Product Groups vs. Industry Groups

How are Product Groups and Industry Groups Different?

As a brief introduction, the investment banking industry delivers strategic and financial advisory services to corporations and institutional clients on mergers and acquisitions (M&A) and securities underwriting.

The investment banking division (IBD) can be separated into two distinct categories:

1. Product Groups → The product groups specialize in the execution of a particular type of corporate action, such as a merger or acquisition.
2. Industry Groups → The industry groups, or “industry coverage groups”, specialize in a specific industry niche while working on a wide range of transactions.

Therefore, product groups specialize in executing a particular transaction type across a wide range of industries, while industry groups participate in various transactions in a specific industry niche.

Each investment bank organizes itself based on its competitive positioning and unique capabilities relative to other market participants.

Considering the revenue model in investment banking, where the revenue generated is a function of the number of client mandates won and the collection of fees, the reason firms strategically structure their front-office functions to put themselves in the most favorable position should be intuitive.

• Firm Expertise → The experience of a firm’s senior bankers and track record of completed transactions are critical factors in winning a client mandate in a “bake-off”, where investment banks compete to be hired on a mandate. Hence, the pitchbook, a marketing deliverable presented to potential clients, contains a section that highlights the credentials of their advisory teams to demonstrate their collective domain expertise.
• Completed Transactions → The pitchbook will also include tombstones from the firm’s past engagements considered relevant to the client mandate, to improve the odds of a potential client retaining the firm.

What are Examples of Product Groups and Industry Groups?

The following chart lists the most common types of product and industry coverage groups:

Product Groups vs. Industry Groups: What is the Difference?

Product groups are specialists in a type of transaction type, while industry coverage groups perform a wide array of transactions in their industry niche.

There are other differences – aside from the aforementioned distinction between the two types of investment banking groups – such as the following:

Of course, there are exceptions to the above, as each statement is intended to consist of broad generalizations.

What are Product Groups in Investment Banking?

The product groups within an investment bank specialize in a specific type of transaction, most notably mergers and acquisitions (M&A).

The following section contains descriptions of the core functions of the most common product groups in investment banking.

1. Mergers and Acquisitions (M&A)

In the mergers and acquisitions (M&A) product group, investment bankers provide strategic and financial advisory services to clients on matters related to M&A transactions on behalf of corporations, institutional investors and governmental entities.

The most common transactions that M&A bankers advise on include mergers, acquisitions, divestitures, spin-offs, and more.

The M&A investment banking product group is typically the most sought-after and competitive group for two reasons:

• Higher Compensation → The compensation earned in M&A is on the higher end, relative to other groups.
• Modeling Intensive Work → The M&A group is widely perceived as the most modeling-intensive and technical product group relative to other groups, causing the potential exit opportunities to be more extensive.

An M&A investment banking firm can advise on either a sell-side or buy-side mandate.

• Sell-Side Mandate → On a sell-side mandate, the client seeks a partial or full exit. Therefore, the investment banker’s priority is to maximize the exit valuation to extract as much profit as possible from the sale.
• Buy-Side Mandate → Conversely, the client on a buy-side mandate actively searches for an acquisition target, or an adjacent transaction, such as the purchase of an individual business division or collection of divested assets. The role of the buy-side advisor is to ensure that the projected revenue and cost synergies can be realized post-acquisition, and confirm that an offer price is reasonable to avoid the risk of overpaying – which is the most common source of an M&A deal not panning out as intended.

M&A Activity and Industry Cylicality Risk

On the topic of industry-wide cyclicality and historical patterns, the performance of product groups is cyclical based on external factors tied to the current state of the economy and financial markets.

M&A transaction volume tends to wane amid periods of a global economic slowdown and high-interest rate environments, because the market demand from buyers declines from macro risks, and due to increased costs of borrowing, as debt is a common source of funding in M&A.

In 2023, the Fed’s fiscal policies and interest rate hikes to reduce inflation prompted the cost of borrowing to rise, causing the global M&A market value to decline 44% in the first five months of 2023.

