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Investment Banking Primer

Quick Primer on Understanding Investment Banking (Updated 2023)

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Investment Banking Primer

Investment Banking in Simple Terms

The investment banking division (IBD) of a financial institution offers services related to advising clients on complex M&A transactions and underwriting securities as part of a corporation’s capital raising efforts.

In particular, the two types of services that investment bankers are relied on by clients to provide are M&A advisory and underwriting services (i.e. capital raising).

Service Offering Description
M&A Advisory Services
  • The investment bank offers guidance to a client regarding the strategic rationale and financial considerations (e.g. recommended offer price, fairness opinion, buyer list building) prior to a potential corporate transaction, such as a merger, acquisition, or divestiture.
  • The investment bank facilitates and manages the process of raising capital on behalf of a client in the form of either debt financing or equity issuances.
Learn More → Investment Banking Industry

What Does an Investment Banker Do?

The day-to-day responsibilities of an investment banker are a function of their position (i.e. seniority within the firm) and the product or industry group in which they work in.

The more senior the position, the more client-facing the responsibilities of the role become, where the priority is to generate deal flow.

From a high-level, however, the following list contains some of the more recurring tasks while working in investment banking.

Learn More → Day in the Life of an Investment Banking Analyst

M&A Advisory Services: Buy Side vs. Sell Side Transaction

The core function of an investment banking division (IBD) is to advise corporations on strategic and financial decisions related to mergers and acquisitions (M&A).

  • Buy Side M&A: The investment banker serves as an advisor to the acquirer (i.e. the buyer) and must determine if the client’s decision to pursue the transaction is reasonable. The priority is to ensure the offer price is reasonable to reduce the risk of overpaying for the underlying asset, e.g. an entire company or individual business segment.
  • Sell Side M&A: The investment banker is an advisor to the acquisition target (i.e. the seller) and therefore must ensure the offer price is fair, without “money left on the table”.
Learn More → Mergers and Acquisitions Guide (M&A)

Underwriting Services: Debt Financing + Equity Issuance (IPO)

Underwriting is the other type of service provided by the investment banking industry, where the firm acts as an intermediary between the entities seeking to raise capital (e.g. corporate clients) and institutional investors (e.g. university endowments, pension funds, hedge funds, and more).

  • Debt Financing: The client obtains funding from borrowing capital from lenders in exchange for agreeing to meet periodic interest payments and return the original principal at maturity.
  • Equity Issuance: The client issues shares in itself to insitutional investors (and the open markets), i.e. shares that represent partial ownership stakes are exchanged for capital.

Most notably, an initial public offering (IPO) – i.e. “going public” – receives the most media attention by a substantial margin.

  • Initial Public Offering (IPO): In an IPO, a formerly private company raises capital by issuing shares to the public for the first time, after which its shares are listed on a public exchange and trade in the open markets.
  • Secondary Offering: A secondary offering is the sale of post-IPO shares in the secondary market from shareholders that participated in a past IPO. However, the term can also refer to the issuance of additional shares by a company already publicly traded, i.e. “follow on offering”.
Learn More → Initial Public Offering Primer (IPO)

Product Groups vs. Industry Groups

Each investment banking division (IBD) is unique to the firm, but the most common structure is segmentation into product and industry groups.

  • Product Groups: An investment banking product group specializes in a particular product that is offered to clients, such as a specific deal type (e.g. M&A advisory, restructuring). In most cases, a product group is industry agnostic, meaning the group offers their services across all industries.
  • Industry Groups: An investment banking industry group specializes in a particular industry niche and can work on a variety of different transaction types, as opposed to being tied to only one.
Product Group Industry Group
  • Technology, Media and Telecom (TMT)
  • Equity Capital Markets (ECM)
  • Healthcare and Life Sciences
  • Financial Institutions Group (FIG)
  • Oil and Gas (O&G)
  • Consumer Goods and Retail
  • Structured Finance
  • Financial Sponsors

Investment Banking Hours + Culture

The investment banking profession is rather notorious for its long hours, and work weeks consisting of 90 to 100 hours can be common for an analyst.

The untimely conflict of several different active engagements can result in multiple consecutive weeks of minimal sleep. However, these periods typically only happen occasionally, especially with the increased attention to the physical and mental health of analysts as of late.

Still, the traditional culture of investment banking remains, wherein analysts are frequently pushed to their physical limits and are expected to work grueling hours.

