Just what's investment banking? have you ever noticed that tons of individuals just throw round the term “investment banking” but none of them seem to actually know what exactly it is?
Try telling folks that you're employed in investment banking and likelihood is that they’ll either ask you to repair their ATM machine or mistaken you for a teller.
Lloyd Blankfein famously tried to form things easy once and just told everyone he does god’s work.
The media likes to form it seem super complex, but actually , investment banking is pretty simple.
The Middlemen
Let’s use an analogy.
Think of what a true realtor does. You know, those that broker a deal between people that have cash but looking to shop for land and other people who have land but looking to sell for cash.
Investment bankers are considerably like land agents. Except rather than selling land , they’re selling investment opportunities. and that they get paid tons doing it.
The bankers compile parties who have capital trying to find investment opportunities and parties who are trying to find investors.
Broadly speaking, a corporation that needs money can catch on in 3 ways:
Borrow debt
Sell equity (aka ownership)
Sell the whole company
This is the sell-side of investment banking. They’re selling an investment opportunity in exchange for cash.
But to the buy-side, each of those represent how to take a position and earn a ROI or return on investment.
Borrow Debt
Say you’re looking to shop for a house for $500K and need to borrow $200K. Where does one go? You attend a bank. All the retail banks would be happy to loan you money because they’ll earn interest. Your expense is their interest income. By lending you money, they’re earning a return on their investment.
But where does one go if you're an outsized company that must borrow $10 billion? You can’t just walk into Chase and expect the teller to offer you $10 billion.
Not many of us or companies during this world can offer you $10 billion in cash.
But there are many investors who can loan you alittle piece of that.
One investor might lend you $10 million, a second investor lend you $15 million, and so on. None of them can individually lend you $10 billion, but collectively, they could add up to $10 billion.
However, having to seek out and convince each investor is time consuming and you’ll got to have the connection .
That’s where the investment bankers are available . they are doing this for a living and maintain relationships with all the main players on Wall Street.
They’ll meet with investors willing to lend money and see what their appetite is. If these investors just like the opportunity (i.e. you’re willing to pay a high interest rate), they’ll subscribe or plan to invest in your debt. this is often called debt financing.
The company gets to borrow money, the lenders earns interest, and therefore the bankers get paid a fee.
Sell Equity
Now let’s assume you’ve bought the house for $500K after borrowing $200K from the bank.
A few months later, you realize that you simply want to urge thereon models & bottles game.
Just one problem. You don’t have enough cash and you can’t borrow more debt.
So how are you able to get cash without borrowing more debt? Well, you'll sell a bit of equity ownership within the house to your friends & family for cash.
That sounds good and you proceed to sell 10% of your house for $30,000 to your friend. Pro forma or “after the transaction”, you get the $30,000 take advantage the bank and now you own 90% of the house while your friend owns 10%.
Simple right? Same thing for companies.
Companies that don’t want to borrow debt can sell equity ownership within the company in exchange for cash, which they will use to fund the business and grow.
But large companies are worth tens of billions and really few investor has that kind of money laying around.
Similar to debt financing, there are many investors who would want to get alittle piece of the equity ownership.
So the investment bankers go around to satisfy different equity investors, who will subscribe the investment opportunity if they like what they’re seeing. this is often referred to as equity financing. You’re selling a bit of your equity or ownership in your company in exchange for cash.
The company gets cash, the investors gets a bit of the corporate , and therefore the bankers get paid a fee.
Sell the whole Company
A year after you bought the house, the important estate market’s doing great and therefore the house that you simply bought for $500,000 is now worth $700,000.
You’re doing pretty much for yourself.
You decide you would like to sell the house so you hire a true realtor to sell the property and reciprocally , you pay the agent a brokerage fee.
Companies add an equivalent way.
The owners of a business might want to exit and sell the corporate for cash. in order that they hire an underwriter to buy the corporate around to seek out a buyer.
The underwriter finds other companies or private equity firms who could be curious about acquiring the business. If both the customer and seller can agree on the terms, they sign an agreement and complete the acquisition . In finance, this is often referred to as mergers & acquisitions (“M&A”) or the buying and selling of companies.
When the deal is completed , the vendor gets the cash, the buyers acquires a corporation , and therefore the banker gets paid an M&A fee. Everyone’s happy.
Who are the World’s Largest Investment Banks Today?
The 9 largest investment banks within the world today are commonly mentioned because the “bulge brackets”. All of those banks are vital to the worldwide financial markets and that they are as follows:
Bank of America Merrill Lynch
Barclays
Citigroup
Credit Suisse
Deutsche Bank
Goldman Sachs
J.P. Morgan
Morgan Stanley
UBS
Conclusion
The above may be a high-level explanation of what investment banking is.
What you are doing on a day-to-day basis as an investment banking analyst though, that’s an entire different story.