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Investment banking 101: What it is and what investment bankers actually do
Considering a career in investment banking? Find out what investment bankers actually do and the key areas within an investment bank – essential info for graduates.
You’ve seen the movies – Leonardo DiCaprio throwing around cash in the Wolf of Wall Street, men in suspenders shouting through phones, desperate to get the deal. Or you’ve stood in line at your local bank, belatedly cashing the cheque your grandfather sent you for your birthday. The world of banking might seem pretty familiar but investment banking plays a role unique from either stockbroking or your brick and mortar commercial bank.
If you’ve ever watched Entourage, think of an investment banker as the Ari Gold, the big shot Hollywood agent. The reason why investment bankers are like agents? Their business is all about closing deals and selling a product that they largely weren’t responsible for producing.
So what does an investment banker actually do?
Rather than working with individuals, investment banks primarily work with large corporations and government agencies. The role of an investment bank is two-fold – either selling or buying. On the sales side, investment banks help clients (usually those listed on the ASX100) to sell securities, which is basically the catch-all term for any tradable financial asset, from banknotes to stocks or bonds. This is generally called ‘underwriting’, the fancy financial term for the process by which banks are able to raise investment capital.
When it comes to buying, investment banks will provide their clients with advice on opportunities for safe, efficient investments. Investment banks make their profits by either charging fees for this advice or earning a commission on the sale of securities. Investment banking is in some ways like consulting. Working in a team, you’re responsible for helping a client make and implement a big financial decision.
Like so much of the finance world, investment banks now do more than ever before. Beyond their more traditional work in underwriting, investment banks will now also have teams supporting clients with mergers and acquisition, risk management, wealth management and proprietary trading (another fancy finance term that explains a bank investing for their own gain rather than on behalf of clients).
Investment banks have a few handy tricks up their sleeve to give them a competitive edge. Beyond fancy calculators and shiny offices, the strength of investment banks relies a great deal on solid research teams, who can support them to safely forecast future trends and investment opportunities. However, it has become increasingly important for research functions to operate at an arms-length from the rest of the business, so as to avoid any potential conflicts of interest. If you’ve heard about the Enron scandal of the early 2000s (if not, we suggest you google it), you’ll understand why this has become so important!
As with all financial services, the success of an investment bank will be closely tied to the twists and turns of the global economy.
So to be successful as an investment banker, it’s crucial to develop the ability to predict the market cycle months and years in advance. Good investment bankers need to not only understand the market but are excellent analysts and problem solvers can communicate clearly and effectively and have an impeccable attention to detail, even after hours of poring over Excel spreadsheets.
What are the key areas within an investment bank?
Now that we’ve got a bit of a sense of the different jobs within an investment bank, let’s spend a bit more time deep diving into what exactly investment banks do. As we’ve spoken about, in recent years banks have either broadened or specialised the services they’ve offered. We want to run you through the major functions that an investment bank might perform, so you can start to get the sense of what areas of the business most appeal to you.
Corporate finance sounds very complicated but really it’s exactly as it sounds: corporate finance is about the financial activities of a corporation.
Now that might not have fully enlightened you (very fair), so let’s dive a little bit deeper! Corporate finance teams generally have one key objective: maximising shareholder value for the client. Because of this, clients will go to the corporate finance teams for advice when they’re in the middle of big decisions like whether or not to make an investment or merge with another company.
One of the most important cards you can play in corporate finance is advising a company to make an IPO (an Initial Public Offering, sometimes known as “floating”). IPO is one of the buzziest of all the (many) buzzwords in investment banking, but don’t let the acronym fool you, once you get your head around it it’s quite simple. An IPO is the first time a company’s stock is offered for purchase on the stock market, turning a company from private to public. By offering stock, a company can get access to the capital they need to rapidly grow. Nailing an IPO, however, means hours and hours of work from a corporate finance team at an investment bank to arrange the deal, price the stock and promote the offering to as many potential investors as possible.
FTSE, NASDAQ, Dow Jones, CAC, ASX, DAX. They could be the names of an up-and-coming DJ or rapper but are actually some of the biggest stock markets or indices around the world. If you’re working in equities, your job is all about keeping a close idea on these bad boys, following what stock is going up and what’s going down and which companies might be under or overvalued.
Working in equities, you’ll want to watch out for whether a stock is having drastic moves up or down. There are often a few key reasons why this might happen. An obvious one is a big internal change, like how Apple stock plummeted when Steve Jobs resigned. External factors, however, are usually the driver. When a country’s economy is hit by inflation, money becomes less valuable and interests rates rise, so investors will look for lower-risk moves, such as investing in bonds rather than stock.
Are you the friend who says ‘yeah nah, might sit this one out’ when your mates spontaneously decide to go bungee jumping on an overseas holiday? Then in a way you’re a bit like a fixed income, you both have a healthy aversion to risk.
Fixed income is one of the safest investments possible because it will return income at regular intervals and reasonably predictable levels. You’ll usually hear about fixed income products as either bonds or derivatives.
Fixed income highlights the many complexities in the world of investment banking but it’s crucial to understand and is a key tool in the arsenal of investment bankers.
Have you ever been going on a big trip overseas waiting for the perfect moment to exchange your Aussie dollar into Euro or USD so you get the best bang for your buck? It’s the same principle behind a foreign exchange desk at an investment bank. Trading in foreign exchange is all about being able to sell back a currency at a more expensive rate then when you purchased it. The foreign exchange market is actually the biggest financial market in the world!
These days almost all countries will have a floating currency (which means it isn’t tied to another currency or value, like how the Aussie dollar used to be tied to the price of sterling). Instead, other factors like political stability or a country’s economic performance will impact the strength of their currency.
Feeling fed up with all the intangible, abstract financial products we’ve been talking about so far? Never fear, commodities are coming to save the day! Commodities are tangible products that have a standard price and quality across the market. Coffee, corn, oil and gold are all commodities.
Usually, commodities are traded as futures, where a contract is drawn up ahead of time to sell a commodity at a certain price. Say you’re helping sell cocoa to Cadbury (tasty gig by the way), you might have a contract six months ahead of when Cadbury wants to start production that will see a farmer sell their cocoa at a set price, giving both parties security.
Commodities is a dynamic and diverse field, giving you the chance to engage with areas such as energy and agriculture.
Mergers and acquisition
‘M&A’, as all the cool kids call it, is generally broken down into sell-side deals and buy-side deals. A sell-side deal will usually begin when a company comes to you wanting your help to sell their business for the maximum possible revenue. Sometimes they might already have a buyer in mind but other times they’ll be needing to sell, quickly, before their situation deteriorates further.
In a buy-side deal, a company will come to your bank because they’re keen to buy a company. Your bank will support this process in two key ways. Firstly, and most importantly, you’ll generally help them raise the capital to make the purchase. Secondly, you’ll play a role in providing advice on how much they should spend on the business they have their eye on.