Written by Josh Coley and Will Hodgson
What is investment banking
Investment Banking is a classification of financial services that typically facilitates deals with large corporations. They perform very specific functions with the most common and well-known being Mergers and Acquisitions (M&A), Initial Public Offerings (IPOs), and assisting companies with their capital structure and financing. Along with these specific functions, Investment Banks also cover a large range of other financial services: Asset Management, Wealth Management, Trading and Sales and Securities Hedging.
Investment Banks have a hand in almost every financial transaction at any scale. The biggest banks often are considerably larger than smaller-sized firms and will typically offer most if not all the previous services, whereas smaller banks (mid-market/ boutique investment banks) may tend to specialise in one or two. Investment Banks that operate at a large scale will typically be multinational firms, referred to as “Bulge bracket” firms. Some of the largest Investment Banking firms include Goldman Sachs, JPMorgan Chase, Morgan Stanley, UBS, Deutsche Bank, Credit Suisse, and Citigroup; and will each facilitate over $500 million a year in transactions.
Management Consulting is another financial discipline that can often have very similar offerings to investment banking. A discrete distinction to make is that management consulting will be tasked with assisting a company holistically with other “limbs” of business outside of just financial advice, whereas investment banks will generally just focus solely on financial advice when it is consulting with a business.
What are Mergers and Acquisitions
Mergers and acquisitions, more commonly referred to as M&A, encompass two distinct transactions.
The merger of two businesses is a system where two competitive businesses will combine into one in hopes of garnering greater market power and transaction volume than what they would have individually. A very simple explanation from one of our panellists at the “Introduction to Investment Banking evening,” is that: x + y =/= z, where z > x+y.
Acquisitions are when companies are bought/sold. Investment Banks will typically classify themselves as buy-side/sell-side, where a buy-side firm acts on behalf of a company looking to expand operations through the purchase of another business; with a sell-side firm acting as the inverse.
What is an Initial Public Offering?
An Initial Public Offering (IPO) is the process of listing a private company on the stock exchange. Companies will typically do this to raise large amounts of funds for expansion or to adjust their Weighted Average Cost of Capital (WACC) by selling equity in their business. IPOs are very complicated processes that involve creating a prospectus (legal document) for potential investors and ensuring the company is compliant with laws specific to the stock market the company is being listed on.
Banks may also “underwrite” the shares being listed in an IPO. Underwriting is a process where the Investment Bank will purchase a specific amount of shares from the company and sell them on the open market, acting as a proxy. By doing this, the bank ensures that there will not be an under subscription of shares, which would stop the process of the company being listed publicly.
The “Dark Side” of Investment Banking
Despite their advisory role, public perception of the major Investment Banks (Goldman Sachs, Morgan Stanley etc) is largely negative for a number of reasons, including but not limited to the lack of work-life balance, expectations placed upon employees and their major role in the Global Financial Crisis of 2007-8.
Although the Investment Banks have almost always had connotations of greed attributed towards them, the Global Financial Crisis of 2008 all but confirmed the image of the “greedy banker” we see in popular culture. Major banks, namely Goldman Sachs, profited massively during the 20 years preceding the GFC by selling mortgage-backed securities, which were considered low-risk due to low default and interest rates preceding 9/11 in 2001. However, the banks kept selling these products even after they ran out of low-risk loans to place in them, creating a high-risk, low-return product that would fail if default rates rose. Inevitably, when they did, the banks (Goldman most notably) bet against the risky products they’d just sold and profited from their clients’ misfortunes. While they largely denied any wrongdoing and didn’t face any criminal charges, public perception of the big banks took a landslide as their actions were considered largely immoral and unethical.
Another main reason for the Banks’ negative reputation is the expectations placed upon entry-level employees and interns in terms of work hours and workload. While the high starting salary makes Investment Banking a very attractive and competitive industry amongst University students, the 80-110 hour work week of entry-level employees has been largely documented and condemned amongst the media. This has been accentuated by numerous anecdotes by former and current bankers of work consuming their lives and leading to a range of physical and mental health problems, namely when deals and investments do not eventuate as planned.
We hope this has given a bit of an insight into Investment Banking, and if it’s something you are interested in, acts as a point for further research. While we may have come off as slightly negative towards Investment Banking in this article, we are not discouraging people from entering the field if that is something they want to do. Rather, we are highlighting the importance of doing thorough research about the job and getting a good understanding of what you are getting yourself into, before deciding whether it is the right path. In fact, that is a lesson that should be applied to any career.