Tuesday, 15 January 2013

Investment Banking 101



This is the first in a series of posts that will briefly describe the various areas of the Finance industry

While this blog is not intended for theoretical education, I felt that a short description of each part of the Finance industry is warranted. Therefore, if you already are well aware of what IB is, feel free to skip this one.


Getting started:

Investment Banking is an umbrella term that is used to refer to three distinct divisions – Sales and Trading, Asset Management and Investment Banking division. While the biggest investment banks typically engage in all three of these activities, the smaller ones generally have only Asset Management and Investment Banking divisions.

On the basis of size, investment banks are classified as: 
  • Bulge Bracket (BB) – The biggest fish in the pond. Think JP Morgan, Goldman Sachs, Bank of America, Citigroup, Morgan Stanley, UBS, Barclays and Credit Suisse. 
  • Middle Market (MM) – The next in the group. BNP Paribas, Yes Bank, Kotak Investment Bank, HSBC, etc. 
  • Boutiques – The smallest fish in the pond (<$1 billion). Some of the notable boutiques in India are Sequioa Capital, MAPE Advisors and Equirus Capital, among others.


So what does the IBD actually do?

When companies wish to raise more money or acquire other companies and the sort, they generally find themselves out of depth regarding what to do. This is where investment banks step in. At the very basic level, investment banks provide financial assistance and advisory services.

Specifically speaking, following are the types of work that an investment bank generally undertakes:

  • Mergers and Acquisitions (M&A) – advisory on sale, merger and purchase of companies by providing valuation, due diligence, etc. 
  • Fund raising – Divided into:
o   Equity Capital Markets (ECM) – equity and equity-based products like IPO’s, secondary offerings, etc.
o   Debt Capital Markets (DCM) – raising and structuring of funding via debt
o   Leveraged Finance – raising of high yield debt, usually to finance acquisitions

  • Restructuring – providing strategic advisory to companies to improve their efficiency and profitability

Uh... Huh?

Investment Banks are brokers. Keep this in mind every time you talk about IB – the banks themselves don’t buy and sell companies. They help others buy and sell companies for a commission. Similarly for fund raising, the banks don’t provide the funds themselves; they just open doors which their clients couldn’t normally access – all for a fee.

Here a question might arise – why do companies go through the investment banks route? Why can’t they raise funds on their own?

Take this small example as an explanation – A guy, whom you’ve never met before, comes to you asking for money. Will you agree to lend to him? Obviously not.
The next day, you get a call from your uncle, whom you’ve known for many years and you trust, and he tells you that the guy is bonafide and he will surely repay you the money. Now you will probably agree to part with your money.

In real life, the company looking for funds is the guy; and the investment bank is the uncle. The bank lends their reputation to the company which assures potential investors (in the example, you) that the company is the real deal and is worthy of the money.


The same analogy applies to M&A transactions as well. When a client is looking to buy a company, the bank provides assurance as to whether everything about the company is in order and there are no irregularities.


Ok, but what do bankers do?

As for bankers themselves, some have compared them to Ari Gold. While not exactly accurate, a large part of banking does involve bringing two parties together. One party is the talent, i.e. the company with good prospects but no money. The other party is the producer / financier, i.e. lenders who have money to invest. Of course, I’m over-simplifying things a lot here.

But if you’re reading this, chances are you won’t be jet-setting around the world for dinners with hedge fund managers just yet. For the first roughly 4-5 years, most of the work involves staring at MS Excel for extended periods of time and changing the font colour in presentations. No, seriously.


So there you have it. Feel free to comment and ask questions. I can’t promise that I will know answers to everything, but I do promise that if I don’t, I’ll find out and let you know.
Stay tuned for more in the 101 series, breaking in, an inside view at life in IB, and more!

7 comments :

  1. i was thinking of ari gold when u mentioned the uncle example n baamm!! there he is :) interesting !!

    ReplyDelete
  2. Hi Bateman,
    I am a high schooler from Singapore hoping to do my undergrad from Singapore (NUS) itself.
    What are my chances of breaking into PE in India? Do I have to be a IIM/ivy league grad?

    ReplyDelete
    Replies
    1. It is not impossible, but very improbable to break into PE with undergrad education alone. The best course would be to get relevant experience in IB or other related finance roles for a couple of years after undergrad; then go for MBA from a tier-I b-school.

      Delete
  3. Investment banks, in contrast to commercial banks, assist public and private organizations in increasing funds in the Capital Markets (both value and debt), as well as in providing ideal advisory services for mergers, acquisitions and other types of financial dealings.

    Mergers and Acquisitions

    ReplyDelete
  4. This blog is very informative. Investment banking is very important for every business. Thanks for sharing us.

    ReplyDelete

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