Most people attribute the role of an investment bank to general corporate and financial advice. In fact they do a lot money. They raise capital, invest capital and advise corporations on the strategic management of capital. The first step to understanding is to learn about the banks themselves.
What is an investment bank?
Investment banks are financial services companies. They act as intermediaries in a range of financial transactions, mainly including issuing a company’s securities to individual or institutional investors, arranging financing for expanding companies, facilitating mergers and
acquisitions, and helping private startups go public with the launch of their initial public offering (IPO).
Some of the most well-known global investment banks include Goldman Sachs, JP Morgan Chase, Morgan Stanley, Bank of America Merrill Lynch, Citigroup, Credit Suisse, and Deutsche Bank. Although these are all bulge bracket banks, meaning they are the largest and most profitable multinational investment banks, investment banks can come in many different sizes. There are also middle-market banks and boutique banks. Boutique banks are even further divided into two categories: regional and elite boutique banks. To discuss what investment bankers do, we will be looking at bulge bracket banks.
Bulge bracket banks deal with clients who consist of the largest institutions, corporations, and governments worldwide. They also have trillions of dollars in client assets under management and tens of thousands of employees to help in the process of managing them. Considering the sheer scale of these banks and the assets they manage, it makes one wonder how people get jobs at them? And, what does it take to work as an investment banker at a bulge bracket bank?
So, how do you become an investment banker?
To become an investment banker, you need to understand the different positions within the banks themselves. The corporate hierarchy, going from the bottom tier to the top tier, is as follows:
investment banking analyst, investment banking associate, Vice President, Senior Vice President, and Managing Director. While these positions may vary slightly in title throughout different banks, this is the basic structure for any bulge bracket bank. The first position for any starting investment banker is as an analyst. Investment banking
analysts are at the bottom of the hierarchy and can work upwards of 100 hours per week. One can become an analyst with a bachelor’s degree, meaning you can get a job in investment banking directly after graduating from your university as an undergraduate.
However, this does not mean that it is easy to get an investment banking job just out of college. Many undergraduates work hard to secure internships at investment banks during their time in college
to improve their chances of receiving an offer to work at an investment bank. Even then, those internships are hard to come by.
One must have a high Grade Point Average (GPA), relevant
extracurricular activities, and, if possible, other work experience in a field related to finance. They look for students who have studied various topics surrounding finance, economics, and mathematics, but that is not exclusive. The process is gruelling and competitive, but those who get through it can expect a fulfilling, high-paying job.
What is an investment banker’s role?
Investment bankers generally work directly with corporations and governments. In doing so, they perform many of the essential functions of investment banks. One of the more common aspects of the job is to arrange financing for their clients. The primary
way of doing this is to issue bonds or securities. The planning that goes into issuing bonds or securities involves creating them, pricing them to create the desired level of demand from potential buyers, managing the documentation required to issue them, then selling them to public or private entities. The investment banker is directly responsible for carrying out each of these tasks. When dealing with a government client, the investment banker will issue bonds to finance a particular government project. These projects could be building new infrastructure within a city, developing pre-existing infrastructure, or other humanitarian projects that improve citizens’ livelihood in the desired community.
Equity Financing
When dealing with companies, the investment banker will arrange equity financing. The main way of doing so, especially for a new, growing company, is to launch an IPO. In this case, the investment banker would organize a prospectus for the company, highlighting its risk, managing the securities issuance, and pricing the shares.
Another aspect of the investment banker job is to underwrite deals.
This is often carried out by more experienced investment bankers and involves more than just one person. Underwriting deals involves buying securities at a specific price, marking the price up, then selling it for a profit. When doing this, there can be high risk. Thus, the bankers underwriting the deal will work together to diminish the risk for each individual involved. Sometimes, the bankers will simply market the securities and sell them for commission.
M&A
Finally, investment bankers are involved in mergers and acquisitions. In this case, the bankers price the deal itself, rather than just a bond or security. They must value the company that is being bought by another and price it based on that value. Therefore, there will be investment bankers for each company who evaluate the asking price. Mergers and acquisitions are not simple processes.
They can often lead to long, hostile battles between the two companies involved. Even if the deal goes through, there will be a period where one company is integrated into another. Some of the
reasons for this are: to grow a company’s market share, to reduce costs on developing business activities, and to improve distribution in the supply chain. While investment bankers do much more than this, these are the most common parts of the job. Their role is important for creating financing for institutions, companies, and governments. They put more money in circulation and ultimately work to bolster the economy on an institutional basis.
This article was written by Marshall Dolan Henshaw, student at Cornell and aspiring financial services professional.
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