Investment banking is a highly coveted field, attracting individuals interested in a Wall Street career due to its high profile and lucrative compensation. However, the job title of an investment banker often fails to provide a clear understanding of their actual responsibilities. So, what do investment bankers really do?
Investment bankers serve as corporate financial advisors, assisting companies in managing the process of raising financing for their various activities. While their involvement in initial public offerings (IPOs) is widely recognized, investment bankers undertake a range of other tasks as well.
The primary role of investment bankers is to act as financial advisors to corporations and, in some cases, governments. Their main objective is to help clients raise capital by issuing stocks, floating bonds, negotiating the acquisition of rival companies, or arranging the sale of the entire company.
The success of investment bankers is closely tied to the performance of capital markets. During prosperous market conditions, investment bankers tend to thrive as more money and increased activity generate profitable projects for both bankers and their clients.
Let's explore the key areas where investment bankers play a vital role:
Arranging Financing: Large companies often require significant capital for projects like constructing factories. To finance such endeavors, investment bankers are brought in to arrange the necessary funds through bond issuances. By skillfully planning the bond issuance, pricing it appropriately, completing the required U.S. Securities and Exchange Commission (SEC) documentation, and effectively marketing the bonds to buyers, investment bankers facilitate the financing process.
Equity Financing: Companies looking to finance their growth and expansion can do so by selling bonds or issuing stocks. Investment bankers are instrumental in arranging the sale of stocks, known as equity financing. When a young company decides to raise funds through an IPO, investment bankers are hired to prepare a prospectus for potential investors, manage the marketing process, explain the offering to the media, and seek approval from regulatory authorities. Accurately pricing the offering is crucial, as it impacts investor interest and the generated funds.
Underwriting Deals: Investment bankers often undertake the underwriting of deals, assuming a significant portion of the associated risk. In this process, they purchase shares directly from issuers and sell them to the public or institutional buyers at a markup, generating profit for their employers. The underwriting spread refers to the difference between the purchase price and the markup price. Lead investment bankers work with a syndicate of bankers to spread the risk among several players. Alternatively, investment bankers may act as intermediaries, marketing the deal without assuming the underwriting risk.
Arranging Private Placements: Not all companies prefer going public to raise capital. Investment bankers also assist clients in raising funds through private placements, where bonds or stocks are sold to select institutional investors. These placements don't require registration with the SEC, as institutional investors are considered more sophisticated. By leveraging their contacts and credibility, investment bankers facilitate private placements for clients efficiently.
Negotiating Mergers and Acquisitions: The process of acquiring or merging with another company involves extensive planning and negotiation. Investment bankers often play an advisory role in these transactions, assisting clients in determining a fair deal price. Mergers and acquisitions can be complex and involve evaluations of multiple offers and counter-offers. Investment bankers provide crucial expertise in navigating these processes.
While investment bankers play a crucial role in capital markets, their activities have also raised concerns about potential conflicts of interest. Chinese walls, intended to separate investment banking, securities research, and trading divisions, aim to address these conflicts. However, there have been instances of investment bankers pressuring analysts to give favorable ratings to securities to please clients and generate more business for the bank. Furthermore, the sharing of confidential client information with traders can create unfair advantages in trading.
Despite the scrutiny and regulation that followed the 2007-08 financial crisis, careers in investment banking remain highly desirable. However, the industry still struggles with diversity, with white men dominating top positions. Many banks have recognized this issue and have implemented diversity programs to actively recruit and promote women and minorities in the field.
To enter the field of investment banking, candidates typically need a college degree in finance or economics, preferably from a prestigious institution. Advanced degrees like an MBA or certification such as Chartered Financial Analyst (CFA) can enhance prospects. Networking, securing internships at reputable firms, and gaining on-the-job experience are crucial for aspiring investment bankers.
Investment bankers are proficient analysts themselves, but they have subordinate financial analysts that crunch the numbers for them.
They are primarily in the business of procuring clients for deals such as IPOs which their investment bank will underwrite. Investment bankers are employees of investment banks whose role is to acquire clients for the bank and to be the liaison between clients and the back office of the investment bank.
The investment bank’s primary business is underwriting and distributing securities issued by another company, and advising on such large scale capital shifts as mergers and acquisitions. They are consultants, analysts, and salespeople who deal with large sums of money in motion between corporations and the public.
They also trade for the bank’s own accounts, without having to please any clients except for their management. This gives the bank the ability to harvest more money that can be used to facilitate larger and larger transactions and requirements.
The Glass-Steagall Act of 1933 separated commercial banks from investment banks, but it was repealed in 1999. Remnants of this Act remain, but some believe that the more important provisions should be reinstated, especially in light of the speculation that caused the crash of 2008.
Investment bankers will comfortably engage in much riskier investing than commercial banks should. The Volcker Rule, part of the Dodd Frank Wall Street Reform Act, put some of the separations back into effect but not all of them. Investment banking is sometimes called ibanking.