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What is Investment Banking and Who are Investment Bankers?
18 October 2022
We often hear about companies making massive mergers and acquisitions and making large investments. This is a specialised process facilitated by finance professionals known as investment bankers. Investment banking refers to the process where a financial institution helps companies with raising capital (underwriting), mergers and acquisitions and financial advisory services.
Not just enterprises, investment banking is used by multinational corporations, Governments and even individuals with a high net worth to raise capital. Simply put, investment banks bring together institutions and investors; who need money to run and grow their businesses and those who have money to invest.
This detailed blog helps you get a detailed understanding of investment banking, how it works, a list of investment banks, the role of an investment banker and more. Read on!
What is Investment Banking?
Investment banking may either be a special division of banks 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, facilitating mergers and acquisitions, reorganisations, broker trades for private investors and institutions and much more. Investment banks and corporations, governments, and other institutions in managing complicated financial transactions and planning finances- all amid changing economic and investment conditions.
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, it may involve the issuance of securities to raise money for client groups and create the documentation necessary for a company to go public with its IPO (Initial Public Offering).
Investment bankers keep themselves abreast with current investment trends, how capital markets work, 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 with different projects before they can move forward with the project.
Corporations and Governments turn to investment bankers for advice and guidance when seeking capital, and are an indispensable part of a smoothly functioning economy.
Benefits of Investment Banking
Listed below are the primary 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 you save time on the financial management of new projects
They help you identify the potential of different projects before you begin the development phase
Let us understand the concept with an investment banking example:
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 one of the top investment banks. They strike a deal where the investment bank will conduct a thorough valuation of both the companies. In addition to this, the investment bank also works 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 helps its client 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.
Let’s take another example of how investment banks help companies launch IPOs
Investment banks also help companies in the underwriting process (raising capital via selling stocks/bonds) of launching an IPO. Assume that company ABC is going to launch its IPO and 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 Rs.100. This price is derived by the investment bank after extensive research, calculation, and valuation. Company ABC aims to receive Rs.1 crore from the proceeds of the sale.
Assume that the investment bank is able to sell only 70,000 shares at Rs.100 each. The investment bank decides to sell the unsold shares at Rs.95 each. The remaining 30,000 shares are sold at Rs.95 each.
So the total capital company ABC raised is:
Rs (70,000 x 100) + Rs (30,000 x 95)
= 70,00,000 + 28,50,000
Thus, the company was slightly overvalued by the investment bank which resulted in a discount listing of the company.
List of a Few Top Investment Banks
Listed below are the top investment banks in India:
Ernst & Young Private Ltd.
Deloitte Touche Tohmatsu India, LLP
PriceWaterHouseCoopers, Investment Banking Arm
O3 Capital Global Advisory Private Ltd.
Axis Capital Ltd.
KPMG India Private Ltd.
Standard Chartered Bank, Investment Banking Division
JM Financial Institutional Securities Ltd.
Avendus Capital Private Ltd.
KPMG Corporate Finance LLC
Difference Between Investment Bank and Commercial Bank
The following table illustrates the differences between investment and commercial banks:
Caters to large corporations, Governments and high net worth individuals
Serve all customers across market segments
Transactions related to stocks and bonds, asset management, underwriting, M&A
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:
Initial public offerings (IPO)
Issuing and selling securities
Mergers, acquisitions, and divestitures
Private placement of capital
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:
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
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.
Q1. What do investment banks do?
Ans: Full-service investment banks offer services that include underwriting, mergers and acquisitions, sales and trading, equity research and asset management.
Q2. How do I become an investment banker?
Ans: 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.
Q3. What are the types of investment banks?
Ans: The different types of investment banks include Bulge Bracket Investment Banks, Regional Boutique Investment Banks, Middle Market Investment Banks and Elite Boutique Investment Banks.
Q5. What makes a good investment banker?
Ans: A good investment banker possesses tangible skills, including knowledge of maths, finance, and economics, and intangible skills, such as creativity and innovation.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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