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Investment Banking Industry – A Detailed Guide

The industry that thrives by raising other company’s and clients’ capital by providing guidance to sell or buy securities and assets or by underwriting, is the investment banking industry. They also deal with equity research, mergers & acquisition, and a list of other services. Check them out below.

Investment Banking Industry

What is Meant by Investment Banking?

The branch of banking that is responsible for organizing large and complex financial transactions like mergers & acquisitions or initial public offering (IPO) underwriting or capital raising is known as investment banking. These banks act as the mediator between companies that require capital or funding to grow their business and investors with money to invest. In short, these investment banks underwrite new and updated debt and equity securities for any & all types of corporations.

Let’s Explore a Bit More About Investment Banking Industry

What investment banks do is they underwrite financial documents such as debt or private equity securities for companies that require help with facilitating any sort of mergers and acquisitions, restructuring and reorganizing, and also negotiating between private investors and the companies. These banks provide appropriate advice to suppliers or distributors about the offering and stock placement. Investment banks exist as a separate entity different from the other types of commercial banks. This was made legal after the Glass-Steagall Act was revoked. 

Originally passed in 1993 due to the huge bank failure situation caused by the 1929 stock market crash, the Glass-Steagall Act was to separate investment and commercial banking activities. This was because the merging of both banking activities was believed to have turned risky, especially after the 1929 crash. This crash resulted in investors returning to withdraw their money from these banks and some banks were not able to fulfill the request as the banks had also invested in the stock market with their client’s money. But the conditions specified under the Glass-Steagall Act also met with drawbacks as many in the financial sector considered these conditions to be too harsh and the act was revoked in 1999. Following this, the Gramm-Leach-Bliley Act of 1999 was passed, taking away the separation of investment and commercial banks. Since then, most banks have resumed working with combined investment and commercial banking activities. 

Let’s see the services provided by investment banks.

Investment Banking Industry – Services Provided 

Some of the Major Services Offered by Investment Banks Are as Follows:

Investment Banking Industry services # 1 – Underwriting 

Underwriting refers to the process of capital raising through a direct market or from the investors for their clients. It is usually in the form of equity and debt securities. In this process, the banks will analyze the exact capital requirement, the market to be targeted, market conditions, political and economic conditions, and the wisdom and confidence of the investor. The entire underwriting process can be explained in three phases – planning, timing & demand, and issue structure. 

The planning phase involves a clear understanding of the goal or vision of the client and investor. 

Timing & demand are the two major factors in successful capital raising. This includes analyzing and understanding various other factors such as the recent condition of the target market, the experience of the investor, benchmark offerings and precedents, and the latest news flow.

Issue structure is the final step in underwriting. To decide on a good structure for the offering you need to consider various factors like whether this is for an international or domestic issue, if there are investors actually interested in this particular offer, the expected sales, etc. After a thorough examination of all these factors, the bank can launch the final structured public issue. Oftentimes, the investment bank also invests a certain percentage of capital. This will be fixed and is used if there is a situation of under subscription. 

Investment Banking Industry services # 2 – Sales & Trading –

This includes services such as stock marketing, new offer placement, researching, reporting, as well as publishing. For corporates and some high-net-worth individuals, these banks also manage investment and broking. The research wing of these banks conducts and covers detailed research and submits reports on financial products and various concerned industries. They are usually focused on creating high-value content for clients and investors alike and also support the bank’s profit centers.  

Investment Banking Industry services # 3 – Mergers & Acquisitions (M&A) –

As common as it is crucial in the world of business and finance, the smooth process of M&A and its forecasting requires an in-depth analysis of all the factors involved. In such cases, these banks take on the responsibility of purchase as well as sales transactions. They manage all the procedures and analysis required for the forecasting and eventually the merger

Investment Banking Industry services # 4 – Equity Research 

here, the bank professionals have well-qualified people to conduct equity research and bring forth analysis and investment opportunity reports for the clients. This is mainly used as means of giving recommendations to clients regarding buying or selling or holding on to their investments. Beyond equity research, these banks also engage in fixed-income research, qualitative research, macroeconomic research, etc. These are also shared with the respective clients as per requirement. 

Investment Banking Industry services # 5-  Asset Management

The management of investment funds is known as investment banking. This includes stock investments, investments in fixed-income stocks, and derivatives among others. For derivatives, since these products will have a higher rate of return and better margin, there are higher risks involved. As such, it needs to be planned accurately and strategically by a strong technical team considering all the security challenges. 

