So, what does an investment banking firm do? If you’re here, you’re probably somewhat confused by the concept of investment banking, or may be completely uninformed about investment banking firms at all. In fact, investing banking firms do a number of different things, depending on who they’re working with, and why. Generally speaking, investment banking differs in many ways from typical banking, and it’s not something that individual people often worry about, compared to larger businesses and firms. With that being said, let’s look into some of the different factors that concern investment banking firms, and what investment banking is from the ground up.
What Is Investment Banking?
To begin with, let’s look into investment banking, as this is the key to answering the question of “what does an investment banking firm do.” An investment bank itself is not the same thing as an investment banking division, otherwise known as an IBD, of a bank. The investment banking division of a bank is not a full service system, and you typically can only have underwriting and business mergers and acquisitions advisory services provided at an investment banking division. Comparably, a full service investment bank is going to offer a number of other services, like underwriting and MandA advising of course, but also sales, trading, asset management, equity research, commercial banking, and retail banking. Generally speaking, while IBDs may work for those that need short-term services, the bigger the company and the more expansive its needs, the more likely it will be that you need to work with a full-service investment banking firm in the long term.
What Do The Services Offered By An Investment Banking Firm Cover?
There are a lot of issues that are covered through investment banking firms, and when you’re looking into the topic of what does an investment banking firm do, you would be remiss to move forward without looking further into what their basic services actually mean. To begin with, let’s look into mergers and acquisitions, or MandA. Mergers and acquisitions are important parts of corporate finance and involve transferring the ownership of corporations or organizations, as well as their organizational units. Essentially, if one business is taking over another or if two companies are being merged, this process will be involved, and generally, an investment banking firm will be involved. Usually, banks will represent both the buy side and sell side of the mergers and acquisitions process.
The next service to consider is underwriting. Underwriting essentially is when another entity accepts the financial risk that may come with certain processes. In this case, an investment banking firm would guarantee payment even if damage occurred after a deal went through. An investment banking firm is often used for underwriting between investors and companies that want to raise money, or perhaps go public through an IPO. When looking into the idea of what does an investment banking firm do, this is a major part of the processes performed by investment banking firms. In actuality, the bank is handling the marketing of a company when they attempt to raise capital, selling it potential investors and displaying the fact that it is a solid investment in the first place. Of the three different types of underwriting, there is a firm commitment, which involves the underwriter assuming full responsibility for unsold shares; all-or-none, in which the deal is terminated and the issuing company receives nothing if the offering price is not reached; and best efforts, in which the underwriter agrees to sell as much of the issued shares as possible and will return all unsold shares to the issuer without any financial responsibility.
Equity research is another important part to consider when looking up “what does an investment banking firm do.” Equity research is really the coverage of securities. This not only supports the trading of stocks, but actually, investors make important investment decisions. Without equity research, investors are often uncertain about whether or not they should proceed in certain investments.
Finally, asset management is another major service that falls under the question of “what does an investment banking firm do”. Asset management basically ensures that investments are managed for a wide range of investors, both individual and institutional. This also covers a wide range of investment styles. Asset management is incredibly important, and businesses have failed when proper asset management is not conducted. Therefore, it is important that a qualified investment banking firm is involved in the process.
What Types Of Clients Do Investment Banking Firms Work With?
When we think of typical banks, we know that they can work with big businesses as well as individuals that simply need to have their money managed. Investment banking firms, on the other hand, work with a specific range of clientele that cannot be found just anywhere. Clients come to investment banking firms, rather than the other way around. Typically, they will be seeking out an investment banking firm with a FINRA investment banking license. FINRA is the Financial Industry Regulatory Authority, Inc. It is actually a private organization and is self-regulatory. It regulates member brokerage firms and exchange markets. When an investment banking firm has a FINRA license, it assures potential clients that its goings-on are being carefully monitored and that it is therefore trustworthy. With that being said, many clients also go off of recommendations from other clients of the investment banking firm, as well as the firm’s historical performance. A firm must be completely trustworthy, as its clientele range can be quite wide and include a number of different organizations and businesses.
To begin with, corporations of course make up a large portion of the clientele for many investment banking firms. Both private and public companies work with investment banking firms to grow their businesses and raise capital. They also look to investment banking firms for research and more general corporate financial advice. But beyond that, they also look to them to make acquisitions and sell business units. Much of a corporation’s financial structure is managed with the help of investment banking firms. Furthermore, when a private company prepares to go public, it tends to work with an investment banking firm for much of the IPO process.
