What are Investment Banks?
Investment Banks are specialized divisions in the finance and banking industry that helps to channel the funds in the economy. At the core of investment banking lays the function to connect organizations seeking funds with investors looking for profitable investment opportunities.
The primary function of any investment bank is to help its clients raise the required funds from the market to achieve their business objectives.
Investment banks help the companies to access the capital market and raise funds by issuing debt or equity securities to the investors/ shareholders. After properly assessing the finances of their clients the investment banks advise on a suitable capital structure for the business corporations. Investment banks also help private companies to sell their shares through Initial Public Offerings (IPOs) by providing their underwriting services.
Investment banks also help companies with Mergers & Acquisitions (M&A) deals, they help to facilitate M&A deals by doing competitor and industry analysis, conducting due diligence on the targeted companies and carrying out the valuation of these companies. Investment banks are subdivided into the sell-side and the buy-side.
The sell-side firms deal with raising capital from the market by selling shares or bonds, like in case of IPOs. The buy-side firms on the other side work with hedge funds, mutual funds, pension funds, etc. to help maximize the return on their client’s investment in popular investment vehicles. Some Investment banks offer both buy-side and sell-side services.
The History of Investment Banks
The investment banking industry was not so well established back in the days. The concept of investment banks have existed for quite some time but the proliferation of this industry is a recent phenomenon which was fuelled by the increased globalisation. If we break down the functioning of a modern investment bank, we will find the role of a mediator at its core. This will help us trace the history of investment banks.
Mediating deals between investors with excess capital and borrowers seeking funds has existed for centuries in some form or the other. Although an exclusive institution dedicated that we call investment banks today were not very prevalent. There were investment financiers who were extremely wealthy citizens that provided funds to the royalty and the governments. The government and royalty backed this loan by taxes collected from their citizens; it acted as a security for the money borrowed from the investment financiers.
Modern investment banking began in USA, during the period of the Civil war when the Philadelphia-based financier Jay Cooke teamed up with hundreds of salespeople. Jay Cooke and his sales team sold millions worth of government bonds to investors with capital to invest in securities. Eventually, war bonds were marketed to the public to raise money, here the financier played the role of a representative of the Department of Treasury to help facilitate the deal.
When the Civil war ended, the investment banks played a major role in building a new and far more efficient capitalist that paved the way for unparalleled wealth creation. Financing capital intensive projects like mining, manufacturing and railroads was beyond the scope of usual banks. Investment banks played a crucial role by acting as mediators and brought together investors with excess capital and corporations seeking capitals for financing large scale projects.
Private investment banking grew and was initially dominated by two groups the Yankee houses and the German-Jewish houses. Eventually, after the collapse of the New York Stock Exchange in 1907 Federal Reserve System was created to regulate the trades. This wasn’t enough to stop another crisis in the form of the Great Depression.
Major reforms in the form of the Glass-Stegal act was made to the US banking system. This required the separation of commercial and investment banks in two categories. The investment banking industry grew multiple folds with new investment opportunities in the market domestically and globally. A major turnaround was made in the year 1999 when the Glass-Stegal act was repealed. Today, the Fintech industry has revolutionised banking & finance and is changing the investment landscape dramatically.
Also Read: What is Best Investment Bank to Work For