An investment banking analyst must be “on-call” and remain available at any given moment, which is attributable to the unpredictable nature of the industry’s workflow and the fact that client requests can come in abruptly without notice.

While that inefficiency frequently results in time spent waiting for deliverables from a client or their advisors, it has historically been and will continue to be a routine part of the business model.

Learn More → Essential Reading for Investment Banking Interviews

Why Investment Banking?

Many top university students continue to pursue a role in investment banking post-graduation, despite the hours and demanding workload in the investment banking profession, especially at the analyst level.

Of course, not everyone decides to become an investment banker for the same reasons. But one of the most cited reasons is because of the doors that open because of working at a prestigious firm.

Many analysts work a stint in investment banking as a “stepping-stone” to a different career path. The ideal exit for most bankers tend to be on the buy-side, i.e. joining a prestigious private equity firm or hedge fund post-banking.

Exit Opportunities Description
Private Equity (LBOs)
  • Private equity firms specialize in leveraged buyouts (LBOs), which are transactions where a majority stake in a private (or public) company is acquired.
  • In order to fund the buyout, a substantial portion of the purchase price stems from debt capital provided by lenders.
Hedge Fund
  • Hedge funds are a form of active management that invests in public securities, such as stocks and bonds, to achieve stable risk-adjusted returns.
  • Compared to other industries, the strategies employed in the hedge fund industry tend to be more diverse, e.g. value-oriented funds, long-short equity (L/S), short only funds, quantitative funds.
Venture Capital (VC)
  • Venture capital (VC) firms obtain minority stakes in high-risk, early-stage startups that are rarely profitable, yet are attempting to disrupt an existing market through a differentiated offering.
  • While the failure rate among startups is quite high – in fact, most are expected to – even one successful investment in a portfolio can be enough to return the value of the entire firm, i.e. the “power law of returns”.
Growth Equity (GE)
  • Growth equity firms acquire minority interests in late-stage companies exhibiting high growth with proven market traction, where the investment strategy is to provide expansion capital to a company on track to “go public” via an initial public offering (IPO).
  • Unlike venture capital firms, the bets undertaken by growth equity investors tend to carry less risk, since the potential to disrupt the target market and demand from customers have been validated.
Real Estate Private Equity (REPE)
  • REPE funds specialize in the acquisition, development, and implementation of operational improvements into properties, such as buildings, on behalf of their limited partners (LPs).
  • Other exits options available to investment bankers, other than on the buy-side, are roles in corporate development, startups, entrepreneurship, FP&A, and more.
Learn More → Sell Side vs. Buy Side

Investment Banking Career Path + Hierarchy of Roles

Investment Banking Career Path

Historically, the traditional career path and hierarchy of roles in investment banking has remained rather rigid, even to the present date.

The seniority structure from most junior to most senior is as follows.

  1. Investment Banking Analyst: The analyst is the entry-level position in investment banking. Therefore, the analyst must handle most of the mundane tasks, such as company research, analyzing financial statements, creating financial models, and preparing presentation material.
  2. Investment Banking Associate: The responsibilities of an associate are relatively comparable to an analyst, aside from marginally reduced hours and the added task of reviewing an analyst’s work. While the associate may be more actively involved in the discussions around deal engagements and pitches, the role is not client-facing.
  3. Vice President (VP): The vice president is responsible for managing the firm’s teams of analysts and associates to oversee the workflow and ensure the quality of the material meets the standards of the managing director (and all deadlines are met).
  4. Managing Director (MD): The managing directors are the centerpiece of the firm’s deal origination process, managing the pitch to the client and ensuring the closure of deals. The firm’s deal flow is directly a byproduct of the managing director’s existing connections with corporate executives and institutional investors, as well as their ability to build their network.
Learn More → Investment Banking Career Path

Investment Banker Salary: Base Compensation + Bonus

The compensation structure in the investment banking industry consists of two parts:

  1. Base Salary: The base salary component is the fixed portion of the analyst’s salary.
  2. Performance Based Bonus: The bonus component, in contrast, is variable and can exceed the base pay, which depends on individual and group performance. The performance on an individual level relative to the rest of the group is also a factor that determines the size of the bonus (i.e. the “top-bucket” analysts receive the highest bonus).