^{M&A Midyear Report 2023 (Source: Bain & Company)}

Learn More → Mergers and Acquisitions (M&A) Guide

2. Equity Capital Markets (ECM)

The equity capital markets (ECM) group offers advisory services to corporations raising capital via the issuance of equity.

The types of transactions that ECM bankers advise on include the following:

• Initial Public Offerings (IPOs) → In an IPO, a formerly private company raises funds by issuing shares – i.e. partial ownership stakes in its equity – in exchange for capital from outside investors for the first time (“going public”).
• Secondary Offerings → In a secondary offering, or “follow-on offering,” a publicly traded company decides to raise additional capital post-IPO, which the ECM bankers facilitate.
• Specialized Financing → The ECM product group also structures the financing arrangement of hybrid securities, such as preferred stock, which are securities that blend features of debt and equity.
• Private Placements → In a private placement, or “non-public offering,” securities are issued to a select number of accredited, institutional investors, rather than via the open markets.

Learn More → Initial Public Offering (IPO)

3. Debt Capital Markets (DCM)

Debt capital markets (DCM) is a product group that offers capital raising services for their clients in the form of investment-grade bonds and loan issuances.

The clients of DCM investment bankers are often corporations ascribed high credit ratings and governmental entities, i.e. borrowers at low risk of default.

Therefore, the process of raising capital is relatively straightforward with minimal disruption, as the market demand for investment-grade debt tends to be more stable and predictable.

The DCM product group provides services predominantly around the origination, structuring, and marketing of investment-grade debt issuances.

• Investment-Grade Bond Issuances → Financing arrangements to corporate borrowers with strong credit profiles, where the risk of default is low.
• Commercial Paper → Commercial paper is unsecured, short-term debt issued to qualified corporate borrowers with near-term maturities.
• Government Bonds → Government debt issuances backed by the “full faith and credit” of the U.S. government (e.g. Treasury Bonds), considered “risk-free” since the government can print more money in the unlikely scenario that it is at risk of default.
• Municipal Bonds → Municipal bonds, often abbreviated as “munis,” are debt securities issued by state, city, or county-level governmental entities to fund public projects, usually related to infrastructure.
• Emerging Markets Bonds → The issuance of debt by governments or corporations in developing nations, which are riskier because the securities are subject to geopolitical and economic risk.

Learn More → Debt Capital Markets (DCM)

4. Leveraged Finance (LevFin)

The leveraged finance (LevFin) group is technically a subsegment of the debt capital markets (DCM), and specializes in the issuance of high-yield bonds (HYBs) and leveraged loans, i.e. speculative-grade debt.

• Investment-Grade Debt → The debt issuances by a corporation with a strong credit profile and low risk of default (BBB/Baa+ Credit Rating).
• Speculative-Grade Debt → The debt issuances by a highly leveraged corporation with a riskier credit profile and high risk of default (Sub-BB/Ba Credit Rating).

The LevFin product group focuses on high-yield bonds (HYBs) and leveraged loans, which are riskier forms of debt. Hence, the LevFin group tends to require more technical expertise and modeling, given the higher stakes of the financing.

• High-Yield Bonds (“Junk Bonds”)
• Leveraged Loans
• Mezzanine Debt

For example, the LevFin group can arrange the financing to fund a risky leveraged buyout (LBO) and structure hybrid securities, such as convertible debt, while the debt capital markets (DCM) facilitate the issuance of bonds on behalf of a government.

LevFin bankers analyze the capital structures of companies to estimate their credit risk and debt capacity, as part of debt sizing (and setting the lending terms appropriately), with significant time allocated toward modeling the downside case, i.e. worst-case scenarios.

DCM vs. LevFin Product Group – What is the Difference?

The distinction from the DCM group is that the LevFin group specializes in high-yield bonds and leveraged loans, i.e. issuers that are below investment-grade.

In contrast, the debt capital markets (DCM) group focuses on investment-grade issuances of debt securities, where the credit risk is low.

Usually, the clients of the DCM product group raise capital for more generalized reasons, while clients of the LevFin product group engage in securing riskier forms of financing for more complex transactions.

