Investment Banking – Working, Types, Benefits and Example
What is Investment Banking?
Investment banking may either be a special division of a bank or a separate financial institution that helps governments, companies and other institutions with the creation of capital funds. It includes the underwriting of equity securities and new debts. Furthermore, it helps in the sales of securities, facilitates mergers and acquisitions, reorganisations, broker trades for private investors and institutions and much more.
How Do Investment Banks Work?
Investment banks play a major role in offering guidance to companies and governments concerning the issue and placement of securities and securing capital. Large investment banking companies are either affiliated with or are subsidiaries of a larger investment banking system. They also act as financial advisors to their clients and help them manage their investments.
Investment banks facilitate huge and complicated transactions between investors and investing institutions. If an investment banker’s client is considering an acquisition, merger, or sale, they may help evaluate a company’s worth and advice on how to best structure a deal. In addition, investment banking may involve the issuance of securities to raise money for client groups and create the necessary documentation for a company to go public with its IPO (Initial Public Offering).
Investment bankers keep themselves abreast with current investment trends, capital market working, economic policies, and other events that help them better manage the finances of their clients. Investment banks help their clients save time and money by identifying risks associated before finalising any project or business move.
Corporations and governments turn to investment bankers for advice and guidance when seeking capital, and they are an indispensable part of a smoothly-functioning economy.
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Types of Investment Banking
1. Bulge Bracket Investment Banks
Bulge bracket investment banks are the largest and most prestigious banks in the financial industry. They are typically global in scope and offer a wide range of financial services to their clients, including underwriting, merger and acquisition advisory, sales and trading, and research. These multinational banks are characterised by their size, expertise, and reputation. They are capable of handling large and complex financial transactions for corporations, governments, and institutional clients. They usually don’t get into deals of less than $1 billion. Examples of bulge bracket investment banks include JPMorgan Chase, Goldman Sachs, and Morgan Stanley. These banks are highly competitive and have a significant impact on the global financial markets.
2. Mid-market Investment Banks
Mid-market investment banks are financial institutions that specialize in providing services to small and medium-sized businesses (SMEs) with deal sizes between $500 million and $1 billion. These banks typically offer services such as M&A advisory, capital raising, and debt restructuring. Unlike bulge bracket investment banks, mid-market banks have a more regional focus and work closely with their clients to provide tailored solutions that meet their specific needs. These banks play a crucial role in supporting the growth and development of SMEs.
3. Elite Boutique Investment Banks
Elite boutique investment banks are small, highly specialized financial institutions that offer a range of services to clients in specific industries or sectors. These banks typically operate with fewer resources and staff than bulge bracket banks but make up for it with highly focused expertise and tailored advice. They often compete with larger banks for deals and focus on building long-term relationships with clients. These banks offer unique insights and niche knowledge to their clients and play an important role in the financial industry.
3. Regional Boutique Investment Banks
Regional boutique investment banks are small financial institutions that offer specialized financial services to clients in a specific geographic area for transactions usually up to $50 million. These banks often have a strong presence in their local market and provide personalized services to their clients. They typically offer services such as M&A advisory, capital raising, and restructuring to middle-market companies. These banks are important players in their local economies and provide critical support to small and mid-sized businesses.
Benefits of Investment Banking
- They are highly experienced with the skill and knowledge to manage finances. They help corporations and institutions crack the best deals and save time and money
- Investment bankers offer financial advice regarding various complicated financial aspects
- Investment bankers help their clients save time on the financial management of new projects
- They help their clients to identify the potential of different projects before they begin the development phase
- Investment banks also provide financial advisory services and research, and facilitate big and small business deals, mergers and acquisitions, among others.
Example of Investment Banking
Scenario 1: Acquisition of a company
Assume that company A wants to acquire another company B but is unaware about their own valuation and the other company’s valuation. To get the most approximate estimate, company A gets in touch with an investment bank. They strike a deal where the investment bank will conduct a thorough valuation of both the companies. Moreover, the investment bank will also work on a detailed report for their client (company A) informing them about the cost of acquisition, the process, short-term and long-term benefits, ancillary costs, and other relevant information.
Further, the investment bank will help company A to broker the best deal to acquire company B and get a certain percentage of the sales as commission, which will be the revenue for the investment bank.
Scenario 2: IPO launch
Assume that company ABC is going to launch its IPO and they hire an investment bank for underwriting. The company chooses a ‘best effort’ type of underwriting, where the underwriter will sell as many shares as possible at a certain agreed price, and will return the unsold shares to the company without bearing any financial responsibility for the unsold shares.
Company ABC wants to sell 1 lakh shares and the investment bank values each share to be at ₹100. This price is derived by the investment bank after extensive research, calculation, and valuation. Company ABC aims to receive ₹1 crore from the proceeds of the sale.
Assume that the investment bank is able to sell only 70,000 shares at ₹100 each. The investment bank decides to sell the unsold 30,000 shares at ₹95 each.
So the total capital company ABC raised is:
₹(70,000 x 100) + ₹(30,000 x 95)
= 70,00,000 + 28,50,000
= ₹98,50,000
Thus, the company was slightly overvalued by the investment bank which resulted in a discount listing of the company.
