Introduction

Whether you're preparing for interviews or just curious about investment banking, this post aims to demystify the essentials of investment banking. We dive into what investment banking entails, why it’s a sought-after career choice, how banks are structured, and the various roles within the industry.

Why Investment Banking

When preparing for an investment banking interview, one of the most common questions you'll encounter is, "Why investment banking?". Your answer needs to convincingly convey your passion for the industry, as well as your commitment to the demanding nature of the job. Here's how to craft a compelling response.

Personal Motivation

Start by sharing your personal motivation for choosing investment banking. This could be your fascination with facilitating major corporate deals, your desire to work in a challenging and rewarding environment, or your long-term career goals. Personalizing your response shows sincerity and determination.

• "I'm drawn to investment banking because I want to work on high-stakes deals that shape entire industries."

Skillset Alignment‍

Next, discuss how your skills and experiences align with the requirements of a role in investment banking. Emphasize traits like your analytical prowess, ability to handle high-pressure situations, and keen interest in financial markets. This highlights not only your qualifications but also your readiness to thrive in the demanding environment of investment banking.

• "My background in finance has equipped me with strong analytical skills, and my experience working on tight deadlines has prepared me for the high-pressure environment of investment banking."

Professional Aspirations

Finally, express how a career in investment banking aligns with your professional aspirations. Talk about how it offers the perfect platform to build a substantial network, gain extensive market knowledge, and potentially influence significant economic outcomes. By tying your future goals with the industry’s impact, you underscore your commitment and potential value to the firm.

• "Investment banking provides a unique opportunity to develop a deep understanding of the market, while contributing to major financial transactions."

Cover these points to create compelling responses that resonate with interviewers and showcase your enthusiasm for a career in investment banking.

What is Investment Banking

Investment banking is often seen as the pinnacle of financial expertise, bridging significant corporate transactions with sophisticated advisory services. Unlike commercial banks, which handle everyday financial needs like managing deposit accounts and providing loans, investment banks deal with big-league stuff like major corporate mergers, acquisitions, and raising capital. They primarily concentrate on two major areas: advisory services and securities underwriting.

Advisory Services

In the advisory arena, investment banks serve as indispensable advisers for companies seeking to expand, restructure, or engage in major financial transactions. Their roles include:

• ‍Mergers and Acquisitions (M&A): Investment banks evaluate potential mergers or acquisitions, assessing the financial health, market position, and strategic fit of potential buyers or targets. They manage the whole process, guiding clients through negotiations, performing financial analysis, and conducting the adequate due diligence.‍‍

• ‍Restructurings: When companies need to restructure their operations or debt, investment banks provide expert advice on the best strategies. This can involve reorganizing the company’s structure, renegotiating debt terms, or even managing bankruptcy proceedings to ensure the company can emerge in a stronger position.

• ‍Other Major Corporate Actions: This includes spin-offs, divestitures, and other significant corporate moves that require careful financial planning and strategic execution.

Securities Underwriting

When it comes to raising capital, investment banks are also the go-to. They act as intermediaries between entities needing capital, like corporations and governments, and investors willing to provide it. This process involves several key steps:

• ‍Valuation: Investment banks conduct a thorough valuation of a company’s worth and the risks involved in the securities being offered. This involves in-depth financial analysis and market research.‍

• ‍Pricing: Based on valuation, investment banks set the initial price for the securities. This is crucial as it determines the attractiveness of the securities to potential investors while ensuring that the issuing company can meet its financial goals.‍

• Managing the Sale: Investment banks manage the sale of securities, which can include stocks, bonds, or other financial instruments. This involves preparing the necessary documentation, marketing the securities to potential investors, and ultimately facilitating the sale to raise the required capital.

By focusing on these areas, investment banks play a vital role in the financial ecosystem, helping companies grow, restructure, and raise the capital needed to fund their operations and expansion plans.

The Game

Investment banks are typically divided between product and industry groups. Understanding this structure is key, as it will shape the nature of your work and your interactions within the bank depending on which team you end up joining.

