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Investment Banking and Its Key Advantages!

Posted on by Imarticus Learning

Understanding Investment Banking

Investment banking Training is a specialized division within the finance and banking industry that engages in advisory-based financial transactions for its clients, the clientele includes individuals, government, and corporations. Investment bank helps in capital creation for its clients. The primary function of these banks is to act as a mediator and facilitate financial transactions between two or more parties.

The investment banks leverage their vast network to connect borrowers seeking funds with investors having surplus capital to invest in profitable avenues.

Investment banks help the economy on a macro level by channeling funds between borrowers and investors. Investment banks also help to facilitate Mergers and Acquisitions deals; it requires conducting rigorous research on the companies that can be a good fit for its client’s M&A strategy. Investment banks also help with underwriting new debt and equity securities for various corporations.

Let’s understand the functioning of an investment bank using a familiar example. You must’ve heard of Initial Public Offering (IPOs), during the IPO process the company issues shares and invites the public to be a part of the organization by buying its shares at a predetermined price. A lot is going on behind the scenes, like valuation of the company, market analysis, competitor’s analysis, etc.

All these complex tasks are carried out by Investment banks to help companies go public and accumulate the required capital for their growth and profitability. Investment banks also determine the share prices so that the chances of oversubscription and under subscription can be avoided. Let’s dig deeper into some of the key advantages of Investment banks and how they help the economy.

Key Advantages of Investment Banks

The key advantages of Investment banks can be highlighted in their functioning.

  • Initial Public Offering (IPOs): Initial Public Offering process is an overwhelming financial transaction process and requires expertise in various aspects. Investment banks serve their clients going public by acting as intermediaries between corporations and investors.

    Investment banks provide underwriting services for companies opting for equity funding by issuing company stocks to the public. The underwriting process is not as simple as it sounds. The underwriting process involves investment banks purchasing the shares of the company at an agreed-upon price which it then resells to the public using a stock exchange.This requires the investment bank’s commitment to purchase a specified number of shares, it could purchase all or part of the total shares being issues. There are three types of underwriting commitments; it includes firm commitment, best efforts, all or none. In the firm commitment, the investment banks have to purchase all the shares being issued at a predetermined price.

    The best effort commitment is suggestive of the name, here investment banks commit their best to sell as many shares as possible and there is no legal obligation for them to buy all the shares being issued. All or none case requires selling all the shares being issued to the public, any under the subscription will lead to a null deal.

  • Mergers and Acquisitions (M&A): Mergers and acquisitions is a strategy used by corporations to come together and boost collective profit by eliminating competition. Corporations leverage their synergy in operations to boost profitability and growth prospects. The merger involves two companies usually competitors coming together whereas acquisition involves one company buying a majority stake in another company or acquiring it.

This whole process entails complex research work to understand the competitors in the market and what they bring to the table for a profitable M&A deal. The M&A deals also require investment banks to value to targeted companies that could be a profitable prospect, this valuation requires conducting rigorous due diligence to understand the financials of the prospective company.

Also Read: Beginner Guide to Investment Banking

Evolution of Investment Banks!

Posted on by Imarticus Learning

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

The Rise and Dramatic Fall of European Investment Banks in the US

Posted on by Imarticus Learning

The modern investment banking industry is one of the most important aspects of the capitalist economy. It is also seen as one of the most sought after career choices for people in the finance industry given the lucrative remuneration and perks that the job offers. Ever wondered how this industry came into existence? How did it help to channel liquidity in the economy and boosted wealth creation? Let’s peep into the history of the glorious investment banking industry.

In its nascent phase, the investment banking industry was limited to investment financiers. The investment financiers were extremely wealthy individuals who had the surplus wealth to spare. They provided funds to governments and the Royals as loans which were backed by taxes collected from the citizens. The modern investment banking started much later and is a part of modern history.
The United States was the founding nation of this industry during the times of the Civil War where Government bonds were circulated to investors as a financial instrument of investments. It followed by issuing war bonds to the public for raising money. After the war was over, the investment banking industry was formally established to fund large scale projects related to railways, manufacturing, etc. Investment bankers were primarily mediators who matched the parties seeking a fund with parties looking to invest in profitable avenues.

