Updated: Oct 6, 2020
What is Investment Banking?
Investment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services.
Pic : Goldman Sachs Headquarters, New York City
Investment banks act as intermediaries between investors (who have money to invest) and corporations (who require capital to grow and run their businesses). This guide will cover what investment banking is and what investment bankers actually do.
Pic : How investment banking works
I. What Do Investment Banks Do?
There can sometimes be confusion between an investment bank and the investment banking division (IBD) of a bank. Full-service investment banks offer a wide range of services that include underwriting, M&A, sales and trading, equity research, asset management, commercial banking, and retail banking. The investment banking division of a bank provides only the underwriting and M&A advisory services.
Full-service banks offer the following services:
Underwriting – Capital raising and underwriting groups work between investors and companies that want to raise money or go public via the IPO process. This function serves the primary market or “new capital”.
Mergers & Acquisitions (M&A) – Advisory roles for both buyers and sellers of businesses, managing the M&A process start to finish.
Sales & Trading – Matching up buyers and sellers of securities in the secondary market. Sales and trading groups in investment banking act as agents for clients and also can trade the firm’s own capital.
Equity Research – The equity research group research, or “coverage”, of securities helps investors make investment decisions and supports trading of stocks.
Asset Management – Managing investments for a wide range of investors including institutions and individuals, across a wide range of investment styles.
Underwriting Services in Investment Banking
Underwriting is the process of raising capital through selling stocks or bonds to investors (e.g., an initial public offering IPO) on behalf of corporations or other entities. Businesses need money to operate and grow their businesses, and the bankers help them get that money by marketing the company to investors.
There are generally three types of underwriting:
Firm Commitment – The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
Best Efforts – Underwriter commits to selling as much of the issue as possible at the agreed-upon offering price but can return any unsold shares to the issuer without financial responsibility.
All-or-None – If the entire issue cannot be sold at the offering price, the deal is called off and the issuing company receives nothing.
Once the bank has started marketing the offering, the following book-building steps are taken to price and complete the deal.
Pic : Book building process
II. M&A Advisory Services
Mergers and acquisitions (M&A) advisory is the process of helping corporations and institutions find, evaluate, and complete acquisitions of businesses. This is a key function in i-banking. Banks use their extensive networks and relationships to find opportunities and help negotiate on their client’s behalf. Bankers advise on both sides of M&A transactions, representing either the “buy-side” or the “sell-side” of the deal.
Below is an overview of the 10-step mergers and acquisitions process.
Pic : M&A Process
III. Banking Clients
Investment bankers advise a wide range of clients on their capital raising and M&A needs. These clients can be located around the world.
Investment banks’ clients include:
Governments – Investment banks work with governments to raise money, trade securities, and buy or sell crown corporations.
Corporations – Bankers work with both private and public companies to help them go public (IPO), raise additional capital, grow their businesses, make acquisitions, sell business units, and provide research for them and general corporate finance advice.
Institutions – Banks work with institutional investors who manage other people’s money to help them trade securities and provide research. They also work with private equity firms to help them acquire portfolio companies and exit those positions by either selling to a strategic buyer or via an IPO.
Investment Banking Skills
I-banking work requires a lot of financial modeling and valuation. Whether for underwriting or M&A activities, Analysts and Associates at banks spend a lot of time in Excel, building financial models and using various valuation methods to advise their clients and complete deals.
IV. Investment banking requires the following skills:
Business valuation – Using a wide range of valuation methods such as comparable company analysis, precedent transactions, and DCF analysis.
Pitchbooks and presentations – Building pitchbooks and PPT presentations from scratch to pitch ideas to prospective clients and win new business (check out CFI’s Pitchbook Course).
Transaction documents – Preparing documents such as a confidential information memorandum (CIM), investment teaser, term sheet, confidentiality agreement, building a data room, and much more (check out CFI’s library of free transaction templates).
Relationship management – Working with existing clients to successfully close a deal and make sure clients are happy with the service being provided.
Sales and business development – Constantly meeting with prospective clients to pitch them ideas, offer them support in their work, and provide value-added advice that will ultimately win new business.
Negotiation – Being a major factor in the negotiation tactics between buyers and sellers in a transaction and helping clients maximize value creation.
Pic : The screenshot above is of a leveraged buyout (LBO) model
IV. What is Goldman Sachs ?
The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.
The Goldman Sachs Group, Inc., is an American multinational investment bank and financial services company headquartered in New York City. It offers services in investment management, securities, asset management, prime brokerage, and securities underwriting. It also provides investment banking to institutional investors.
The bank is one of the largest investment banking enterprises in the world, and is a primary dealer in the United States Treasury security market and more generally, a prominent market maker. The group also owns Goldman Sachs Bank USA, a direct bank. Goldman Sachs was founded in 1869 and is headquartered at 200 West Street in Lower Manhattan with additional offices in other international financial centers.
As a result of its involvement in securitization during the subprime mortgage crisis, Goldman Sachs suffered during the financial crisis of 2007–2008,and received a $10 billion investment from the United States Department of the Treasury as part of the Troubled Asset Relief Program, a financial bailout created by the Emergency Economic Stabilization Act of 2008. The investment was made in November 2008 and was repaid in June 2009.
Pic : Goldman Sachs Office , New Jersey.
Several former employees of Goldman Sachs have moved on to work in government positions. Notable examples include former U.S. Secretaries of the Treasury Robert Rubin and Henry Paulson; current United States Secretary of the Treasury Steven Mnuchin; former Under Secretary of State John C. Whitehead; former chief economic advisor Gary Cohn; Governor of New Jersey Phil Murphy and former Governor of New Jersey Jon Corzine; former Prime Minister of Italy Mario Monti; European Central Bank President Mario Draghi; former Bank of Canada and Bank of England Governor Mark Carney; British Chancellor of the Exchequer Rishi Sunak; and the former Prime Minister of Australia Malcolm Turnbull. In addition, former Goldman employees have headed the New York Stock Exchange, the World Bank, and competing banks such as Citigroup and