Thursday, February 14, 2008

Investment Banking Explained

What is an investment bank and what do they do? Watch the video below to get a brief overview. This video is very straight forward and does a good job of explaining what investment banking is all about, so if you can't stand listening to this video, maybe this is your way of knowing that investment banking isn't for you.

About the Video Below (32 min)
Dr Kathy Walsh from the School of Banking and Finance at the Australian School of Business has produced a video that introduces undergraduate students to the exciting world of investment banking. The project was generously funded and co-produced by UBS.

Now that you have watched the video above, hopefully the following will make more sense and will help you gain a stronger understanding of what investment banking is all about. According to K. Thomas Liaw, the author and of The Business of Investment Banking, Investment banks engage in public and private market transactions for corporations, governments, and investors. These transactions include:
  • mergers,
  • acquisitions,
  • divestitures and
  • the issuance of equity or debt securities, or a combination of both.
Investment banks also advise and assist clients with specialized industry expertise. The industry or sector groupings include Industrial, Consumer, Healthcare, Financial Institutions, Real Estate, Technology, Media and Telecommunications, and others. Investment banks today also encompass securities businesses such as trading, securitization, financial engineering, merchant banking, investment management, and securities services. For those activities, investment banks earn fees, commissions, and gain from principal transactions.

Investment banking includes capital raising and merger and acquisition (M&A) advisory services. Investment banks help clients raise capital through underwriting in which investment banks purchase the whole block of new securities from the issuer and distribute them to institutional and individual investors. For the service, investment bankers earn an underwriting spread, the difference between the price they receive from investors and the amount they pay to the issuing firm. The underwriting spread has been in the range of 6 to 7 percent of the total proceeds raised for equity offerings. The competitive pressure has forced bankers to charge less, especially for a large deal in which the spread could go as low as 3 percent.

Another major line in investment banking is strategic advice on M&As. Services offered include structuring and executing domestic and international transactions in acquisitions, divestitures, mergers, joint ventures, corporate restructurings, and defenses against unsolicited takeover attempts. Fees are usually negotiable.

There are also other areas of interest to consider at an investment bank. These are Sales & Trading and Research.

Sales & Trading (S&T)
  • Distribution and execution arm of the investment bank
  • Sells and trades stocks and bonds
  • Manages the firm's risk and makes markets for the securities underwritten by the investment bank
So what is sales and trading? According to the Vault Career Guide to Sales and Trading, salespeople work with customers on what is called "the buy-side" selling them large amounts of securities like stocks, bonds or currencies. The largest customers on the buy-side are typically institutions (such as mutual funds or pension funds) that manage assets for others. Salespeople who sell to these institutions are identified by a variety of titles: institutional salesperson, sales-trader or research salesperson. Salespeople who sell to smaller institutions or wealthy individuals are called private client services (PCS) professionals.

Traders watch the market and trade orders for customers. The trader never talks directly to the customer; it's the job of the salesperson (institutional or PCS) to act as intermediary. The trader uses an array of computer systems to track the market and execute orders.

How does S&T differ from investment banking? Again, all of this information is coming from Vault, so I recommend you read their manuals if you are interested. You can access these Vault Guides and others for free by referring to the Banking Resources on your right.

There are several ways to compare and contrast the differences between investment banking and sales and trading. The first is the actual work that they do and the time in which this work is done. Investment bankers primarily help to raise money for clients through stock or bond offerings or advise clients on mergers and acquisitions. The endless flow of pitchbooks (PowerPoint or Word presentations to clients), the detailed financial modeling and around-the-clock client schmoozing are all focused on achieving one result: a deal that will generate substantial fee income for the investment bank. This fee is calculated as a percentage of the deal (for example, a percentage of the money raised by an initial public offering). Investment bankers work for months - even years - to generate one deal, schmoozing company execs until the company is ready to raise money or acquire a company. But when the company is ready and hires the bank to help them, the reward for the bank in substantial.

Salespeople and traders also work on deals - every trade is a deal - and also entertain clients. Compared to investment banking, however, it takes much less time to consummate a transaction in S&T. Typical trades are consummated in seconds or minutes, and the average fee per trade is measured in cents per share traded rather than as a percentage of the deal's proceeds.

Another big difference between S&T and I-banking is the lifestyle. Sales and trading professionals are the first-in-and-first-out (FIFO) in the investment bank. TO get a jumpstart on the trading day, salespeople and traders normally take the earliest train to work. But they are the first ones out of the office, leaving shortly after the markets close. Salespeople and traders also never work weekends - trading desks are completely abandoned on the weekends. In contrast, investment bankers are expected to be at their desks during the weekdays and weekends, at all hours and throughout major holidays. If you ever want to see a sad sight, go to one of the major investment banks on Christmas Day or Easter. Around lunch time, you'll see investment banking analysts trickle down from their cramped bullpens to pick up their food orders from the delivery guy. Simply put, Sales and Trading is a sprint; investment banking is an endless marathon that rarely ever stops for anything.

  • Analysis and recommendations of stocks and bonds
  • Includes company coverage and sector coverage
There will be more information to come on this area of the investment bank in the future.

Intro Investment Banking PowerPoint
Lehman Brothers PowerPoint: Intro Investment Banking


Now answer the following questions. I pulled this information straight off the Deutsche Bank website, which I have linked to below.
Deutsche Bank: Careers

Is a career with an investment bank right for you?

Firstly, you should research the industry and consider whether a career in investment banking is the right choice for you. Take a look at the 'How to prepare' section for tips on how best to do this. You shouldn't go into banking just for the money, the lifestyle is too demanding. To excel in this world, you will need to enjoy the work as much as the rewards.

How to decide which area of investment banking to join?

Investment banking isn't one specific service or function. It's an umbrella term for a range of financial activities. At Deutsche Bank these activities are grouped into divisions, each of which offer different opportunities for graduates depending on your qualifications, skills, likes and dislikes and career aspirations. Research these areas thoroughly before making your decision as to where you want to apply.

Firstly, talk to investment bank employees. You can do this by attending presentations and campus events. Find out where you can meet Deutsche Bank representatives by visiting our 'Events' section. When you go, make sure you talk to the business representatives, ask them questions and make an impression. Attending one of our campus events will give you the best insight into our company and culture.

At any university, the best sources of information are people who have spent an internship at an investment bank. Your alumni network will also provide useful information. Career guides and the profiles in the 'Meet our People' section of this site are also both excellent sources of information.

Competition is fierce and you'll need to be resourceful and persistent. Doing an internship in an investment bank is the best possible way of finding out if banking and the division you've chosen is right for you, as well as giving you a foot in the door.

Once you have gathered as much information as possible from different sources, both about the industry and Deutsche Bank, you're ready to prepare for the online application.

1 comment:

Boutique Investment Bank said...

Informative video! Investment banking is a great way to learn the ins and outs of corporate finance and develop analytical skills that will prove useful throughout a business career. Thanks a lot for sharing with us...