Last updated on August 17th, 2024 at 05:58 am
Large corporations, such as Reliance and Facebook, often pursue diversification strategies through acquisitions or capital-raising initiatives. These complex transactions necessitate the expertise of specialised individuals and organisations adept at dealing with strategic financial decisions.
These experts conduct comprehensive research and analysis to assess the profitability of high-value financial transactions, ensuring their viability and potential return on investment. Investment banking plays a crucial role in this process, facilitating these transactions and providing essential valuation services.
Investment bankers employed by investment banks are responsible for conducting these valuations, which are a core component of investment banking's financial services offerings. By securing the necessary capital, what do investment bankers do is enable companies to maintain competitiveness and achieve growth within the market.
To make these concepts easy for you, we have prepared this guide. Through this article, we will explain what investment banking is and what do investment bankers do. We will also discuss what the core functions of investment banking are and what are the different types of investment banking.
What is Investment Banking?
Investment banking is a special financial service that helps companies, governments, and individuals raise capital to meet their short-term and long-term financial goals. The needed capital is acquired through IPOs, mergers, and a few other methods.
Investment banks also provide financial advice to companies with reorganisation and risk management. These investment banking solutions span many sectors and products. There are a few investment banks raking in billions with their top-notch investment advice.
They are:
- J.P. Morgan - They made $49.6 billion in 2023 as net income, which is the highest in American history.
- Goldman and Sachs - They made $8.52 billion in 2023 as net income.
- Credit Suisse - This Swiss investment bank made $27.8 billion in the year 2023.
In India, there are many good investment banks, but a few stand out, like:
- ICICI Securities - They made a net profit of ₹ 536.53 Cr in the last quarter of 2023.
- HDFC Bank - They offer a wide range of financial services to raise capital for businesses in India.
- Edelweiss Financial Services - They also have merger and acquisition services as financial solutions.
Understanding Investment Banking
All financial services offered by investment banks are investment banking operations. They are further supported by processes like due diligence, which help investment banking operations to perform smoothly.
Let’s discuss what do investment bankers do in detail.
Investment Banking Operations
Investment banking operations are the main functions that a well-established investment bank will offer.
Capital Raising and Underwriting
The role of investment banks is to assist companies in receiving investments by selling their stocks or bonds. These securities are underwritten by the underwriters, who guarantee that the securities will be sold at a pre-agreed price. This enables companies to raise capital to support operations and expansion.
Mergers and Acquisitions (M&A)
Investment banks raise finance, advise on, and execute mergers, acquisitions, and divestitures. They review accounts, appraise resources, bargain for deals, and execute deals in a way that will meet the client’s needs. This may include extensive negotiations and administrative or regulatory permits.
Advisory Services
Investment banks provide corporations and governments with strategic advice concerning finance. This can include strategies for restructuring and financial planning and even market strategies to assist clients in decision-making.
Sales and Trading
Financial intermediaries who trade in securities like shares, bonds, and futures for their clients. These products are also marketed to institutional customers by sales staff. This activity keeps liquidity in the market and provides an effective means for trading.
Research and Analysis
Investment banks perform studies on various industries and organisations. They apply this information to their clients, investors and internal team members. This research is very crucial in making an investment decision.
Investment Banking Concepts
The investment banking concepts are the techniques at a theoretical and practical level that investment bankers apply in the field of finance. These concepts include interpreting financial statements, making investment decisions, and measuring the effect of economic conditions on various sectors.
By understanding these concepts, what do investment bankers do is offer efficient advice to their clients to enable them to reach their objectives. Investment banking operations function smoothly because of concepts that guarantee the successful execution of financial transactions.
Due Diligence
Due diligence is an investigation aimed at determining whether the financial and legal aspects of a possible transaction or investment are genuine. Investment bankers undertake it through thorough research and evaluation.
Valuation and Pricing
Investment bankers evaluate the worth of assets, firms or transactions in which they are involved. This is important in determining the right price for transactions like takeovers or mergers.
Regulatory Compliance
Financial investment institutions must follow many guidelines and regulations. This helps in their operation and compliance to safeguard the interests of the bank and its customers.
Risk Management
Good risk management is very crucial for the growth and performance of an investment bank. Risk Management is the process of evaluating probable risks of a business or investment.
Banks involved with investment activities tend to appraise and mitigate these potential risks concerning financial transactions and investments. Some of these risks are market risk, credit risk and operational risk.
Initial Public Offering
Initial Public Offering (IPO) can be referred to as a growth strategy where a company is open to selling its shares in a regulated public market. This transaction enables companies to accelerate growth by acquiring the capital required to put their business model into practice.
IPO enables private shareholders to acquire liquidity, and realise the value of their shares and increase their level of assets.
Example of Investment Banking in Action
For instance, there is a local Indian restaurant chain in New Delhi called “Raj’s Rasoi,” and it has been working successfully for several years, so it may decide to issue an initial public offering.
Raj, the owner, enters an investment banker’s office in a well-known financial institution called Priya Investment Bank. After talking, they mutually decide that the firm of Priya will make an offer of the IPO of 5,00,000 shares of the company of Raj Rasoi at ₹100 per share.