JP Morgan Capital Markets Groups (Source: JPM Investment Banking)

Learn More → Leveraged Finance (LevFin) Guide

5. Corporate Restructuring (RX)

Restructuring advisory services are oriented around the reorganization of distressed corporations with unsustainable capital structures.

The distressed company (“debtor”) must “right-size” its balance sheet, as the current debt burden is unmanageable.

Like sell-side and buy-side mandates in M&A, restructuring professionals can advise on two sides: the debtor or creditor engagements.

• Out-of-Court Restructuring → The debtor and creditors can reach an amicable solution without involving the Court in out-of-court restructuring, which is an option if the cause of distress is considered a straightforward fix, and there are limited creditors. But the more common outcome is the debtor filing for bankruptcy protection post-default to initiate the in-court restructuring process.
• In-Court Restructuring → On the other hand, in-court restructuring is a more formal, standardized procedure with judicial oversight. The drawbacks to in-court restructuring are the costs incurred over the course of the proceedings and the time required before the Court arrives at a final decision.

The priority in restructuring is for the debtor to return to operating on a “going-concern” basis, and the risk of insolvency is no longer a concerning matter.

• Chapter 11 (Reorganization) → If the Court decides the debtor can return to normalcy and approves its plan of reorganization (POR) – i.e. post-confirmation that the creditors can receive higher recovery rates from a reorganization compared to a liquidation – the debtor can emerge from Chapter 11.
• Chapter 7 (Liquidation) → On the other hand, a Chapter 7 bankruptcy is the straightforward liquidation of the assets belonging to the debtor, where the proceeds retrieved post-liquidation are distributed to creditors as a reorganization is no longer viable.

The necessity for restructuring advisory services is the inverse of M&A advisory, as demand for restructuring rises in periods of economic contractions, as distressed transactions, defaults on financial obligations, and corporate bankruptcies spike in such periods.

For example, market demand for restructuring advisory services at the onset of the COVID-19 pandemic exceeded the capacity of the RX industry, forcing certain firms to carefully select which mandates to undertake.

Issuers of debt securities with high credit ratings that operate in stable sectors can negotiate amend-and-extend (A&E) arrangements with lenders to push the debt’s maturity to a later date.

Restructuring Advisory (RX) – Bulge Brackets vs. Elite Boutiques

Suppose the corporate banking division of a bulge bracket firm participates in the arrangement of a syndicated loan, a form of lending where a syndicate (i.e. a group of lenders) contributes financing to a borrower under a single credit facility.

If the borrower defaults on the loan and becomes financially distressed later on, the firm’s restructuring practice offering advisory services is unlikely to sit right with the debtor, as the firm’s corporate banking division is partially at fault.

The conflict of interest illustrated here is the reason that the restructuring firms at the top of the league tables are mostly elite boutiques, rather than full-service bulge bracket firms.

Unlike bulge bracket investment banks, elite boutiques do “not have a balance sheet,” as their revenue model is almost entirely based around collecting advisory fees, instead of having multiple streams of revenue, such as a corporate lending division.

^{2022 Restructuring Investment Banking Advisor League Tables (Source: Reorg Research)}

Learn More → Corporate Restructuring (RX) Primer

What are the Industry Groups in Investment Banking?

We’ll now shift to the common industry groups in investment banking.

Industry coverage groups are differentiated by the type of clients served, namely their industry classification.

Unlike product groups, industry groups cover all companies that operate in a pre-specified industry niche, without constraints on their product offerings.

1. Technology, Media and Telecom (TMT)

In TMT investment banking, the industry group advises technology, media and telecom companies on raising capital and M&A.

The rapid growth of the technology sector, which stems mostly from the software side, has led to disruption of traditional business models, creating a new norm.

