Investment Banks are financial intermediaries who help bridge the gap between the providers of capital and the users of capital. Providers of capital include High Net Worth Individuals and Institutions that manage money for others (for example pension funds) whereas users of capital include businesses and industries who would like to leverage capital to grow and expand their businesses.
While working as intermediaries they also provide a range of other services which include advisory services, facilitate mergers and acquisitions and help with corporate reorganizations. The scope of bank offerings depends on the size of the bank.
What do Investment Banks do?
Financial Markets provide many avenues to raise capital. Companies that seek access to these markets approach Investment Banks with expertise in these fields to provide counseling and underwriting services.
Two broad categories of raising capital for companies are debt and equity financing.
a) Equity Financing
With Equity Financing, Investment Banks raise capital for companies through a process called an Initial Public Offering (IPO). An IPO is a process in which a privately held company makes it shares available for sale to the public. You can read more about it by clicking here.
b) Debt Financing
With debt financing, corporations take on debt from investors and in return, issue corporate bonds. This debt is paid back to Investors with interest over a stipulated period of time.
Bonds and Stocks combined are commonly known as 'Securities'.
The process of raising capital through debt or equity financing is called Underwriting. The Underwriting process involves multiple steps such as preparing a prospectus, approaching the market, establishing a price & eventually selling securities to the public.
After the underwriting process, Investment banks also facilitate clients in obtaining approval from all regulatory bodies such as the SEC and the sale of these securities through private placements and public markets.
The role of Investment Banks is not limited to raising capital alone. They also play a leading role in facilitating Mergers and Acquisitions as well as Corporate restructurings
Mergers and Acquisitions
The nature of Mergers and Acquisitions makes them very complex deals to implement. While in a merger, two companies combine to form one organization, in an acquisition, one company takes over another company. In either case, Investment banks have the expertise to play advisory roles for clients depending on which part of the transaction they represent.
In M & A's, representing the seller of a company is often referred to as 'sell-side' or advising prospective acquirers is called 'buy-side'.
Investment bankers rely on financial models to create multiple scenarios for synergy and arrive at a fair price for the parties involved. These models used assumptions to forecast a range of outcomes should the deal go through. If both parties agree to move forward, Investment Bankers on either side have large teams in place for implementation to ensure all goes smoothly.
The M & A process is a very sensitive area of Investment Banking and all parties involved have to ensure absolute confidentiality during the entire process since any premature market news about a potential Merger or Acquisition also tends to impact Investor sentiment and may have a subsequent effect on the prices of the securities related to the company.
How do clients choose Investment banks?
While clients pick the bank most qualified for the transaction, the process leading to that decision can be quite fierce and competitive.
Companies will go through an interview process with several investment banks and invite 'bids'. In the bids, Investment Banks will highlight their strengths and why they would be the best fit to meet the client's requirements. While larger banks have an advantage over their smaller counterparts in deals that involve raising capital due to bigger networks, smaller banks tend to specialize in certain sectors.
While the bid is an important component, clients will also evaluate a range of other factors such as capable team, strong track record, etc. and choose the bank who is the best fit for their requirements.
The situations in which two or more investment banks compete to attract a client's business referred to as a 'bake-off'.
Popular Investment Banks
While Investment Banks vary in size, scope and expertise, some of the more popular Investment Banks are
- Bank of America
- Barclays Capital
- Credit Suisse
- Deutsche Bank
- Goldman Sachs
- J.P. Morgan
- Morgan Stanley
- Wells Fargo
Career Paths in Investment Banks
While the timeline varies, the career path in Investment Banks is fairly linear. If an Investment Banker does well he/she typically moves through the below stages.
- Vice President
- Director or Senior Vice President
- Managing Director
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