What is Investment Banking? 5 Steps to Understand the Industry

• investment banking division (IBD),
• sales and trading (S&T),
• Asset Management.

The large global banks typically offer all 3, with smaller banks usually focusing more on the IBD side covering advisory and M&A.

Define IBD

IBD is sometimes referred to as corporate finance and is broadly split into 2 sectors, products and industries. The purpose of both is to provide advisory on transactions, M&A and to arrange (and sometimes even provide) financing for these transactions.

This area of banking is the subject of the popular book “Monkey Business: Swinging Through the Wall Street Jungle”.

What Do Investment Bankers Do?

When companies seek out an IB relationship, they are interested in a financial partner that can guide them through the complicated landscape related to financing a business and managing its assets. Investment bankers offer executives strategic planning advice. They often advise company executives about the best times to make a PO, sell a large company asset, or acquire another business.

Investment Banking Product Group Overview

• Mergers and Acquisitions (M&A) – advisory on sale, merger, and purchase of companies
• Leveraged Finance (LevFin) – issuance of high-yield debt to firms to finance acquisitions and other corporate activities
• Equity Capital Markets (ECM) – advice on equity and equity-derived products (IPOs, shares, capital raises, secondary offerings, etc.)
• Debt Capital Markets (DCM) – advice on raising and structuring of debt to finance acquisitions and other corporate activities
• Restructuring – improving the structures of a company to make it more profitable or efficient

IB Industry or Coverage Groups

Industry groups focus on one specific industry (Technology & Media & Telecoms, Financial Institutions, Energy, etc) but carry out all the different kinds of deals for firms within that sector. 

• E.g: the Financial Institutions (FIG) team will work with clients on raising debt, IPOs, acquisitions, etc, but will only work with clients within that sector.

The Importance of Relationships in IB

A primary advantage for accessing the services of an investment banker is the relationships and contacts that an established IB can offer its clients. The principal role of an investment banker is to introduce lenders to companies in need of capital. 

Hierarchy And Compensation In Investment Banking

The hierarchy within the investment banking division is very well defined:

• Analyst – this is how you will enter banking once you have completed your degree. Typically the analyst does all the ‘grunt’ work on projects such as valuing companies, creating models, putting together pitch books, etc. Analysts are well known for working 80-100 hours per week but are well paid for it.
• Associate – It is also possible to be promoted to associate directly for the 3rd year. Your work as an associate will be focused on coordinating the work of the analysts to meet the expectations of the vice president. Associates tend to work as much as or slightly less than analysts, but are paid more for it.
• Vice President/Director is where the managerial work starts to kick in. Your role is to make sure that the work your analysts and associates produce is what your senior vice president and managing directors want. There is a lot of client interaction and the work becomes more client relationship orientated. 
• Senior Vice President/Executive Director – this is basically a mixture between vice president and managing director. The focus is both on executing deals and client relationships.
• Managing Director – MD is the highest level you can achieve within a bank. Almost all of an MD’s time is spent on client relationships and sourcing new clients.

Content source: Wallstreet Oasis (2020) Frequently asked question. Available from: https://www.wallstreetoasis.com/frequently-asked-questions [Accessed 11 February, 2020]