banks. Master the core financial accounting, modeling, valuation, and deal-making skills needed to excel.

Questions often asked about Investment Banking Careers

Front Office vs. Back Office: What is the Difference?

The front office is typically the most visible part of a financial firm. It includes all functions that directly generate revenue for the firm and its employees mostly interact directly with clients. The front office of an investment bank includes client-facing roles such as sales, trading, and advisory services.

The back office is often termed ‘the engine room’ of a financial firm, responsible for all the processes that support the front and middle offices. This includes trade settlement, data management, technology, and accounting. The back office supports the functions of the front office with roles in operations, technology, and compliance.

The middle office serves as a bridge between the front office and back office, playing a critical role in risk management, strategy, and ensuring that transactions are processed smoothly.

Investment Banking vs. Commercial Banking: What is the Difference?

Investment banking focuses on raising capital, M&A, and advisory services, while commercial banking deals with deposit-taking, lending, and other retail banking services. Investment banks serve large corporations and institutions, whereas commercial banks cater to individuals and small businesses.

A commercial bank is a financial institution that offers a variety of retail banking products and services to both individual clients and corporate entities. These services generally encompass checking and savings accounts, loans, credit facilities, and other forms of borrowing.

Buy Side vs. Sell Side: What is the Difference?

The investment industry is generally divided into buy side and sell side roles. Investment Banks are the sell side of the industry (but may also have a buy side arm). The buy side refers to entities that purchase securities for investment purposes, such as asset managers and hedge funds. JP Morgan is an investment bank (sell side) which also has an asset management business, JP Morgan Asset Management (buy side) which will be run independently to prevent conflicts of interest.

The sell side includes firms that sell securities and provide advisory services, such as investment banks and brokerage firms. Analysts on both the buy and sell sides are highly qualified and play fundamental roles in their firms’ businesses.

Investment Banking vs. Private Equity: What is the Difference?

Investment banking involves providing financial advisory services and facilitating transactions, while private equity focuses on investing in and managing private companies. Private equity firms raise capital from investors to acquire and improve businesses, eventually selling them for a profit. It is considered higher risk as investments are typically leveraged so the private equity client base are deemed to be sophisticated investors.

Both fields offer significant opportunities for advancement and high compensation but differ in their career paths and day-to-day activities.

Investment Banking:

• Investment bankers provide advice and assistance in raising capital, such as underwriting new debt and equity securities, facilitating mergers and acquisitions (M&A), and offering financial advisory services
• The role involves long hours, often exceeding 80 hours a week, and requires strong numerical, business, and financial acumen, as well as soft skills like communication and presentation
• Investment banking is transaction-oriented, with professionals working on multiple deals simultaneously

Private Equity:

• Private equity involves making investments in companies that are not publicly traded, focusing on longer-term value creation
• Private equity professionals spend more time on specific deals, sometimes years, and get to know companies and their management teams intimately
• The work/life balance in private equity is generally better than in investment banking, although long hours may still be required during the execution phase of a deal

Here is a full comparison of Investment Banking and Private Equity industries and roles within them.

Conclusion

Investment banking plays a crucial role in the financial industry by providing a range of services that help corporations, governments, and institutions raise capital and navigate complex financial transactions. The field is highly competitive and demands a strong skill set, including analytical abilities, financial modeling, and excellent communication skills. As investment banks continue to evolve, they remain integral to the global economy, facilitating growth and innovation through their diverse services.