• Technology Industry → The technology industry is by far the most fast-paced field in terms of innovation. The industry participants frequently disrupt traditional markets to become pioneers of new business models, creating the potential to contribute tangible, long-term value to shareholders and society. Therefore, given those industry attributes, the TMT investment banking group is one of the more exciting (and competitive) industry groups to secure a role in.
• Media Industry → The media industry consists of digital media providers, entertainment apps, social media apps, and streaming platforms for consumers. Given the fluctuations in consumer behavioral patterns and spending trends, the media industry tends to be unpredictable. The sustainability of a media company is tied to its ability to adapt to constantly changing consumer trends. For instance, most media companies nowadays have shifted toward subscription-based pricing models to cater to the preferences of the modern customer (e.g. Netflix, Hulu, HBO Max, Disney+). From a monetization perspective, understanding the target market and setting pricing rates appropriately, with the right customer acquisition strategies, is necessary to generate recurring revenue with limited churn.
• Telecommunications Industry → The telecommunications industry has garnered a reputation for the slow roll-out of features, as the strict regulatory risk around anti-competition practices is a looming threat. In effect, each step toward innovation and developing improved capabilities (e.g. 5G network) receives regulatory scrutiny and requires steep costs because of the capital intensity of the sub-industry.

Technology Sector – Initial Public Offerings (IPOs)

In the past decade, a substantial percentage of the largest initial public offerings (IPOs) and M&A deals have occurred in the TMT verticals – not to mention, the companies with the most significant market caps are all tied to tech (e.g. Meta, Apple, Netflix, Google, Amazon, Microsoft).

The equity capital markets have been in a trough for most of 2023, up until Arm – the SoftBank-backed chip designer – raised $4.87 billion in the largest initial public offering (IPO) of the year.

Riding the current artificial intelligence (AI) wave – which has greatly benefited the valuation of NVIDIA and AMD – the Arm’s IPO valued the chip designer at around $68 billion on a fully-diluted basis.

The state of the IPO market is often led by IPOs in the tech sector, as seen by market participants evaluating the near-term outlook based on the IPO of Arm, with expectations that it will serve as a catalyst for more IPOs, such as online grocery delivery company, Instacart, and marketing automation company, Klaviyo.

^{Arm Holding IPO Annoucement (Source: Arm Investor Relations)}

2. Healthcare and Life Sciences

The healthcare industry is broad in scope and consists of sub-industries such as pharmaceuticals, life sciences, and biotechnology (“biotech”).

• Pharmaceuticals Industry → The pharmaceuticals industry includes producers of generic drugs and branded drugs (i.e. patent protected for a pre-defined period). The industry participants research and develop pharmaceutical drugs for production, marketing, and administration (or distribution for self-administration) to patients as a preventive measure or treatment to cure diseases or alleviate symptoms.
• Biotechnology Industry → The biotechnology sector is a highly technical field where derivatives of living organisms and molecular biology are used to produce healthcare products for commercial use. For instance, certain biotech companies develop therapeutics or specialized processes (e.g. DNA), while others contribute to the development of medicine, therapies, and pharmaceuticals like vaccines to combat diseases to advance the medical field. In addition, biotech companies apply their science in genomics, food production (e.g. crops), and the production of biofuels. The biotech industry is highly fragmented, with substantial spending needs in research and development (R&D). The compressed margins from high R&D spending requirements, coupled with the fragmented nature of the industry, present industry consolidation opportunities for larger-sized companies.
• Life Sciences Industry → The life sciences industry comprises research organizations and companies whose work is centered around research and development (R&D) on living organisms, such as animals, plants, and human beings.

The healthcare equipment and services industry refers to the distributors of the technical products developed in labs. For example, the standard intermediaries are medical facilities, hospitals, and assisted living facilities, while the products include medical devices, healthcare IT, and managed care.

Healthcare is considered a non-cyclical, defensive sector, but regulatory requirements are the most significant barriers that impede new product development (and M&A activity).

Historically, the healthcare sector has been known for its reluctance to adopt new technologies, yet the COVID pandemic introduced the potential for cost-savings and improvements in operating efficiency.

With that said, the current digitalization of healthcare – e.g. telehealth services – is expected to drive M&A activity in the coming years.

3. Financial Institutions Group (FIG)

The FIG investment banking group provides capital raising and advisory services for financial institutions, which include the following types of clients:

• Commercial Banks
• Insurance Companies
• Specialty Lenders
• Brokerages
• Asset Management Firms (or Wealth Management)
• Fintech Start-Ups

Because of the strict government regulations and oversight in the financial services sector, M&A activity is not too common. Instead, financing transactions have been more prevalent in the past, but that trend is expected to shift.

