WHAT YOU NEED TO KNOW ABOUT INVESTMENT BANKING

What is Investment Banking?

Investment banking is a segment of the Financial services industry that assists companies, institutions and the government with capital raising and executing large financial transactions. They essentially act as intermediaries between investors (those with funds to invest) and corporations (those requiring capital to grow and run their businesses).

What does an Investment Banker really do?

Essentially, Investment bankers are corporate financial advisors. The average Investment banker acts in a capital market advisory capacity to corporations and governments. They help clients raise money in the capital markets, provide various financial advisory services, and assist with Mergers and acquisitions activities. For instance, if a large company intends to build a factory and is looking to issue bond to finance its expansion, it may seek the services of an Investment bank. Similarly, if the government wants to finance the building and construction of an airport, highway and other large scale municipal projects, it may work with an Investment bank to issue bonds to raise capital. In such cases, the Investment banker would plan the bond issuance by pricing the bond so as to ensure there is enough demand, work with regulatory authorities and then help sell the bonds.

The Investment banker also plays a role when it comes to arranging equity financing. Suppose a company figures it needs more money to grow and decides to raise funds by opting for an Initial public offering (IPO), the investment banker would put together the necessary documents explaining the terms of the offering and the risk it carries, manage the issuance process with regulatory authorities, and help price the offering. Another area where Investment bankers play a vital role is when a company is looking to buy another company. This activity is known as an acquisition, and the Investment banker offers advice on how the company should go about it, including the pricing of the offer. This process involves valuing the targeted company and coming up with a price that represents its value.

Typical day-to-day work of an Investment banker within the firm are broadly categorized as follows: analysis, creating presentations and other documents, administrative tasks, and recruiting and other firm-building activities. The first type of work performed by bankers is the analysis work. Basically if a banker is using Microsoft Excel, then their work is considered to be analysis. Common examples of work done on Excel include entering historic company data from public documents and calculating various statistics using the data, estimating the fair market value of a company or its stock and projecting a company’s financial statements.

The second significant type of work performed is drafting and editing presentations and other types of documents. This type of work typically involves the use of Microsoft PowerPoint or Word to put together such materials. Example of these documents are offerings and private placements memorandums, pitchbooks for presentations, investment teasers and credit memorandums.

The administrative tasks bankers are always involved in are the type of functions that aims at ensuring organisation and efficiency in deal executions and transactions. This could involve scheduling conference calls and meeting for due diligence, information exchanges and negotiation sessions, and continually updating the working group list.

In addition to other day-to-day work, Investment bankers also spend a portion of their time on firm-building activities. This type of activities are usually required of bankers at all levels and a banker’s level of participation and enthusiasm is often taken into consideration in the annual performance review. The activities include but are not limited to training of new analysts and associates, mentoring junior banker, and participating in various committees.

Structure of the Investment Banking Division

The Investment banking division is usually divided into two groups: product groups and industry groups, which is also referred to as sector/coverage groups. Investment bankers in product groups typically have product expertise and execute transactions while bankers in the industry groups do more marketing of the firm’s services by building and maintaining relationships with companies within the industry they cover.

Product Groups: The three most well-known product groups are Mergers and acquisitions (M&A), leveraged finance, and restructuring. Equity capital markets (ECM) and debt capital markets (DCM), which are sometimes grouped together as capital markets, are specialized product groups within the Investment bank. The ECM group helps execute equity raises such as IPOs whole the DCM group typically helps to raise investment-grade debt for clients.

Industry Groups: Bankers in the industry groups market the bank’s Investment banking services to companies in specific industries. At the senior level, bankers in industry groups tends to have relationships with the senior management teams of the companies they cover. Some of the larger groups are sometimes further segregated into subgroups, for example, healthcare might be divided into biotechnology, medical devices, managed care, and pharmaceuticals, while the financial institutions group might be separated into banks, financial technology companies and insurance. More common industry groups are: Consumer/retail, Industrials and Transportation, Natural resources, Power and utilities, Technology, media, and telecom (TMT), amongst others.

Hierarchy within an Investment Bank

Investment banks have a rigid and strict hierarchy that is often comparable to a military organization, where each rank means a great deal and carries specific perks an advancement is achieved. The typical hierarchy of Investment banks is common to almost all banks although some few banks may have different job titles, job descriptions tend to be consistent from one Investment bank to another.

· Analyst: This position ranks the lowest in the Investment banking hierarchy and almost all analysts enter the industry as fresh graduates from colleges. Most Investment banks have a two-year program, after which the analyst rises to the next rank. The majority of an analyst’s work involves researching companies, building financial models in Excel and creating PowerPoint presentations that the bank uses to communicate ideas to potential and existing clients.

· Associate: After working for two or three years as an analyst, promotion to the associate rank is almost always the next thing. Alternatively, one can sometimes enter the associate rank directly by arriving at the bank with a graduate degree from an MBA program. Apart from watching over the analysts, the associate spends most of their time talking to clients and attending to what they need. They may also work alongside analysts in preparing presentation materials and in financial modelling.

· Vice President: An associate typically rises to the rank of a vice president after working at the bank for a period of three to four years. A vice president speaks to client and updates them on how deals and transactions are progressing. By default, the analysts and associates fall under the vice president, whose responsibilities include ensuring that PowerPoint presentations and financial models are built in the right way.

· Director / Senior Vice President: A senior vice president may also be called a director, depending on the Investment bank. To become a senior VP, one must have worked for a considerable time in the bank and climbed up the corporate ladder. A senior VP deals directly with a lot of clients and acts as a bridge between the clients and the team in the lower ranks.

· Managing Director (MD): The Managing director sits at the highest level of the Investment banking hierarchy and he/she is responsible for the profitability of the bank. The work of an MD is to know how all deals are progressing and to be aware of what is happening in the political or economic environment that is likely to affect the bank’s operations or their clients. Most of the MD’s time is spent on soliciting new clients, meeting potential investors, and building relationships.

Investment banking as a career path in Finance is a highly rewarding one. It offers a steep learning curve and the avenue to fairly contribute to the deals and financial transactions being executed, arguably more than any other job space from entry level. However, given that it is a client-facing business, a huge emphasis is always placed on the standards of human capital. This is the major reason that breaking into Investment banking is more often than not a herculean task as Investment banks are always extremely careful about the type of personnel in their employ. The requirements however have remained the same over the years and they include having the right attitude, technical and soft skillset, proactiveness and an eye for detail, networking capacity, amongst others.

By Chiemerie Oguejiofor, for THE FINANCE HUB