And finally Merchant Banking 

Many investment banks offer consultancy services regarding marketing, financial, legal, managerial matters, etc. Merchant banking includes services such as money market operations, raising finance of the client, being a stock exchange broker, project management, portfolio management, handling government consent for industrial projects, managing public issues of a company, leasing service, and assistance to startups and small companies.

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Now Let’s See the Different Types of Investment Banking.

Types of Investment Banking

The Major Types of Investment Banks Are as Follows: 

  • Bulge Bracket Investment Banks

These are the largest and the most easily recognized investment banks, having a presence worldwide. It has the most number of employees as well as the most number of working offices with big corporate clients. As such these banks have the highest brand value. They tend to focus on advisory, trading, and retail tasks and have separate divisions for each. All divisions are responsible for profit and revenue generation. For the advisory division, profit is from the capital generation and transaction services offered to clients. For the trading division, profit is through market outperformance. And the retail division earns profit mainly from loan disbursal to various clients and businesses. 

Overall, the main services offered by bulge bracket banks include mergers & acquisitions services, cross-selling financial services to generate revenue by the commercial and retail banking division, equity research, making reports, financing services, asset management services, etc.  

These banks mostly deal with the biggest and most complex deals, like multibillion-dollar deals, hence their large presence and significance. Some of the banks of this type include JP Morgan, Goldman Sachs, Deutsche Bank, Morgan Stanley, Bank of America, etc.

  • Regional Boutique Investment Banks

Unlike Bulge Bracket banks, regional boutique banks deal with transactions usually smaller than $10 million. These are also smaller in size with clients from smaller organizations based in their locality and also state government firms.

They offer a limited number of services and usually focuses on mergers & acquisition for a specific industry. They also give assistance to companies regarding loan financing tasks. These banks mainly work on various types of projects for various clients that can be from different industries but in small cities and local organizations. Hence, they have a high significance and good connections within that area. 

  • Elite Boutique Investment Banks

These banks resemble bulge bracket banks in that they offer a better range of services than regional boutique banks. The salary from these banks is also relatively higher than that of bulge bracket banks. 

The services offered by them are mainly related to mergers & acquisitions, asset management services, and restructuring. They also work on different projects for different clients. They also make deals up to $1 billion and can be considered an adversary for bulge bracket banks, but doesn’t have the same global significance as bulge bracket banks. They rather deal with high-profile clients more locally or within a country

  • Middle-market Investment Banks –

These fall between bulge bracket banks and regional banks. This means that while they do not have any global impact or reach like bulge brackets, they do have a much broader reach than regional banks.

Similar to bulge brackets, these banks provide a wide range of banking services which include financial services, asset management services, raising equity and capital generation, deals restructuring, etc. They can also specialize in a particular industry like regional banks. They focus on middle-market customers and related finance, and clients that have deals much larger for the regional bank and quite small for the bulge bracket banks to take on. Their transaction deals fall between $50 million to $500 million. Examples of this type of bank include Jefferies, RBC Capital Markets, and Piper Sandler Companies.

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So, How to be an Investment Banker and thrive in the Investment Banking Industry?

Banking professionals who are responsible for raising capital for their clients, government institutions, and other corporations while working in a financial institution is called investment banker. These are also pretty well-paid jobs. All the services and tasks done by different types of banks mentioned above are exactly the role and responsibility of an investment banker. To sum it up, this includes giving advice on all sorts of security issues related to bonds and stocks, when, how, which market, and the price of issuing the stock or bond, raising capital through book building, prospectus drafting, Initial Public Offerings (IPO), issuing & selling securities, and ‘roadshow’ investment meetings. The bankers are also responsible for mergers, acquisitions & divestitures, private placement of capital, corporate restructuring, services in debt & equity advisory, and various services in funds like hedge funds, pension funds & mutual funds. 

The minimum qualification is a Bachelor’s degree in accounting, business administration, finance, economics, or any related field to be able to kick-start your career in investment banking as most entry-level positions for analysts in this field only require a basic bachelor’s degree qualification. You can grow your experience and learn to climb up the ladder to senior analyst roles or the like as an investment banker. But having a Master’s degree will help you advance in roles of mid-level to senior-level posts. 