This is the valuation of a stock, which is based on research conducted by the analysts from the investment bank, a critical aspect of investment banking.
It floats the shares to the market at ₹110 per share after acquiring 5 crores of their shares at ₹5 each. But it can only offer 30% of the shares in the market at this price and has to lower it to ₹95 to offer the other 70% of the shares.
This is one of the things that can happen in investment banking because the value may be high when the client asks for the valuation but the market may not be impressed at the same time.
Finally, the investment bank receives a return of 48 rupees. 5 crore [150000 shares at ₹110 + 350000 shares at ₹95 = ₹1.65 crore + ₹3.325 crore = ₹4.975 crore]. This means that they lost ₹25 lakhs on the deal since they overpriced Raj’s Rasoi shares.
This example specifically serves the purpose of supplying the investor with highly important investment banking analysis related to the risks of underwriting an IPO.
This scenario fits well in describing what one can anticipate in what do investment bankers do. There is a huge demand and high competition for IPO deals, which sometimes results in over-bidding and not obtaining the expected punitive.
Further, there is also an added advantage in terms of spreading around the risks associated with financing securities but this may translate to reduced profits for individual banks.
This example is simplistic but presents one of the most important processes involved in the concept of investment banking, opening the market for equity and providing companies with access to the market.
It shows that the process of investment banking involves an accurate prediction of company valuation and the level of risk that needs to be taken to achieve the desired result.
What Do Investment Bankers Do
An investment banker is a type of finance professional who deals with the company, even the state, or an individual to obtain a loan or issue shares. They also offer support during crucial transactions in finance for example mergers and acquisitions.
They also engage in advocacy on when to raise certain financial securities, such as bonds or stocks.
They further advise about how many securities should be floated as well as what price each security should be offered. What do investment bankers do is save time and money, as they can point out the risks involved in a project.
Let’s look at What do Investment Bankers do:
- Working in the division that deals with merging and acquiring companies and creating financial models to build it or assist in the process of merging or acquiring a company.
- The problem of stock pricing to facilitate the investors entitles them to make investments in the stock for the betterment of the company.
- Establishing mechanisms for ensuring conformity to financial regulation bodies like the SEBI, given the fact that they offer financial services as well.
- Economic and financial issues concerning IPOs and documentation.
- Advocacy for the clients in determining the pricing of the financial tools.
- Providing advice to corporations regarding the type of securities to offer to shareholders.
- Assisting firms or other entities to sell municipal bonds, equities, or debt-carrying securities in the private or public markets.
Types of Investment Banking
Investment banking is a diverse industry with various types. Each investment banking type serves different clients and transaction sizes.
Bulge Bracket Investment Banks
Bulge-bracket investment banks typically manage deals over $1 billion and offer comprehensive investment banking services. With a global presence, they build strong international networks. Citibank, JP Morgan, and Barclays are renowned Bulge Bracket Investment Banks.
Elite Boutique Investment Banks
These banks specialise in a smaller range of activities, unlike the broader focus of the bulge bracket investment banks. Some of these investment banks focus on specific niches, like mergers and acquisitions or capital restructuring. Others concentrate on specific industries, such as consumer products or energy (gas and oil). Despite their niche focus, they are known for their expertise and ability to handle large deals.
Regional Boutique Investment Banks
Regional boutique investment banks are the smallest type of investment banks, working primarily with small local businesses. Their deals typically range under $10 million, sometimes reaching up to $50 million. They are limited by their geographical coverage and focus on helping businesses with financing loans.
Mid-Market Investment Banks
These banks cater to mid-sized clients and transactions falling between regional firms and bulge-bracket banks. The usual deal size for these banks would be around $500 million to $1 billion. Mid-market investment banks are not as well-known. However, they have significant financial expertise and offer similar services to larger banks but with a narrower geographic focus.
Every type of investment bank offers unique benefits and drawbacks. The ideal choice depends on the transaction's size and the client's specific needs. Understanding these types of investment banking and what do investment bankers do is essential for anyone interested in this sector.
Conclusion
Investment Banking as a financial service is an important vein for businesses. The knowledge and expertise they bring to assist is unparalleled. What do investment bankers do is both demanding and challenging but highly rewarding. If you are someone who sees themselves in such a position, then the Investment Banking course by Imarticus Learning is your best bet.
FAQ's
Is investment banking really banking?
No, investment banking is different from a traditional commercial bank. Investment banking focuses on raising capital and other investment banking operations.
Which is better, an MBA or investment banking?
The better option would depend on your career goals. Analyse which option suits your career goals and choose that option.
Who earns more, a CA or an investment banker?
Both the career options have good earning potential. With good experience and hard work, you can make a good yearly salary, whether you are a CA or an investment banker.
Why is investment banking called investment banking?
Investment banking is called so because it focuses on investments and capital markets.
What is the future of investment banking?
The future of investment banking looks promising because there are constant financial tech advancements and increasing fluctuations in the financial market. Investment banks will play an important role for companies with their financial goals.