European Investment Banks In The US Territory

There was a time when the European investment banks went on an acquisition spree in the United States to tap on one of the most promising trading and banking markets in the whole world. The year 1978 saw the first move from European lenders in the US market when Credit Suisse made an exemplary move into First Boston, a top tier advisory firm in the US. By 1998, Credit Suisse acquired the third position in the industry in terms of investment banking fees, beating both Morgan Stanley and Goldman Sachs.
The pre-global financial crisis market saw the proliferation of European investment banks in the US market. Some of the most prominent acquisitions which were the highlights of the growing European expansion were as follows; Deutsch Bank’s acquisition of Banker’s Trust, in a record-breaking $10 billion deal (1998), HSBC’s takeover of Consumer Finance Business Household (2003), Credit Suisse’s acquisition of DLJ (2000).

All these deals amounted to billions being pumped into the US market from European lenders. European investment banks became prominent players in fixed income trading and leveraged the finance segment by hiring top-notch talent in Wall Street. The period between the years 2002-2007 saw a rise in the market share of European investment banks in the US territory.
The reign of the European Investment Banks in the US territory began to crumble in the last decade around the global financial crisis. By the year 2007, the Deutsch Bank was ranked 9th in terms of Investment banking fee that was approximately equal to $1.6 billion, far less than its competitor JP Morgan’s $4.4 billion. Retail operations of the European Investment banks also struggled; HSBC’s household business was shut down just after the few years of its purchase.

The period between the years 2012-2019 marked a steep decline in the proliferation and profitability of the European Investment Banks. In more recent developments it was found that HSBC was shutting down 30% of its US branches after admitting the losses from US operations. In addition to this, another prominent European player the Deutsch bank closed its global equities business which resulted in thousands of job losses. One of the most prominent reasons for this steep decline has been the strict regulatory challenges faced by the European Banks after the global financial crisis that shook the world.

Roles and Functions of Modern Investment Bank

Posted on by Imarticus Learning

There are different types of financial institutions around the globe that helps people in various ways. One such type of bank is the investment bank. In this article, we will try to understand the importance of an investment bank and its functions and roles.

We will try to understand the services offered by the IB (investment bank). Let us first understand what is an investment bank?

What is an investment bank?

It is a type of financial institution which acts as a bridge between the securities issuer and the public investors. In layman terms, you can say that an IB works as a broker for clients. IB also specializes in pension funding. They help institutions to issue new sets of stock through an initial public offering (IPO) or follow-on offering. Besides helping financially, IB also gives advice and predictions in order to make the institution or any particular company rise more and more. Let us study the roles and functions of modern investment banks in detail.

Roles and functions of the Investment Bank

An IB has various roles ranging from advisory to mergers and acquisitions. Let us cover each of the roles thoroughly.

New stock issues

Whenever a company goes public, i.e. it seeks funding from the public and is ready to sell its shares. Then the IB helps those institutions by buying some of the agreed shares keeping in mind the IPO (initial public offering). This whole process of stock issuing is also called underwriting. So, in short, the funds/stocks from a private institution are transferred to the public through underwriting.

Advisory roles

Besides the money talk, investment banks help their clients by giving them advises advice which that brings more capital and investment. They help in taking the firm/institution to new heights. Investment banks boast a huge client base and are always helpful in financial queries.

Mergers and Acquisitions

Whatever the acquisitions are, an IB tries to find out its worth or current market value. It acts as a bridge for the deal to close in. They are helpful for the successful completion of a deal.

Risk analysis and management

A financial institution is always prone to difficulties. An IB helps in finding out the target area which is incurring losses. It helps in preparing a particular firm from various risks such as inflation, credit risks, liquidity, loans, etc. it always makes the firm less vulnerable to losses.

Research

Investment banks have come a long way, nowadays, they do research too. Through this research, one can find out the trustworthiness and loyalty of any particular firm. IB gives people the rating points of any particular firm which helps in deciding whether to buy, sell or hold any acquisition belonging to that particular firm/company.

Derivative product structuring

We are talking about modern investment banks here; they have now various services and functions to be offered. A derivative product mostly gives a high return rate and margin. To identify such worthy derivative and then structuring in such a way that it gives profit is often a tedious job, but it is done by the investment banks. They identify future derivatives and find the right time to invest. This helps the clients to increase their business.

Conclusion

As we read, modern-day investment banks have evolved a lot. Their services now range from consultancy to derivative product structuring. They also help various firms in getting a yes from the government for any particular project. They focus on various dealings and investments which helps the owner of any particular firm to focus on something else and take the company to new heights. This article was all about the roles and functions of modern-day investment banks.