Professional certifications like the Chartered Financial Analyst (CFA) designation from the CFA Institute are also helpful in giving a career boost. This certification especially is considered the most important certification in the investment banking field earned by its professionals. Three exams must be passed by the candidates to earn this designation and the exam can be taken by investment analysts or financial analysts with a minimum of four years of experience in the field.  

Investment bankers also require a set of soft skills which includes quick math skills for performing calculations for financial models (coursework in mathematics is recommended for this by industry experts), good verbal and written communication skills, the ability to work long hours, intellectual curiosity to not only do the task given to you but to also be able to branch out to understand the overall project and take on more work in the future, proper discipline to keep confidential data confidential, creativity and problem-solving ability to approach a problem in a new and effective way, good social and relationship building skills, etc. 

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Advantages and Disadvantages of Working in Investment Banking

As with any job, working as an investment banker has its own set of advantages and disadvantages. Let’s see the good side first.

The Advantages of Being an Investment Banker Are as Follows:

  • Salary – Investment bankers are paid a high salary from the early stages as the salary can range from INR 1 lakh – INR 39 lakh with an annual average salary of INR 4 lakh. 
  • Benefits – The bankers also get additional bonuses according to their performance as well as other benefit packages. The bank also gives compensation in the form of commission, insurance, and even stock options.
  • Colleagues and teamwork – Working in this sector requires proper analytical skills and knowledge to perform well and stay competitive. Regardless of whether you work solo or in a team, working alongside efficient colleagues can help motivate you to learn more and challenge yourself to give accurate results or they can also help you when you are in need of it.
  • Connections and networking – Working as an investment banker often require meeting up with powerful people for discussions and presentations. This presents the opportunity to build connections with people who can, later on, give a good recommendation or reference when you are changing jobs or asking for a promotion. 
  • Career development – Regardless of the industry, the market is ever-changing and ever-evolving, which in turn keeps the professionals of the banking sector on their toes as their work is also evolving and changing. To keep up with the change, you need to be updated with the essential skills and knowledge in your career. You may also be required to learn new technologies and software. This is an excellent way to develop your career and up your skills. 

The Not-so-glamorous Side of Working as an Investment Banker is as Follows:

  • Extensive and grueling working hours – The working hours are not your typical 9-5 and can easily exceed the 40 hours per week mark when there is an excessive workload. It can even extend to working on weekends. While there is compensation for working overtime, it is still a grueling workspace and bankers can find it difficult.  
  • Work-life imbalance – A customer or client may call at irregular working hours or on weekends, as per their availability, and would expect you to be also free. This anytime-accessible expectation can also be in the form of answering emails, taking calls, or even attending meetings if required, to be able to better provide for the customer. While this can lead to limited private life, it can be beneficial in the long run as you will have a good impression on your employer and clients. 
  • Highly competitive – This high-paid job is also very competitive, due to the generally competitive nature of investments. It can put extreme pressure on the professionals until they can work well under pressure without seeking out help from their peers. Having a good relationship with a colleague can make your job easier by having them provide you with the necessary details to complete your task.  
  • Stressful – The entire financial health of a client company can depend on your one decision. Wrong advice can not only harm the client company but also your reputation can take a major hit. Customers can often have unaccommodating demands and high expectations due to the high fees demanded by the banks. All these factors, time, and the market itself can become a problem for you. As such, this highly in-demand job is also a highly stressful job. 
  • Repetitive tasks – Most of the work of an investment banker can be repetitive, such as doing research and writing reports. People who don’t mind the repetitive yet stable job would thrive here while people who prefer their job to be more dynamic may not find this very appealing.  

Frequently Asked Questions (FAQs) on Investment Banking Industry

Q. What is meant by IPO?

When a startup or a small company for the very first time offers an issue of securities, or an offer to sell its already existing securities or both to the public, it is known as Initial Public Offering or IPO.

Q. What do you mean by private placement?

When you are selling securities to a group of investors privately, it is known as a private placement. This is not issued to the public and this is usually bought by large banks, insurance companies, etc.

Q. What is a public offering?

A public offering is when you are raising company funds by selling certain assets and securities to the public. IPO is an example of this. 

Concluding thoughts on Investment Banking Industry

In this article, we’ve seen a general introduction to the world of investment banking, the services provided by them, their different types, what it takes to be an investment banker, and the industry’s advantages and disadvantages. But all things considered, this is a good career path because so long as a business in any industry exists, there will be a need for these banking services for different mergers or loans or anything and people who can win that deal. 

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