Interestingly, the first thing about investment banks is that they’re not banks – not even by the most creative reckoning! They neither collect money in their accounts nor loan money. The other thing about investment banks is that they deal only with institutional, organizational, corporate or government clients – and never with individual investors – unless these investors are individuals are billionaires from the families of Rockefellers or the Rothschild’s!
Investment banks should be most simply understood as firms that help companies and institutions raise funding and grow their client’s organizations and investments. They’re specially organized, equipped and licensed financial services and advisory organizations mandated to primarily help companies and governments raise money (for projects etc.,) through primary and secondary equity and debt, bond and derivatives markets.
Indeed, all investment banks, hence, manage end-to-end documentation; underwriting of equity or bond issues; valuation of companies before acquisitions and mergers; and design and management of investment portfolios of large organizations. In many markets, investment banks also manage wealth of extremely rich individuals – high net-worth individuals with billions of dollars of personal wealth.
The top global investment banks – those in the so-called Bulge Bracket - comprise Goldman Sachs, JP Morgan and Morgan Stanley, but by no means they’re the only ones around. There are numerous regionally oriented or situated investment banks – like Piper Jaffray - in the middle market dotting the investment banking landscape and completing the global investment banking eco-system. Then, there’s the group of small, specialized firms called boutiques, oriented toward specific industry verticals; or focused on just one or two investment banking horizontals instead of doing everything that the bulge bracket guys do. Hence, you’ll find boutique investment banks specializing in bond-trading or M&A advisory, or underwriting or equity markets or derivatives etc.
Typically, large investment banks work through voluminous groups within them covering a range of client-facing or operational areas. But in most firms, we can see three key divisions:
Investment banks employ some of the finest white-collar talents from business schools, and the bare minimum expectation – besides the pedigree – is a combination of strong analytical and interpersonal skills.
Indeed, specific skill-sets demand vary across jobs and roles – brokers need to have killer sales-skills, whereas, equities analysts would demand both analytic and interpersonal skills.
Though only the very best of the talents eventually make it into the best investment banks, to be fair, even rookie-undergrads are let in by them to join the Analyst roles. MBAs join a rung higher – as associates. Analysts and associates work within specialized groups (domains or horizontals) but they may not always have control over the group to which they get assigned (analysts especially).
Most large investment banks have a business division or domain with practice areas dedicated to industry-specific and product-specific investment banking. Hence, an Analyst or an Associate can get to be assigned either into one of these product groups (e.g., private placements) or in one of the many industry coverage groups (e.g., aerospace) that the investment bank may be playing in.
In the corporate finance domain, analysts and associates usually work with client-companies to help them raise capital needed for their new projects and ongoing operations. Work involves end-to-end solutions – right from determining the amount and structure of fund needs of a client through equity, debt, convertibles, preferred, asset-backs, or derivative securities – down to planning action for raising funds.
Working in this group essentially means helping clients raise money – or multiply their investments - either through Debt Capital Market operations or those in the Equity Capital Markets (ECM) or Currency or even Derivatives Markets.
Among the hottest of investment banking horizontals, M & A professionals set up lucrative, high-value deals in which one company buys another, and the investment banks earn big fee out of these transactions. Incidentally, this is an important source of fee income for many investment banks.
Project finance involves funding infrastructure and oil capital projects off of a company or government's main balance sheet. When other sources of borrowing dry up, project finance is generally still there.
Some of the most desirable jobs in investment banking are in sales and trading. Your responsibilities would involve undertaking transactions in equities, bonds, currencies (referred to as Forex or FX), options or futures with traders at commercial banks, investment banks and large institutional investors.
Positions in structured finance involve the creation of financing vehicles to redirect cash flows to investors (known as asset-backed securities). Typical asset-backs securitize credit card receivables, auto loan receivables or mortgages.
Advisory services are often provided by investment banks to public and private clients involved in M&A and financings. The areas of capital structure advisory, valuation advisory and risk management advisory have been popular at many investment banks. Often work will be done to determine a client's value, options for creating value or on a client's industry conditions.
Security analysts are usually assigned to an industry or region. You could be responsible for making buy or sell recommendations to investors about a stock or bond. Your duties would involve visiting companies and heavy telephone contact with institutional investors. Investment banks often like to hire people with industry experience into analyst positions (as opposed to fresh MBAs or undergrads).
An area of continued growth is in international sales. Despite many past disasters like the Asia crisis in 1997, investor demand for securities issued in emerging markets typically comes back strong. Firms are meeting this demand by providing sales personnel and analysts specialized in these markets. Another area of high demand is in emerging markets such as Thailand or Mexico. Firms are looking for people with specific language skills, a willingness to travel and knowledge of these emerging markets.
The market for municipal bonds is very large and calls for analysts, municipal advisors and traders. Positions in public finance are usually difficult to obtain but offer high rewards. Persons with previous experience in public administration would be attractive to investment banks in this capacity. A major growth area in municipals is in the project finance area.
Private Client Bankers / brokers are in the business of selling stocks, bonds, insurance and other investments to individuals. Some brokers specialize in high net worth individuals while others span a variety of clients.
In institutional sales you would be responsible for conveying information about particular securities to institutional investors. You would be likely to have heavy contact with portfolio managers and your own firm's analysts and traders. Sales skills and product knowledge are crucial in this area as is the ability to get through to busy institutional investors. Working in sales for an investment bank (on the sell side) is often good preparation to move over to the buy side (insurance companies and mutual funds). Both types of jobs can be brutal and subject you to abuse. The average salaries in institutional sales can exceed $750,000 per annum.
One way to break into investment banking is to start as a ratings agency analyst. The pay is relatively low and advancement opportunities aren't great, but the investment banks know it and use the agencies as hunting grounds for new analysts. The two largest agencies are Moodys and Standard and Poor's. Moodys has over 2,000 analysts and S&P has rated $50 trillion worth of securities. These highly profitable agencies grade the credit quality of companies and sovereign entities accessing the markets. Most of their revenue comes from fees paid by issuers.
Investment Banking Career Path
What it Takes to Succeed in Banking