The daily life of an i-Banker
What do investment bankers do?
Uh…they are bankers who invest… right?
Well, yes, indeed, investment bankers do invest. However, it’s a little more complicated than that…
Investment banking is one of the most prestigious professions on Wall Street. Although it features some of the most coveted and financially rewarding positions in the banking industry, investment banking is also one of the most challenging and difficult career paths, noted for being characterized by long working hours and high levels of stress.
It’s not unusual for investment banking analysts or associates to put in 80 to 100 hours of work a week. (Of course, it’s not quite as horrific as some might lead you to believe – it’s not like investment bankers work 80 to 100 hours every week).
There’s quite a bit of confusion – combined with not much actual information – regarding the field of investment banking. Most people are probably at least familiar with, have at least heard the phrase “investment banking”, but don’t really have a clear idea in their minds of what investment banking entails, other than perhaps the vaguest of notions that investing and banking are somehow involved.
In this article we’re going to demystify investment banking, explaining as plainly and simply as possible just what it is that investment bankers do.
Before getting into what the individuals in various job positions at an investment bank do, let’s first clarify the financial services that investment banks provide.
Investment banks exist primarily to facilitate capital funding through investment in either corporations or government entities such as municipalities or states. Investment banks work to provide such organizations with financing through activities such as underwriting (which basically just means finding buyers or investors) the issuance of stock or bonds. When you hear that a company is going public and offering stock shares to investors for the first time through an “initial public offering” (IPO), an investment bank is typically the entity handling the IPO.
In managing an IPO, an investment bank is responsible for creating a prospectus that explains the company and the terms of the stock offering, handling all necessary legal and compliance issues with the appropriate financial regulatory body, such as the U.S. Securities and Exchange Commission (SEC), and setting the initial stock price at a level that will hopefully attract sufficient investment to obtain the financing that the company wants or needs.
Determining IPO stock prices can be a tricky business, as the investment bank has to strike a delicate balance in pegging an optimal price that will provide maximum funding for their client company while also attracting a maximum number of investors. Price the stock too high and it may fail to attract sufficient investors; price the stock too low and it may fail to provide a sufficient amount of capital.
When handling bond offerings, investment banks provide client services similar to those for an IPO, and again the key element is pricing which, in the case of bonds, is determined by the interest rate offered. Understanding underwriting is a big part of understanding, “What do investment bankers do?”
Investment banks also assist clients in transactions such as mergers and acquisitions (M&A) where one company seeks to acquire another or when a company is offered for sale. The company valuations that investment banks produce typically determine what one company is willing to pay for another.
For companies looking to make an acquisition, investment banks advise their client on both the value of the company being acquired and about the most favorable way to structure the offer. Investment banks whose client is a company targeted for acquisition advise their client by determining a reasonable asking price, or value, for the company, and by advising the client on favorable or unfavorable structures of the sale. Acquisitions may be made in deals involving all cash, stock swaps, or a combination of cash and stocks.
Acting in the above-outlined capacities, investment banks basically serve as financial advisors to their clients in relation to capital markets, the markets that provide capital through the sale of equities (stocks) or debt instruments (bonds).
It’s probably already easy to see that investment banking is not just a single job. Rather, it is a business, within the banking industry, that includes a number of jobs. Looking at job titles will further answer the question of, “what do investment bankers do?”
Admittedly, things can get a bit confusing, since virtually anyone, other than clerical support staff, who works at an investment bank will usually describe themselves as “an investment banker”, regardless of their specific job title.
There are two ways to look at what investment bankers do. One is by their job title, which basically determines what type of tasks they handle. The other is by the division of the investment bank they work in, which determines the types of projects they work on.
Analysts and Associates are both considered entry-level positions at an investment bank, with associates occupying a slightly higher rung on the corporate ladder, usually by virtue of possessing an MBA or substantial prior experience in the financial industry.
Analysts are typically recent college graduates or individuals who may have some financial industry work experience, but who are new to investment banking. Analysts can usually work their way up to becoming associates within three or four years, although doing so may require not only gaining work experience but additional education as well. Most investment banks prefer their associates to have an MBA or other graduate degree related to finance.
Analysts and associates generally split the “grunt” work of investment banking – doing basic research and producing endless reports that are typically sent back down by vice presidents or directors for endless revisions. They are also responsible for putting together what are called “pitch books”.
An investment banking pitch book is pretty much what it sounds like; a “book” (i.e., lengthy report or presentation) designed to pitch the bank’s services to new or existing clients. Pitch books are used by directors or managing directors as handy reference guides and visual aids when making sales pitches to clients.
For example, a pitch book for a proposed IPO basically attempts to lay out how the bank will help the company considering the IPO to realize more money than it could ever have imagined possible. To buttress the bank’s argument, a pitch book will often recount how successfully it handled the IPO of a similar company. However, just to cover its bases and avoid unrealistic expectations, the pitch book will also present numerous scenarios of various possible outcomes for the IPO, courtesy of numerous projections run by analysts or associates.
An analyst’s day is typically occupied with doing research and writing reports. Investment banking analysts usually become world-class experts at generating spreadsheets in Excel. They are also often responsible for handling their supervisors’ schedules and fielding phone calls from clients.