Underwriting Services in Investment Banking
Investment banks also provide underwriting services wherein they raise capital through sale of stocks, bonds and other security on behalf of their clients, like governments or corporations. Their aim is to market their client to potential investors helping them make more money which the latter use to grow their business.
The underwriting services of an investment bank guarantees the sale of the securities and agrees to purchase any unsold shares, thus helping the issuer raise capital. Investment banks use their expertise to assess the risks and set the price for the securities, ensuring that the securities are attractive to investors. This service is a critical part of the capital markets and is often used in conjunction with other financial services, such as M&A advisory or debt restructuring.
List of a Few Top Investment Banks
- JP Morgan
- Bank of America Securities India Ltd
- Morgan Stanley
- Goldman Sachs
- Citigroup Global Markets India Pvt Ltd
- ICICI Securities Ltd
- Axis Capital
- HDFC Bank
- SBI Capital Markets Ltd
- Kotak Mahindra Bank
- Ernst & Young Private Ltd.
- Deloitte Touche Tohmatsu India, LLP
- PriceWaterHouseCoopers, Investment Banking Arm
- O3 Capital Global Advisory Private Ltd.
- KPMG India Private Ltd.
- Standard Chartered Bank, Investment Banking Division
- JM Financial Institutional Securities Ltd.
Difference Between Investment Bank and Commercial Bank
| Parameters | Investment banks | Commercial banks |
| Clients | Caters to large corporations, governments and high net worth individuals | Serve all customers across market segments |
| Services | Transactions related to stocks and bonds, asset management, underwriting, M&A | Mortgages, lending, internet banking, overdrafts, lockers, mobile banking |
| Number of clients | Few hundreds | Crores of people |
| Mode of income | Commissions, retainer fees, trading profit | Annual fees & charges, and interest |
Investment Bankers and Their Role
Investment bankers are employed by investment banks to help institutions, corporations and other entities plan and manage large-scale financial transactions. Investment bankers help their clients save time and money, and identify risks with the project before their clients begin working on it.
A typical investment banker’s day is fast-paced, demanding and may be considered stressful. Investment bankers might also be required to perform the following financial services for corporations:
- Capital raising
- Book building
- Initial public offerings (IPO)
- Investment meetings
- Prospectus drafting
- Issuing and selling securities
- Mergers, acquisitions, and divestitures
- Private placement of capital
- Corporate restructuring
- Bond issuance and pricing on bond markets
- Equity and debt advisory services
- Mutual funds, hedge funds, and pension fund advisory services
Eligibility to Become an Investment Banker
Listed below are the prerequisites for becoming an investment banker in India:
- Bachelor’s Degree: Anyone who has graduated in finance, accounting, or commerce can pursue a career.
- MBA (Finance): It is one of the most common methods of getting into the investment banking industry. Furthermore, it also opens doors for entering into the careers of Research Analyst, Financial Consulting, etc.
- Chartered Financial Analyst (CFA): It helps find employment opportunities in investment firms, financial institutions, banks, management consultancies, brokerage firms, and more.
- Chartered Accountant (CA): A CA has extensive training in finance, money market, equities, securities, mergers & acquisitions, and IPO listing, among other subjects. It enables them to identify potential opportunities for working in both banking and non-banking institutions as investment bankers.
Apart from the above qualifications, the candidates are also expected to have the following skills to excel in the field of investment banking:
- Financial modelling
- Business valuation
- Building pitchbooks
- Preparing transaction documents
- Sales and business development
- Negotiation and relationship management
Key Points to Remember About Investment Banking
Here are some points you should know about investment banking:
- The investment banking industry assists companies, governments and institutions in raising funds and executing financial transactions
- Investment banks handle mergers and acquisitions, issuance of securities, and other transactions unlike retail banks, which deal with individual consumers
- In addition to conducting research, financial modelling, managing projects, and providing strategic advice, investment bankers can earn some of the highest salaries
Final Word
The purpose of investment banking is to raise or create capital for companies, governments and other entities. Trend analysis, risk assessment, strategic advice and project management are some of the duties of investment bankers. Investment banking helps raise or create capital. Analysts and risk assessors in an investment bank provide strategic advice and manage projects for investment banks. An investment banker’s job is demanding and robust and requires certain eligibility criteria to be fulfilled with exceptional analytical, mathematical and time management skills.
FAQs
Full-service investment banks offer services that include underwriting, mergers and acquisitions, sales and trading, equity research and asset management.
The basic qualification to become an investment banker is to complete a Bachelor’s Degree in Finance, Business, Accounting, or Economics. This will lead to an entry-level position at investment banking companies. Later, you can improve your prospects with a Master’s Degree, pursuing professional certifications or by acquiring new skills.
The different types of investment banks include Bulge Bracket Investment Banks, Regional Boutique Investment Banks, Middle Market Investment Banks and Elite Boutique Investment Banks.
A good investment banker possesses tangible skills, including knowledge of maths, finance, and economics, and intangible skills, such as creativity and innovation.
Companies and governments need investment banking services to raise capital, manage risks, and execute complex financial transactions such as mergers and acquisitions or initial public offerings (IPOs).
Banking typically refers to commercial banking services such as deposits, loans, and credit cards, while investment banking involves more specialised and big-ticket financial services such as underwriting, M&A advisory, and capital raising for corporations and governments.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
