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“Investment Banking” is an oft used buzzword thrown around at family dinners when hearing about what your long lost cousin has been doing, or a lucrative, suggested career path touted by family and relatives. Even amongst friends, media like Industry, Wolf of Wall Street, and American Psycho come to mind when thinking about what happens in these banks. Vaguely speaking, people dismiss it as a job about “the markets, stocks, and the economy.” But what is Investment Banking?
The industry is too large not to know about; generating USD $132 billion in 2021 revenue within the U.S. alone, it should be worth knowing what the actual functions of an Investment Bank are, and what junior-level bankers actually do.
Truth be told, Investment Banking is far more than buying low and selling high as many people believe; it is primarily concerned with two functions: capital raising and mergers and acquisitions (herein referred to as M&A). While there are many more important functions of Investment Banking (which I will briefly mention at the end for those interested), this article explains each of these at a high level, and what an analyst does for each role.
Capital Raising
Businesses will always need capital (i.e. money) to do anything. Using a simple analogy: if you wanted to start a lemonade stand, you would need capital to pay for lemons, juicing equipment, a stand, and cups amongst other costs. While this might seem affordable, imagine this at a macro scale: large businesses in the world might need money to open hundreds of new factories and outlets, pay for research into inventing new medicines, or build a new railroad. The possibilities are endless for why companies need capital, and sometimes, they don’t have the money needed to do it.
One role of Investment Bankers is to assist with raising this capital, or in other words, finding people who would give businesses money in exchange for something, be it a promise to pay this money back with interest (debt), or to have a stake in the company (equity). On the job, capital raising has many processes involved: sourcing parties who would offer capital, deciding the terms of these agreements, and making the transfer of money occur.
At the analyst level, we assist our teams with constructing the necessary materials that come with this for our clients. If your lemonade stand needed money, we would be advising you on which banks, companies, or people would do that for you, and the favorability of each of these terms. Sometimes, the Investment Bank would actually be the party to offer this money, if favorable. Of course, these recommendations need to be backed by necessary analysis, which is what we spend a good amount of time doing - seeing the favorability of terms, negotiating with other parties, and recommending what is the best way to find this capital.
Mergers and Acquisitions (M&A)
M&A happens to be another term that can be seen on any business news headline page. In line with the lemonade analogy, what if you decide that you wanted to start selling apple juice as well? Rather than taking the time to develop the perfect apple juice recipe or find the supermarket with the best apples, you might think to buy another business that already makes great apple juice so that you don’t have to repeat the arduous process of starting from scratch.
On the other hand, say you are an apple and pear juice business. Perhaps you want to stop selling apple juice to focus on pear products. You might have an amazing recipe, apples in storage, top-quality apple juicers, and other equipment necessary to run this business. It could be beneficial for you to sell the apple juice part of your business to the lemonade stand.
Let’s take this to a larger scale again: businesses often seek ways to improve by buying other businesses or even selling parts of their own. Society’s needs are always changing, so this could be for expansion of product offerings, or even diversification into others. Your lemonade stand could buy a delivery service, a soda business, or anything under the sun that could help the it improve.
M&A within Investment Banking helps businesses merge with or acquire other businesses. This comes with many questions, and to name a few:
How much is the business you want to buy or sell worth?
What specifically does the other business offer to yours or what do you offer them?
What are the businesses out there available to be bought, or who would buy your business?
How could this impact your business or theirs in a synergistic fashion?
If you don’t have the cash on hand to buy a business, where do you get the money?
Investment Bankers attempt to answer these questions, once again with a series of analyses that take the effort of many people, hours, and discussions. We help clients with buying other businesses (buy-side) or selling a part of their own business (sell-side) by answering the questions above.
How would you value your lemonade stand? Probably by looking at the value of other lemonade stands, or by how much you earn every year. The list goes on of how you might prescribe “value” to a company, which is the question every Investment Banker attempts to answer.
On a daily basis, analysts will put together materials for clients to see what is out there, potential prices, ways of sourcing this capital (as explained earlier), and how the purchase or sale would impact the business itself.
All in all, Investment Banking is a career often spoken about but not often understood. A day in the life on Wall Street will involve wearing all of the hats mentioned above, and more. Its name is self-explanatory, as it is banking that has to do with investments. If this article has piqued your interest, I’d recommend reading into other functions that would need much more explaining, such as restructuring, shareholder advisory, and private placements. Businesses always need advice and services, so the list could go on forever, but I assure that if you start reading, you will always have something new to learn about the industry.
I have been working with the team behind EdXP since 2017 in their endeavour to bring quality IB (International Baccalaureate, not Investment Banking) education to students around the world. We worked together to teach and guide IB students based in Hong Kong, Shanghai, Europe and the USA in various ways to succeed in these examinations and beyond. Reporting directly to the founding team, I know that they are passionate about this cause and have a team of experienced and competent IB specialists whose expertise go far beyond education itself. I also played a consulting role with the creation of EdXP and I’m confident that this will help IB students around the world to achieve success! That being said, I hope you learned more about Investment Banking from this read.
This article was written by Ben, a student at Cornell University and a former IBDP student who scored 42 points at Anglo-Chinese School (Independent), Singapore. He is currently pursuing a career in finance, and has been accepted into the graduate programme of Evercore New York, a boutique investment banking firm in Wall Street. Ben is also actively involved with EdXP as a consultant in the creation and development of the platform.
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