Understanding Investment Banking
12 Nov, 2013
Big money. Long hours. Young age.
If you hear these words in a conversation, it likely concerns investment banking. Countless people from various faculties strive to begin their career in investment banking, with the primary intention of earning enormous sums of money at a young age and leading a glorious life. However, prospective bankers seldom know what investment banking is really like.
The Word on the Street
A common misconception amongst both management and non-management students is that investment banking consists of investing money on behalf of institutions, such as pension funds, or wealthy individuals, in the stock market, while incurring no risk yourself.
An investment bank is a financial institution which helps corporations, governments, and private businesses raise capital by acting as the underwriter in the issuance of stocks and bonds, and helps them execute large transactions. Twitter, for example, has hired the investment bank Goldman Sachs to underwrite its impending IPO. An investment bank can assist in mergers and acquisitions of corporations, and facilitate the trading of derivatives, equities, or bonds by acting as a market maker. Typically, bulge-bracket investment banks will also have an equity research division, which communicates with the management of companies to obtain information required for thorough analysis. This research is then used by investors to make investment decisions.
What do I do as an investment banker?
Investment banking consists primarily of four departments: the investment banking division (IBD), sales and trading (S&T), research, and equity capital markets (ECM). As an eager student, it is critical to understand the differences between these divisions, and the tasks associated with each.
Investment banking professionals focus on corporate advising to facilitate transactions such as mergers and acquisitions, restructuring, recapitalization, or selling assets. They take a long-term focus on serving their customers.
Equity capital markets is the nucleus of the investment bank, and often works with IBD to provide external financing to their clients’ transactions. ECM takes a short-term focus on the single transaction they are working on. They are the product experts, and provide advisory to the pricing, sizing and pitch of a of a bid to raise capital.
The sales and trading department analyzes the market and performs the execution of transactions and trading for the bank. Sales professionals maintain relationships with institutional investors who support the banks operations.
Lastly, the research department provides follow-on stock coverage to the banks clients, and operates independently from IBD. Safeguards must be put in place to avoid sharing of insider information between researchers and investment bankers.
At a an investment bank that has both an IBD and a research department, a “Chinese Wall” must be put into place. This serves as a virtual block of information flows between investment banking professionals and researchers. As a result, analysts cannot encourage the public to trade stocks for which the investment bank has insider information.
What about the glory and the money?
The primary tasks of analysts and associates will be conducting financial analysis, creating pitch materials, and answering to client requests. Analysts are rarely client-facing, and are involved primarily in back-office work. On average, analysts within the mergers and acquisitions group can expect to work 90-100 hours per week, and even more when in the midst of a deal. The work week is shorter in equity research and sales and trading, averaging “just” 60 to 70 hours. It becomes very difficult for young analysts to commit to social plans or relationships because of the unpredictable hours.
Undoubtedly, the pay at bulge-bracket investment banks is attractive. For first year analysts in the IB division, base salary is typically $80,000, with bonus ranging from 15%-150% of base. In equity research, base salary is $70,000, with bonus ranging from 30%-50%. Also, don’t forget about the $10,000 signing bonus.
Still want to be an investment banker?
Recruiting season for internships is just heating up, with peak hiring occurring in early January. Jobs with bulge-bracket global investment banks such as J.P. Morgan, Goldman Sachs, and Morgan Stanley are all extremely competitive. The top Canadian banks are Royal Bank of Canada, Bank of Montreal, Scotiabank, and TD. Investment banking is a high-powered and lucrative career path, but is clearly not for everyone. As an investment banker, work will probably be your top priority for the rest of your life. It is up to ambitious students to decide whether the potential rewards are worth the sacrifice.