Before I entered banking I remember thinking “I have no idea what investment banks actually do!” I knew they advised companies on things related to finance and that they made a lot of money doing it but when it came to the actual services they offered companies…I had no idea.
Half the confusion comes from the fact that most large investment banks are actually giant conglomerates which operate in several lines of business. The lines of business that each bank operate in (and specialise in) can be different but broadly speaking these are the different things that investment banks do
Advise companies on Mergers and Acquisitions (M&A)
- When most people refer to investment bankers this is what they are thinking of. Traditionally a company would decide that they wanted to buy another company and they would hire an investment bank to help them with deciding how much the company was worth.
- These days the industry is so competitive it is much more common for the investment bank to go to companies and pitch ideas to them and hope that they will get appointed if and when the company decides to do something
Help companies raise money on the stock exchange (ECM)
- Companies need to raise money for a variety of reasons, whether it is to expand into new areas or product lines or to acquire other companies. This can be done via an IPO (initial public offering) or by a secondary offering if the company is already listing.
- Investment banks help companies to raise money by providing their expertise in the process of raising money but also by providing access to investors who may want to invest in the companies. Often the investment bank which has helped the company acquire another (i.e. the M&A division) will also get the ECM role as well.
Help investors value the company (Equities Research)
- Investment banks also help investors to value the companies that are listed on the share market. They do this by providing research and investment advice on listed companies for their clients. People that do this role are typically called Equities Research Analysts.
- This role fits nicely into the investment banking business because it allows the bank to promote the ECM and M&A deals they are doing to investors but also provides a way of getting Sales and Trading business for the bank (listed below)
Provide a way for investors to trade in the stock market (Sales and Trading)
- Before the era of online trading and the discounted broker model, full service brokers were the integral part of the investment universe. They provided advice and access to the share market for investors. Today they do not provide this role to individual investors as much but they definitely still do so for institutions.
- The investment bank hopes that by providing good research (from the Equities Research division) for their institutional clients that these clients will then trade through the bank when they decide to buy or sell a stock and the bank makes a commission on this sale in the process
Help clients manage their individual investment accounts (Private Wealth Management)
- Investment banks don’t leave individual investors out in the lurch. They also offer services to clients to help them invest their money. Most investment banks only do this for particularly rich clients (where they can offer an expertise that regular financial institutions do not have the resources to offer).
- Services may include managing a client’s money and investing it in different products, whether through the share market (through their sales and trading arm) or in other investment products whether external or internal to the investment bank (see the Asset Management division below)
Invest on behalf of clients (Asset Management)
- Investment banks will often create managed financial products for their clients (as well as any external parties that want to invest in their product…for a fee). These can relate to a range of industries and asset classes including infrastructure funds, equities funds, private equity funds and a whole host of other products.
Invest on their own behalf (Proprietary Trading)
- Investment banks don’t only invest on client’s behalf, they will often also use their excess capital to invest on their own behalf (i.e. to make money for the bank) and this division is called Proprietary Trading.
As you can see from the brief summaries above investment banks try and involve themselves in almost every part of the investing and financial spectrum. In the coming weeks I will go into more of these divisions in detail.