In early 2020, the valuation of Fintech startups was staggering, to say the least, until the industry observed a significant collapse post-COVID, creating the opportunity for traditional banks to acquire these cash-flow negative Fintech startups at steep discounts to integrate their technological capabilities into their offerings.

The acquisition of Fintech startups is expected to drive much of the M&A activity within the financial services industry, especially if the sub-industry’s valuations continue their downward trajectory.

The main downside to FIG investment banking is that the work is highly specialized, with minimal usefulness outside the banking and insurance verticals.

4. Oil and Gas (O&G)

In oil and gas (O&G) investment banking, the clients are advised in their initiates to produce (i.e. drill), store, transport, refine, and distribute natural resources.

The activities are costly to perform, creating the need to raise significant capital per project or to engage in strategic mergers and acquisitions to realize synergies.

The major verticals within O&G investment banking include the following:

• Upstream → Exploration and Production
• Midstream → Storage and Transportation
• Downstream → Refinement and Marketing
• Oilfield Services → Energy Services (e.g. Equipment Production, Maintenance, and Repair Services)

Like the financial institutions group (FIG), the oil and gas industry group is concentrated on a niche, where technical knowledge offers minimal carry-over into other industries.

In addition, O&G investment banking firms are restricted to certain locations, such as Houston, TX, which is a factor to consider for exit opportunities post-banking.

5. Consumer Goods and Retail

In consumer retail investment banking, the clients operate in consumer staples, consumer discretionary, and retail sub-industries.

• Consumer Staples → Consumer staples are non-discretionary products and therefore considered recession-resistant, such as foods and beverages, household goods, and hygiene products.
• Consumer Discretionary Goods → Consumer discretionary goods are non-essential purchases and sensitive to the economic conditions as of the present date (and the disposable income of consumers).
• Retail Industry → The emergence of the eCommerce sector has disrupted the retail industry and caused traditional retailers to suffer steep losses – many of which had to file for Chapter 11 bankruptcy around the pandemic (e.g. J.Crew, Brooks Brothers). The secular shift toward online purchases by consumers, rather than in-person purchases, is unlikely to reverse, forcing retailers to invest substantial capital in developing their online channels and building their distribution channels.

6. Financial Sponsors Group (FSG)

The financial sponsors group (FSG) provides advisory services to institutional investors, such as private equity firms, hedge funds, pension funds, and sovereign wealth funds (SWF).

The commonality among the different types of firms mentioned is that their funds are mostly contributed by external capital providers, whom the firm invests on behalf of.

The most active client profile consists of private equity firms, who seek guidance on raising capital, deal structuring for potential investments, and facilitating transactions involving their portfolio companies (“portcos”):

• Dividend Recapitalization (“Dividend Recap”) → In a dividend recap, a private equity firm raises more debt to issue itself a dividend, as a partial exit method, to recoup a portion of the original equity contribution (and re-risk) and improve the fund’s internal rate of return (IRR).
• LBO Exit Strategies → Secondary Buyouts (SBOs), Strategic Sales, and Initial Public Offering (IPOs)

Because the financial sponsors group provides guidance to private equity firms on sourcing potential acquisition targets, as well as advisory services to help their portfolio companies obtain financing, the FSG group serves as a coverage group for PE firms.

But while the term “financial sponsor” is often used interchangeably with “private equity firm”, the clients served also can include other institutional investors:

• Hedge Funds
• Asset Managers
• Mutual Funds
• Pension Funds
• Soveign Wealth Funds (SWF)
• Family Offices

7. Real Estate, Gaming and Lodging

The real estate, gaming, and lodging coverage group provides advisory and capital-raising services to real estate investment firms, as well as gaming and lodging businesses.