Institutions, of course, also need the help of investment banking firms. In this case, when looking into “what does an investment banking firm do”, you’ll notice that institutions actually use investment banking firms to help them trade securities and conduct research. This is because these institutions manage the money of other people, and they will also work with private equity firms. This will help them acquire portfolio companies, and gradually exit those positions either through an IPO or through selling to a strategic buyer. Essentially, this process allows institutions to do the work that they must, without having to take on all of it internally.
Some may be surprised by the fact that governments work with investment banking firms as well. But indeed they do, and with good reason. Investment banking firms sometimes work under government contracts to help governments trade securities and sell crown corporations, as well as raise money in general. Just as with institutions and corporations, governments tend to be working with a large amount of money, and this is most effectively managed with the help of investment banking firms. Clearly, this indicates that while there is a wide variety of different careers available within investment banking, not everyone has the right skill set for the task.
What Types Of Skills Are Necessary For Those Working In Investment Banking?
Investment banking careers, are, again, varied, But it’s not enough to have a general career history in banking. Those that want to work within investment banking firms aspire to be in charge of handling shareholder agreements and other complex issues, and therefore must have a particular set of skills. They need to be able to handle business analysis, which means that they must be familiar with company analyses and DCF analysis, as well as precedent transactions. They must also be able to build pitchbooks and presentations. As much being able to build a great PowerPoint presentation may not seem to be what you would think of when you start a search for the term “what does an investment banking firm do”, being able to present is crucial for any investment banker. They have to be able to win new business and pitch ideas to potential clients, just as any good salesperson should. Sales skills do in fact factor into becoming an investment banker, as strange as this may initially seem.
On that note, aspiring investment bankers must be able to cultivate relationships. Essentially, if you want to work for an investment banking firm, you do need to understand numbers, yes. But you also need to be a people person. Understanding what people need and what they’re worried about is incredibly important for those working within investment banking. To an extent, you must be intuitive and able to see why people may have concerns about moving forward with a deal so that you can assuage those concerns. This doesn’t mean that you can go without technical skills, however. You also need to train on different financial modeling activities, such as DCF models, LBO models, and other types of financial models. Furthermore, being able to prepare transaction documents, like confidential information memorandums and term sheets as well as investment teasers is very important. But returning to the idea that your personality and the way in which you conduct yourself can go a long way in establishing your potential career in an investment banking firm, it’s also important that you work on your negotiation skills. You will need to be a part of negotiations, and you will need to represent yourself and your clients well. Your goal is to help your clients maximize value creation, and this will involve being a savvy negotiator.
What Are The Types Of Careers Available In Investment Banking?
There is a long road between searching for the term what does an investment banking firm do and becoming an investment banker yourself. There are actually many different careers within the field, but there are often more people vying for positions than there are positions to give within individual firms. Before reaching the top of the food chain, as head, chair, or vice-chair of a firm, people usually work their way up from the bottom, starting off as analysts. They can climb from there to associate, and if they work hard make their way up to vice president. From vice president, the next role is usually director, then managing director, before someone within the field would reach the pinnacle of their career. But again, these positions are coveted, and investment banking firms are careful about who they hire. The wrong head can take a firm from the top of the game to seeking bankruptcy services in a matter of years, as has been seen in historical financial disasters.
In terms of the biggest and most influential investment banking firms, we’d be remiss if we didn’t mention J.P. Morgan, as it was the largest investment banking firm based on revenue globally as of December 2019. However, others, like Bank of America Merrill Lynch, Barclays Capital, Citi, and of course Goldman Sachs and Morgan Stanley are also incredibly important and figure not only into the investment banking scene, but banking worldwide in general.
There are many factors that can affect an individual’s potential career in investment banking, and looking up the phrase “what does an investment banking firm do” is just the beginning of your research. If you do want to enter this world, you need to be tough, ready to work hard, and capable of learning. Investment banking is complex, and each case that an investment banking firm deals with is incredibly individualized. However, there is much money to be made in this field, and it affects businesses every day. Therefore, even as certain firms rise and fall, investment banking, in general, will remain an important part of American life for years to come.