What is Investment Banking?
Investment Banking is oriented around offering guidance on matters pertaining to mergers and acquisitions (M&A) and underwriting services (i.e. capital raising) on behalf of clients, which are most often corporations and institutional investors.
Table of Contents
- Investment Banking in Simple Terms
- What Does an Investment Banker Do?
- M&A Advisory Services: Buy Side vs. Sell Side Transaction
- Underwriting Services: Debt Financing + Equity Issuance (IPO)
- Product Groups vs. Industry Groups
- Investment Banking Hours + Culture
- Why Investment Banking?
- Investment Banking Career Path + Hierarchy of Roles
- Investment Banker Salary: Base Compensation + Bonus
- Top Investment Banks: Bulge Bracket vs. Elite Boutique Firms
- Investment Bank Structure + Divisions
- Investment Banking Functions: Front Office vs. Back Office Roles
- Sell Side vs. Buy Side: Career Differences + Skills Required
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).
|M&A Advisory Services||
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.
- Build Financial and Valuation Models (e.g. 3-Statement Financial Model, DCF Model, Trading Comps, Transaction Comps)
- Create Presentations and Client Marketing Deliverables (e.g. CIM, Public Information Book, Pitch Book)
- Conduct Due Diligence on Live Transactions
- Perform Company-Specific and Industry Research
- Participate in “Bake-Offs”, Roadshows, and Client Meetings
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”.
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”.
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|
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.
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.
|Private Equity (LBOs)||
|Venture Capital (VC)||
|Growth Equity (GE)||
|Real Estate Private Equity (REPE)||
Investment Banking Career Path + Hierarchy of Roles
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.
- 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.
- 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.
- 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).
- 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.
Investment Banker Salary: Base Compensation + Bonus
The compensation structure in the investment banking industry consists of two parts:
- Base Salary: The base salary component is the fixed portion of the analyst’s salary.
- 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 Compensation Structure
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.
|Bulge Brackets (BBs)||
|Elite Boutiques (EBs)||
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.
Structure of Divisions of an Investment Bank
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).
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)||
|Private Equity (PE)||