What is Investment Banking?
What’s investment banking all about, exactly? Investment banks are highly complex organisations, making decisions around the clock across the world which directly impact the economy.
The professionals working in investment banking are experts in the financial markets and values of businesses. An investment bank perform a number of core functions on behalf of institutional and retail investors and for themselves. They’re power houses of money making and facilitation of the financial markets.
What do investment banks do?
Let’s break down what they do…
Act as the middleman
A company will hire an investment bank when they are looking to sell proportions of ownership in themselves (issue stocks) in order to raise capital (make money) to do things like finance projects or buy or merge with another company. The company may also want to deal in bonds. If it’s the first time the company has gone public with issuing shares then it’s what’s known as an IPO (Initial Public Offering) on the primary market. Existing shares are traded on the secondary market.
The investment bank provides expertise in pricing of the shares and underwrites this for the client (guarantees that they’ll get a set amount of the proceeds). Their sales team will then go forth to drum up interest in the upcoming shares in their client network. This is the middleman part – they are the link between the company looking to sell and the buying public.
Then it’s over to the traders, who are the ones to facilitate the deals for the buyers and sellers. They also do this by creating liquidity in the market for the shares, bonds etc. on offer by investing with the bank’s own account.
The investment bank earns a fee for providing this service to the client. It’s also important to note that investment banks also trade from their own account to make money for themselves.
Sales and equity expertise
Equity research is also a key part of the services an investment bank provides to institutional investors (for example pension funds and mutual funds). Equity research analysts and associates carry out detailed research into the latest investment opportunities across the world that the bank can pitch to these institutional clients. This information is fed to the bank’s fund managers, who are responsible for introducing these opportunities to suitable clients, or even making the decision to invest then and there if consultation with the client on investment decisions isn’t required.
Mergers and acquisitions (M&A)
Investment banks help companies to buy or merge other companies, or sell. This is hugely impactful for the economy, constantly shifting and shaping the business landscape at both regional and global scales.
An investment bank can work on either the ‘buy-side’ (the side making the acquisition) or the sell-side (the ones looking to sell). M&A bankers will source potential new investments, pitch on behalf of the sell-side, negotiate the best deal on behalf of the client, be present at a Board of Directors approval meeting, prepare and file the necessary documentation (also liaising with lawyers when necessary), be present at shareholders meetings and at the close of a deal.
The M&A department in an investment bank will also carry out what’s known as due diligence – extensive exchanges of financial information and documentation with the other side of the proposed deal to check all finances and things like the business model, so that the client and bank are sure that the deal won’t be too risky.
This is one of the most glamorous areas of investment banking. The fees the banks charge for these advisory services are much higher than those for underwriting, and this is where you’ll find some of the biggest bonuses.