“At the lowest level of the investment banking hierarchy are the analysts. To find this young talent, the I-banks send their manicured young bankers out to the Whartons, Harvards and Princetons of the world to roll out the red carpet for the top undergraduates and begin the process of destroying whatever noble ideals the youngsters have left.” ― John Rolfe
Cited as the most complex financial mechanism worldwide, investment banking serves distinct purposes and business entities and covers a broad range of financial services such as proprietary trading or trading securities, mergers and acquisitions advisory, leveraged finance, and settlement acquisitions, and restructuring, and new issues or IPOs.
Let’s discuss the services in detail by covering the topics
1. What is investment banking?
2. What does investment banking do?
3. Working of investment banking
4. Role and responsibilities of investment banking
Investment Banking is a particular part of banking operations assisting organizations in order to raise capital and offer financial-based consultancy and assistance to them. It renders extensive financial advisory, capital raising, governments and financial institutions, financial and risk management services & assistance to corporations.
Some of the biggest investment banks in India include Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan.
(As discussing banks and services, read the Reserve Bank of India(RBI): History, Objectives and Functions)
“What investment banking is to the ambitious and acquisitive today, the pepper trade was to the Romans—the most direct route to great riches.” ― William J. Bernstein
Investment banking serves in the form of the mediation among security distributors and investors and supports the latest small firms to spread widely.
Either from purchasing all the shares available at the rate predicted by professionals and sell them publicly to auction shares in the support of the distributor and acquire commission on each share, investment banking provides services as a negotiator.
(Read also: 5 Key Elements of Financial Analysis)
In simple words, investment banking works with two sides, that is “buy-side” and “sell-side”, where buy-side operations and functions include the services like securities trading and portfolio management and sell-side operations and functions include underwriting some stock lines, marketing financial products and advertising financial research.
Front office: It conducts revenue generation and incorporates various segments like corporate finances, sales and trading and financial research.
Middle office: It prompts the diverse methods related to the revenue generation like risk management and treasury.
Back office: It involves roles and responsibilities like acquiesced, accounting, information technology (IT) and HR.
There is often confusion among the terms an investment bank and Investment Banking Division of a bank. However, full-services investment banks provide a broad range of services including underwriting, M&A, marketing, sales and trading, commercial banking, retailing banking, equity research and analysis, asset supervision. And, the investment banking division offers only underwriting and M&A advisory services.
Following is the brief note on the services provided by Full-service banks;
Underwriting: It includes the capital raising and approving group tasks among investors and companies who demand to raise money or go public through the process of IPO. In addition to that, this function works as an elemental market or new capital.
Mergers & Acquisitions (M&A): Under M&A function, from providing advisory roles and responsibilities for both buyers and sellers of businesses to governing the entire M&A process is given.
Sales & Trading: This function assists in matching up buyers and retailers of securities in the secondary market. Also, sales and trading clubs in investment banking are the serving agents for clients and could trade the own capital of an organization.
Equity Research: The equity research group of securities aids investors in making smart investment decisions and encourages the trading of stocks.
Asset Management: Controlling investments over a deep class of investors that consists of institutions and individuals, over a broad variety of investment styles.
(Must read: An Introduction to Financial Analysis)
In addition to that, when a company embraces an IPO, in that condition, an investment bank would purchase a maximum portion of shares of that company directly from the company.
Correspondingly, in terms of the representation of the company that holds an IPO, the investment bank will trade the shares in the market and make things more smooth for the company itself as they effectively engage the IPO to the investment bank.
(Recommended blog: What is Corporate Governance?)
Consider the example, company A is acquiring another company X but A is not sure is X really worthy in particular of long-term profits such as revenues, costs, etc.
In that condition, the investment bank comes into the process of payable diligence in order to establish the cost of the company, fixing the deal via supporting A in making required documents and assisting it over the suitable timing of the deal.
Basically, the investment bank operates at the side of purchasing and at the same time other investment banks could work on the selling side in order to help company X. Also, the larger the size of the deal, the extra commission a bank could receive. (In reference to)
In broad words, being a complicated process, investment banking functions with several objectives and business bodies, it offers diverse kinds of financial services including goods exchanges, proprietary or securities exchanges for their own accounts, merges and acquisitions advisory for assisting firms in M&As, financial assistance that lends capital to firms for purchasing goods and fixing deals, latest issues, and reconfiguring includes enhance companies’ system and makes them more efficient to achieve utmost benefits.
(Related blog: What is Personnal Finance?)
Some main role and responsibilities under investment banking are following;
Making recommendations for various product contributions, individual equity transactions, mergers and acquisitions and appraisals.
Organizing and explaining financial reports to the banking groups
Designing and deploying several types of financial models and forecasts.
Conducting multiple methods of valuation such as comparable companies, models and precedents, etc.
Operating owed diligence, probing, deciphering and documenting of live transactions.
Making sure the regular compilation of financial services.
Arranging materials that are deployed under financing of clients covering investment memo, management portrayals, and pitchbooks.
Building relationships with new and current clients for increasing business synergies.
Since the investment banking act as an intermediary among investors (those who invest capital) and corporations ( those who look for capital in order to expand and execute their business).
Therefore investment bankers work with teams that manage clients for marketing and trading firms, identifying suitable targets in order to achieve and establish deals. These bankers also suggest appropriate conditions and timing for raising capital and then marketing the subject of that debt or equity issue to investors.
Investment banks employ investment bankers who assist corporations, governments, and other associated groups in planning and managing large schemes, preserving time and money of their client by addressing risks interconnected with the schemes before the client moves ahead.
(Also read: Mutual Fund in India)
Investment bankers are the professionalists who focuses on the latest investing environment, and businesses and institutions seek the help of investment banks for advice on how to plan suitably their development, and where investment bankers could tailor their suggestions according to the current state of economic development.
Moreover, an investment banking analyst is an initial position in a team of experts converging on providing advises to companies on huge, corporate-level transactions, for example, mergers and acquisitions, debt and equity delivery. The most important function of an analyst under investment banking is to focus on aiding leading bankers in conquering and establishing deals on the behalf of the bank. (from)
Being a primitive role in an investment banking an analyst holds, he is accountable for various fundamental tasks such as Excel and PowerPoint deliverables, administrative functions, answering to the queries from clients and potential investors, etc.
More of the tasks included updating presentations, following buyers and sellers, specifying market upshots, helping in valuation computation/measurements and operating financial models.
Being a kind of financial service, investment banking holds essentially advisory services either for individuals or companies, it does not consider deposits, unlike retail or commercial banks. Even though, it is linked with corporate finances and enact as clients’ agent while addressing bonds.
“It's good to have a special price to pay for the future and it will pay you in return, in the exact way you would wish to be paid.” ― Auliq Ice
From the blog, it can be concluded that investment banking aid in mergers and acquisitions, raising capitals, and offers various financial assistance. Either private or corporate, basically investment banking involves in investment advice and essential operations in investment.
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