Investment Banking Overview

Investment banks perform two basic, critical functions. First, investment banks act as intermediaries between those entities that demand capital (e.g. corporations) and the ones that supply it (e.g. traders). That is mainly facilitated through debts and equity offerings by companies. Second, investment banks advise corporations on mergers, acquisitions, restructurings, and other major corporate actions.

While nearly all investment banking institutions perform both of these functions, it is important to learn which products and services each bank or investment company specializes in. After the Glass-Steagall Act repeal, investment banks started to participate in both investment and commercial banking activities, and thereby undertake a great deal of risk (on behalf of both bank and its clients).

Corporate Finance (this function is most commonly referred to as “Investment Banking”): Assist companies in increasing capital through debts and collateral capital markets, and provide advisory services on mergers and acquisitions (M&A) and other corporate transactions. Sales and Trading: Trade securities and other financial instruments as an intermediary with respect to its clients.

Research: Provide detailed company and industry research reports and make recommendations on whether to buy, sell, or keep public securities. Asset Management: Provide equity, set income, money market, and alternate investment products and services to specific and institutional clients. Corporate Finance is broken down into various kinds groups, but the primary distinction is between Product groups and Industry/Coverage groups.

Each group grips its own customer accounts, and is accountable for a designated product or industry sector. Product groups: Differentiated with what types of services the groups provide. Typical groupings include Mergers and Acquisitions (M&A), Leveraged Finance (Lev Fin), Equity Capital Markets (ECM), Debts Capital Marketplaces Restructuring and (DCM). These groups focus only on the specific products and can work across all industry groups. Industry/Coverage groups: Differentiated with what types of clients the groups serve. Typical groupings include Healthcare, Technology, Media, Telecom (TMT), FINANCE INSTITUTIONS Group (FIG), Natural Resources, Consumer & Retail (C&R), Industrials, PROPERTY, Lodging and Gaming, and Financial Sponsors.

Industry groupings cover all companies in a specified industry, but have exposure to a number of products including debt, equity, and M&A. Financial Sponsors is a unique coverage group as it generally does not cover a specified industry but instead acts only Private Equity firms. Private Equity firms might own multiple “portfolio” companies across a variety of industries, and have a series of unique investment bank needs. An analyst’s experience in a certain group can vary widely with respect to the investment bank and group, as each bank or investment company has its own talents and weaknesses across groups relative to its peers.

For example, Goldman Sachs does not have a typical Mergers and Acquisitions (M&A) group, while Morgan Stanley depends significantly on its M&A group for deal execution and less on its Industry/Coverage organizations for deal execution. The investment banking seniority structure/hierarchy is very rigid. A typical hierarchy includes (from most Junior to many Senior): Analyst, Associate, Vice President, Director, and Managing Director.

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Analysts will have a tendency to work almost specifically 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 use one analyst, one associate, one vice president, a director possibly, and the lead managing director on the offer.

Work circulation will be performed from the bottom-up: analysts create the materials, which is approved in the team hierarchy quickly, to the managing director on the deal. The managing director will have last say on all deal material before it is proven to your client (the business that the bank is representing on the offer).

It is quite typical for deal groups to contain bankers from across Product or Coverage groupings with respect to the type of offer or engagement. Investment banking organizations run very lean for the amount of work they produce, and the typical 90-100 hour workweek for junior investment bankers is well known.