HISTORY OF INVESTMENT BANKING
Investment banks perform two basic, critical functions. First, investment banks act as intermediaries between those entities that demand capital (e.g. corporations) and those that supply it (e.g. investors). This is mainly facilitated through debt and equity offerings by companies. Second, investment banks advise corporations on mergers, acquisitions, restructurings, and other major corporate actions. While the majority of investment banks perform these two functions, it is important to know which products and services each bank specializes in.
INVESTMENT BANKING VS. COMMERCIAL BANKING
One distinction that is important to understand is the fundamental difference between an “investment bank” and a “commercial bank.” Investment banks perform advisory services and securities underwriting, while commercial banks manage deposit accounts, such as checking and savings, for individuals and businesses (but primarily for businesses—similar transaction accounts for individuals are often handled by a retail bank). This distinction is important to understand, because the U.S. enacted the Glass-Steagall Act in 1933 in response to the Stock Market Crash of 1929 and the Great Depression. The Glass-Steagall Act essentially prohibited banks from performing both “investment banking” and “commercial banking” activities within the same entity. This was done in order to prevent banks from making implicit bets on the direction of the market, at the potential expense of depositors. Banks were forced to choose between investment banking and commercial banking, and that continued until the Glass-Steagall Act was repealed in 1999.
GLOBAL ECONOMIC CRISIS
After the Glass-Steagall Act repeal, investment banks started to participate in both investment and commercial banking activities, and thereby take on a considerable amount of risk (on behalf of both the bank and its clients). This high level of risk-taking, combined with high leverage, led to several major investment banks failing during the global economic meltdown in 2008. Huge losses were recorded and the remaining major investment banks were forced to either change their business models or consolidate with other banks in an industry-wide effort to reduce leverage ratios and stabilize the banking system.
CORE ACTIVITIES AT INVESTMENT BANKS
- Corporate Finance (this function is most commonly referred to as “Investment Banking”): Assist corporations in raising capital through debt and equity capital markets, and provide advisory services on mergers and acquisitions (M&A) and other corporate transactions.
- Sales and Trading: Buy and sell securities and other financial instruments as an intermediary on behalf of its clients.
- Research: Provide detailed company and industry research reports and make recommendations on whether to buy, sell, or hold public securities.
- Asset Management: Provide equity, fixed income, money market, and alternative investment products and services to individual and institutional clients.
CORPORATE FINANCE/INVESTMENT BANKING GROUP STRUCTURE
Corporate Finance is broken down into several types of groups, but the primary distinction is between Product groups and Industry/Coverage groups. Each group handles its own client accounts, and is responsible for a designated product or industry sector.
- Product groups: Differentiated by what types of services the groups provide. Typical groups include Mergers and Acquisitions (M&A), Leveraged Finance (Lev Fin), Equity Capital Markets (ECM), Debt Capital Markets (DCM) and Restructuring. These groups focus only on their specific products and can work across all industry groups.
- Industry/Coverage groups: Differentiated by what types of clients the groups serve. Typical groups include Healthcare, Technology, Media, Telecom (TMT), Financial Institutions Group (FIG), Natural Resources, Consumer & Retail (C&R), Industrials, Real Estate, Gaming and Lodging, and Financial Sponsors. Industry groups cover all companies in a specified industry, but have exposure to a variety of products including debt, equity, and M&A. Financial Sponsors is a unique coverage group as it does not cover a specified industry but instead serves only Private Equity firms. Private Equity firms may own multiple “portfolio” companies across a variety of industries, and have a series of unique investment banking needs.
An analyst’s experience in a certain group can vary widely depending on the investment bank and group, as each bank has its own strengths and weaknesses across groups relative to its peers. For example, Goldman Sachs does not have a standard Mergers and Acquisitions (M&A) group, while Morgan Stanley relies significantly on its M&A group for deal execution and less on its Industry/Coverage groups for deal execution.
INVESTMENT BANKING HIERARCHY
The investment banking seniority structure/hierarchy is very strict. A typical hierarchy includes (from most Junior to most Senior): Analyst, Associate, Vice President, Director, and Managing Director. Analysts will tend to work almost exclusively with an Associate, and the Analyst-Associate pair will be responsible for the majority of deliverables in a typical client engagement.
Investment banking deals are done in small teams of 4-6 bankers who usually work with one analyst, one associate, one vice president, possibly a director, and the lead managing director on the deal. Work flow will be executed from the bottom-up: analysts create the material, which is quickly approved up the team hierarchy, to the managing director on the deal. The managing director will have final say on all deal material before it is shown to the client (the company that the bank is representing on the deal). It is very common for deal teams to consist of bankers from across Product or Coverage groups depending on the type of deal or engagement.
DEAL TEAMS AND WORKLOAD
Investment banking groups run very lean for the amount of work they produce, and the typical 90-100 hour workweek for junior investment bankers is well known. The question you will likely keep asking yourself is: if investment bankers work 100 hours a week, why don’t they just hire more people? The answer is that it is mostly because of the culture of investment banking; it’s the way the job has been done for a long time. However, it is important to note that part of the reason is that as a deal or transaction progresses, the details are substantial and they can change very quickly. The work typically needs to be done by a select handful of people who are in on all of these details, and it’s cumbersome to bring in additional employees, retrain them, and add them to the deal team to take over work product.
SALARY: HOW MUCH WILL YOU MAKE?
Let’s face it— it’s important to know how much you’ll be working for. First-year investment bankers typically receive a $10k signing bonus and $70k base salary. Interns are usually compensated on a pro-rated basis, based on first-year salaries plus overtime. Associates out of an MBA program will receive a $30k signing bonus and $95k salary (this varies bank to bank and can be higher in certain instances). Bonuses will be paid out at the end of the year and can vary significantly as a function of the banker’s productivity as well as the performance of the group and the bank as a whole.←IntroductionTop Investment Banks→