• Real Estate Investment Firms → Real Estate Private Equity (REPE) Firms, Real Estate Investment Management, Real Estate Development Firms (Property Developers), Real Estate Investment Trusts (REITs), Real Estate Operating Companies (REOCs), and Real Estate Brokerage Firms
• Gaming Businesses → Casinos, Sports Betting Operators, Slot Machine Operator, Online Casino Platforms
• Lodging Businesses → Hotels, Resorts, Cruise Lines, Amusement Parks, Hospitality REITs

The real estate sector has faced challenges since early 2022, after the Federal Reserve’s fiscal policies and interest rate hikes to fend off inflation.

Given the external market risks, real estate firms have resorted to optimizing their operations using software tools, digital platforms, and tech-enabled services.

The trend has opened up the potential for new revenue streams and M&A opportunities in the real estate sector, especially around technology.

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8. Industrials

The industrials product group covers a wide range of sub-industries. But to generalize for simplicity, most sub-verticals can be placed into the following categories.

• Manufacturing
• Transportation (Incl. Distribution and Logistics)
• Professional Services (i.e. Aftermarket Services)

In recent times, manufacturing has become more complex due to technical advancements in the field, while professional service providers are undergoing a consolidation phase via vertical integration, as more manufacturers are starting to offer after-market services to generate more recurring revenue, instead of relying on one-time sales.

Most sub-sectors in the industrials sector are considered “recession-proof”. Hence, the sector’s M&A activity has historically been stable, especially because such sectors are fragmented, causing the consolidation strategy among financial buyers and strategics to pick up amid periods of an economic slowdown (and compression in purchase multiples).

The companies that operate in the industrials sector possess attributes that contribute to consistent M&A volume, namely the consistency in cash flow generation and asset-heavy business models.

• Recurring, Predictable Cash Flow → Companies in the industrials sector with long-term contractual revenue (i.e. multi-year contracts), B2B business models, and products that are deemed “mission-critical” to end markets cause debt to be much easier even in unfavorable lending environments.
• Asset-Heavy Business Model → Generally, debt financing is easier to obtain from lenders for asset-heavy companies with consistent cash flow generation.

In particular, a substantial percentage of the deals in the industrials sector are sponsor-led, as private equity firms actively seek those traits in potential LBO targets.

The exceptions are automotive and manufacturing tied to the housing market, which are both highly cyclical and dependent on current economic conditions.

Common Misconception – Industry-Specialized Knowledge

Considering the limitations of time, an investment banker in an industry coverage group should possess more industry knowledge than a product group banker in the long run – all else being equal.

However, one common misunderstanding is the belief that product groups have limited industry knowledge, which is a misguided notion.

For example, an M&A investment banking analyst can accumulate industry-specific knowledge on par with industry coverage groups for the following reasons:

• Firm-Specialization → Each firm tends to be more active in certain industries than others. Therefore, it is inevitable for a product group to acquire more knowledge in the industries, where the firm’s deal volume is concentrated.
• Upper Parameter on Industry-Knowledge → The industry-specific knowledge obtained from working in an coverage group does not follow a linear trajectory. Initially, one’s understanding of an industry might initially grow significantly, but the marginal benefit in knowledge starts to decline over time, i.e. the law of diminishing marginal utility.

To elaborate, the industry relationships and up-to-date knowledge of an industry coverage banker are likely to exceed a product group banker, since the coverage banker is more actively in a relationship-oriented role.

From a practical standpoint, the fundamental concepts required to understand an industry (e.g. unit economics, operating drivers, competitive landscape, industry and secular trends, risks, etc.) are still understood by product group bankers.

For instance, the equity capital markets (ECM) product group job description posted by Evercore states the ECM deal team is industry agnostic. But right after, a disclaimer is provided in parenthesis that explains the industry focus is “heavily tech and tech-enabled”.

^{Equity Capital Markets Analyst – Job Description (Source: Evercore)}

Product Group vs. Industry Group: What are the Pros and Cons?

If given the option to choose between joining a product group or industry coverage group, decide based on your personal priorities in terms of self-fulfillment and long-term career ambitions.

In conclusion, the product group vs. industry group decision boils down to your personal priorities.

Therefore, diligently conduct research and self-reflect before making your decision, with consideration toward your long-term career ambitions, the skills you want to develop, the culture of the firm (or office), and potential exit opportunities.