Keys to success as an analyst are not complaining, fetching coffee and snack orders properly, always giving your supervisor all the credit, and learning how to stay out of the line of fire when something goes wrong.
Associates are counted on to possess all the skills of analysts and to additionally be able to generate solid discounted cash flow (DCF) valuations of companies, arrange meetings with clients, price new offerings, and produce (with the help of analysts doing all the hard work) weekly newsletters.
Keys to being a successful associate, and hopefully moving on to a vice president or director position as soon as possible, include making sure the analysts don’t screw anything up, being able to successfully cultivate personal relationships with clients, always giving your supervisor all the credit, and the ability to present bad news in a way that makes it sound not quite so bad.
Vice presidents are middle management personnel at an investment bank, who usually directly supervise the analysts and associates. They have more direct contact with clients than the analysts and associates, who are typically hidden away in the back of the office.
Directors represent the next rung up the ladder. In addition to supervising teams in their area of specialization, they are more actively involved in soliciting clients and handling client relationships. Directors are often responsible for deciding on the structure for a specific capital funding deal, such as whether it will be pursued through an equity or a debt offering.
At the top of the investment banking hierarchy are managing directors. Managing directors are the firm’s principal “salespeople,” tasked primarily with attracting new clients. They also serve as the main contact person for key existing clients. In that capacity, their job is to (A) keep existing clients happy, so as to retain their business, and (B) suggest possible new undertakings to clients, such as an acquisition, that will generate additional revenues for the investment bank.
To sum things up, as you move up the corporate ladder at an investment bank, you generally move away from having to do the labor-intensive tasks such as research and generating reports, and more toward handling the marketing and people-skills tasks of cultivating relationships with clients.
In addition to work being divided by the basic types of tasks assigned to different job titles within an investment bank, one can also view the work done by investment bankers according to the general area of investment banking that different endeavors fall under. We are now getting closer to understanding “what do investment bankers do?”
Most investment banks divide their staff into working groups assigned to cover specific industries or market sectors. Each industry coverage group is headed by a managing director overseeing a team of directors, vice presidents, associates, and analysts, whose overall job is to continually be on top of news, trends, and key companies within their assigned industry.
The industry group’s job is to solicit new client business and service existing clients within their assigned sector of the market. Tasks include presenting pitches and ideas to clients, preparing pitch books, writing industry reports, and executing transactions.
Separate individual teams are usually assembled within an industry coverage group to handle specific projects for clients. Alternatively, specific projects may be assigned to teams of managing directors, directors, vice presidents, associates, and analysts within the appropriate divisions of either “corporate finance” or “mergers and acquisitions”.
Corporate finance work in an investment bank is focused on helping clients obtain necessary capital for either new growth projects or simply to finance ongoing projects or operations.
Corporate finance teams aim to determine the ideal means of obtaining financing, among possibilities that include debt, equity, convertible bonds, preferred stock, and derivatives.
This division of an investment bank handles its usual capital markets work for clients, such as IPOs and bond offerings. Sometimes this division is further broken up into teams that specifically handle different types of bond issues, such as sovereign, convertible, zero-coupon, or municipal bonds.
Equity capital markets (ECM) specialists may work with specialists in other divisions of the investment bank, such as foreign currency or derivatives experts, in order to devise the most efficient means of raising equity capital.
When it comes to understanding “what do investment bankers do?”, it’s important to look at the skills required for the job. An investment banker has a wide array of responsibilities, ranging from conducting industry research to tracking financial trends and handling a pile of administrative duties. The exact responsibilities depend on the firm, division, and industry category. Investment bankers should expect to perform the following activities.
Investment bankers spend hours analyzing market reports and databases to get relevant information to aid in decision-making. The research may range from finding and comparing stock performances for several companies to building company profiles for reports. On a given day, they may spend countless hours finding the latest technology in healthcare, the size of oil fields in Nigeria, or studying emerging market economies in Asia.
Doing company valuations, performing financial modeling, and calculating financial metrics requires people who are good with numbers, and this is one of the responsibilities that investment bankers should expect to fulfill on a daily basis.
New investment bankers are required to prepare pitch book presentations that outline proposals, benefits, risks, and timelines. They are required to do the majority of the work, from preparing slides to making presentations, after factoring in comments and markups from the seniors. Investment analysts should be prepared for sudden and unreasonable deadlines for the pitches and presentation materials.
Apart from the usual responsibilities, investment bankers may be required to organize meetings, make travel arrangements, prepare notes, print documents, edit reports, and send updates to team members. On several occasions, they may find themselves making coffee, booking a restaurant for a group dinner, fixing printers, and running other minor errands. Some investment analysts call themselves “mini-admins” due to the many administrative roles that they perform every day.
Investment banks play a key role in helping companies and government entities obtain capital financing. As financial advisors to their clients, they help to price capital, allocate resources, and manage investments. Although investment banks have been scrutinized and criticized from many different angles in recent years, they are virtually an indispensable element for the smooth, successful operation of a free market economy. Hopefully, this has helped answer the question for you, “What do investment bankers do?”
Thank you for reading CFI’s guide to “What do Investment Bankers do?” To learn more about the banking industry, see the following resources:
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