What is Investment Banking?
Investment banking is a hierarchical industry that rests on the skills and knowledge of investment bankers. It has been described as “the lifeblood of capitalism. It is a profession that involves handling money for clients or managing funds on behalf of clients through lending institutions such as banks or other financial intermediaries. Investment banking is one subset of the banking industry that specializes in finding investors for various types of securities such as stocks, bonds, and whole companies. It has three main modes: commercial banking (loans, investments, securities), securities underwriting (issuing new securities), and venture capital.
Fintalent’s Investment Banking Consultants note that the investment banking industry was created by investment bankers in order to provide a wider range of lending options to companies that could not obtain funding from other banks. There are different types of services provided by financial institutions such as an extensive retail network or a more specialized business operations group. Earlier, investment banking was the exclusive domain of larger institutions.
The typical client will be a company that is based in the United States. The main difference between investment banking and retail banking as an agent of U.S. commercial banks, is that investment banking deals with more complex financial transactions like mergers and acquisitions on behalf of clients with high stakes in their companies.
Investment banks deal with new issues (new securities) and secondary issues (new securities sold off once previously issued) for corporations, equity underwritings for start-ups, and debt underwritings for leveraged buyouts (LBOs). Secondary issues are when an investment bank takes an existing security and sells it to another investor to raise cash on the capital markets.
The first steps towards creating an investment banking industry began in the last half of the 19th century. It was only at this time that investors became more sophisticated and beginning to consider corporate financing on a large scale.
It is important to note that although prior to this period, businesses seeking capital had traveled elsewhere (New York, Boston, Pittsburgh) for funding. They were not able to raise capital on the market when they needed it most because they were suffering financial distress or did not have a reputable reputation with potential creditors. This left the door open for investment bankers to act as intermediaries, who would buy up bonds and stock of troubled firms and turn them around.
Investment bankers can be split into two main categories: corporate finance and sell side. Sell side are the underwriters of securities (securities are stocks and bonds) that are offered to public when an investment bank wishes to raise new capital for a firm. The underwritings serve a significant role in providing companies with capital and increasing liquidity in securities markets. The other category is corporate finance which includes mergers, acquisitions and divestitures work.This work is usually done on behalf of large firms seeking financial support through partners (usually large banks). From a technical perspective, both sell side and corporate finance are quite different from each other.
Corporate finance is more closely associated with the securities markets, while investment banking is more closely associated with the capital markets (debt and equity). The first major change in the field of commercial banking occurred after World War II when many leading investment bankers were recruited to help out the war effort. It was at this time that standardization began to occur among investment banks.
Prior to this point, it was common for firms operating within similar industries to do business with each other based on personal relationships and less formal screening processes. It was not until the 1920s that a restrictive anti-merger agreement began to be enforced with more aggressive policies following thereafter. Examples of this include the Glass–Steagall Act and the Chase Manhattan Bank Merger.
Ultimately, a movement began during the 1960s and 1970s that resulted in significant changes to how investment banking worked. One of these changes is the rise of the investment banking conglomerates through a series of acquisitions and mergers, which included JP Morgan Chase, Goldman Sachs and Merrill Lynch.
These mergers were possible because investment banks could raise capital from new sources such as pension funds or by borrowing money from other investors as well as their own shareholders; this was made possible because there were few laws preventing them from doing so .
After the start of the 21st century, the industry has since been transformed through the emergence of super-regional firms, which has led to a weakening of their international presence.
However, there are still firms that are considered “bulge bracket”, which refers to tier 1 investment banks with more than $10 billion in annual revenue. These types include: Goldman Sachs, Morgan Stanley and Merrill Lynch. Other successful global investment banks include JP Morgan Chase, Credit Suisse and Deutsche Bank AG.
Types of Investment Banks
Investment banks may be divided into three types: primary, secondary, and research.
Primary activities are those similar to traditional commercial banking: the provision of financing, investment banking products, and securities underwriting services. The focus is more on lending products than equity underwriting.
Secondary activities involves the execution of orders from other financial institutions or investors to sell or buy a security or other financial instrument. It is responsible for the pricing in capital markets (securities). Research involves compiling information about market trends and technologies, analyzing investment opportunities and identifying new investment opportunities in both fixed income instruments and equities. It works closely with sell side to evaluate them along with the sell side’s marketing department.
The investment banking division of banks is a collection of firms, each with unique functions, that offer a variety of services to the financial industry. The division is responsible for providing capital and capital markets products, securities underwriting and selling, mergers and acquisitions advisory services, syndication of loans and loan syndications for corporations, as well as debt and equity transactions.
The division’s primary goals are to provide equity risk analysis for corporations by identifying companies that are undervalued or are overvalued in light of risk factors such as market volatility and interest rate risks. An investment bank may be part of a larger banks’ retail (or consumer) banking division along with consumer financial services such as checking accounts or credit cards.