Investment Banking Analyst Salary and Bonuses

Investment Banking Compensation Structure

Learn More → Investment Banking Analyst Salary Guide

Top Investment Banks: Bulge Bracket vs. Elite Boutique Firms

The top investment banking firms can be designated into two categories: 1) Bulge Bracket Banks and 2) Elite Boutique Banks.

Type Description
Bulge Brackets (BBs)
Elite Boutiques (EBs)
  • The elite boutiques (EBs) are specialists in a particular product group or industry.
  • The pay is on par with the bulge bracket banks, with a comparable amount of prestige.
  • However, the one drawback is that name recognition is close to non-existent outside of the finance industry.
  • Since an elite boutique incurs far fewer overhead costs, more of the fees generated from its deals can be distributed to the firm’s deal team.
  • Examples: Moelis & Company, Evercore, Lazard, Centerview Partners, PJT Partners, Qatalyst Partners, Rothschild & Co., Greenhill & Co.
  • There are also up-and-coming firms such as LionTree (TMT) and FT Partners (FinTech) held in high esteem in their respective niches, as well as prestigious firms such as Allen & Co. and M. Klein & Co. that intentionally maintain a low profile.

Top Investment Banking Banks: Bulge Bracket and Elite Boutique

Examples of Bulge Brackets (BBs) and Elite Boutiques (EBs)

Investment Bank Structure + Divisions

The difference between bulge bracket banks (BBs) and elite boutique banks (EBs) is that the former is more institutionalized (and thus, has a balance sheet).

To elaborate further, the phrase “has a balance sheet” indicates the investment bank’s revenue is diversified, with a lending division (i.e. corporate banking) rather than purely offering M&A advisory services.

The absence of a balance sheet can be advantageous for a firm such as Moelis & Company, where historically close to all of the firm’s revenue came from M&A advisory and restructuring services. Hence, such firms often refer to themselves as “independent advisors” to emphasize the fact that their advisory services are unconflicted and entirely in the best interests of their client.

The bulge brackets can benefit from the diversified sources of revenue and the option to provide staple financing arrangements, for instance. The drawback, however, is that multiple divisions serving clients on both sides of transactions (i.e. the seller and the buyer) can create the potential for conflicts of interest.

Investment Bank Structure

Structure of Divisions of an Investment Bank

Learn More → Finance Careers Infographic

Investment Banking Functions: Front Office vs. Back Office Roles

The functions of an investment bank can be segmented into three distinct parts, which are the front office (FO), the middle office (MO), and the back office (BO).

Functions Description
Front Office
  • The front office describes the part of the investment bank that generates revenue, such as the M&A advisory and capital markets division, as well as the sales and trading (S&T) division.
Middle Office
  • The middle office is intended to support the front office, particularly in the context of risk management and ensuring the firm is in compliance with regulations.
Back Office
  • The back office refers to roles that support firm-wide operations, such as the human resources (HR) department, accounting staff, and information technology (IT).
Learn More → Front Office vs. Back Office

Sell Side vs. Buy Side: Career Differences + Skills Required

The term “sell side” refers to the field of investment banking, whereas the “buy side” is an all-encompassing term composed of institutional investors ranging from private equity firms, hedge funds, mutual funds, insurance companies, pension funds, and university endowments.

While investment bankers attempt to provide their clients with the best advice given their specific situation, the buy side, such as private equity investors, instead prioritizes generating profitable returns on behalf of their investors, i.e. the limited partners (LPs) of the fund.

The private equity industry tends to be the most sought after exit for investment bankers, typically after one or two years of working on the sell-side. For example, the interest in exiting to the buy-side (and the competition among firms to get the top talent) in 2022 become so competitive that the recruiting cycle kicks off before analysts even have a chance to work on an actual deal or finish new hire training.

Sell-Side vs. Buy-Side Description
Investment Banking (IB)
  • The investment banking revenue model is oriented around providing guidance to clients through critical decisions.
  • Investment bankers are paid advisory fees based on a percentage of transaction value, which will be specified in their engagement contract.
Private Equity (PE)
  • The private equity industry, in contrast, specializes in leveraged buyouts (LBOs).
  • Furthermore, private equity investors are paid via an annual management fee to cover the overhead costs of the firm and the agreed-upon split on the profits earned from the fund’s investments (i.e. the traditional ”2 and 20” fee structure).
Learn More → Investment Banking vs. Private Equity
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