Product Groups

Product groups specialize in specific financial products and services. Examples include:

• ‍Mergers and Acquisitions (M&A): Focus on advising companies on buying or merging with other companies. This involves evaluating potential targets, negotiating terms, and ensuring the deal aligns with strategic goals.‍

• ‍Equity Capital Markets (ECM): Handle all aspects of equity issuance, including initial public offerings (IPOs) and follow-on offerings. ECM teams work on pricing shares, preparing prospectuses, and marketing new equity to investors.‍

• Debt Capital Markets (DCM): Specialize in debt issuance, helping clients raise capital through bonds and other debt instruments. DCM teams assess the creditworthiness of issuers, structure debt offerings, and manage investor relations.‍

• ‍Leveraged Finance (LevFin): Deal with high-yield debt, often used to finance leveraged buyouts (LBOs) and other high-risk investments. This group structures and arranges debt financing for transactions involving significant leverage.

Industry Groups

Industry groups, on the other hand, focus on specific sectors or industries, providing expertise tailored to the unique needs and dynamics of each sector. Examples include:‍

• ‍Healthcare: Advising pharmaceutical companies, healthcare providers, and biotech firms on financial transactions. This includes M&A, capital raising, and strategic advisory services tailored to the healthcare industry's regulatory environment and market trends.‍

• ‍Technology, Media, and Telecom (TMT): Specializing in deals within the tech and media landscapes. TMT teams work with companies involved in software, hardware, media, and telecommunications, offering insights into the fast-evolving tech market.‍

• Energy: Covering oil and gas companies, renewable energy ventures, and large-scale utility projects. Energy teams provide advisory and financing services for transactions in the traditional and renewable energy sectors, considering factors like commodity prices and regulatory changes.

The distinction between product and industry groups allows investment banks to cater effectively to a diverse client base. Product groups offer specialized financial expertise, while industry groups provide deep sector knowledge. This combination enhances the advisory and transactional services investment banks provide, ensuring clients receive comprehensive and tailored support.

The Players

Investment banking is highly hierarchical, with each level playing a distinct role in the firm's operations.

Analyst (Entry-level)

• ‍Responsibilities: Analysts are the backbone of the team, responsible for creating financial models, conducting research, preparing pitch books, and supporting senior bankers in deal execution.‍

• ‍Skills Required: Strong analytical skills, attention to detail, proficiency in Excel and financial modelling, and the ability to work long hours under tight deadlines.‍

• Career Path: Typically, analysts are recruited from top universities and spend 2 years in the role before being considered for promotion to Associate.

"At the lowest level of the investment banking hierarchy are the analysts. For the recruiting banker the ideal analyst candidate is somebody with above-average intelligence, a love of money (or the capacity to learn that love), a view of the world conforming with that of the Marquis de Sade, and the willingness to work all night, every night, with a big grin on his face, like the joker from Batman.

The analysts are at the bottom of the shit heap. They are the algae under the rim of the public toilets at the Port Authority bus station, the scum below the scum at the bottom of a beer keg. Analysts quickly learn, in no uncertain terms, that their days as analysts terminate after three years.

To the uninitiated this may seem, at best, shortsighted and, at worst, akin to infanticide. Why jettison these young minds with two to three years of hardcore financial training? The answer is simple. The analysts have been tortured and abused for three years. They’ve reached the point of being dangerous. To keep them on would be to institutionalize sure seeds of discontent within the investment bank."

Associate (Mid-level)

• ‍Responsibilities: Associates oversee the analysts, review their work, and ensure the accuracy of financial models and presentations. They also play a key role in client interactions and deal execution.‍

• ‍Skills Required: Strong leadership and project management skills, advanced financial knowledge, and the ability to communicate effectively with clients and senior bankers.‍

• Career Path: Associates often have an MBA or significant industry experience and typically aim to be promoted to Vice President within 3-4 years.

Quote:

"At the next rung up the investment bank ladder are the associates. You can generally assume that the associates are a lot happier than the analysts, since they have both the institutional backing and the ability to ease their own misery by heaping agony onto the analysts. Therein lies the beauty of the hierarchy.

For the associates in an investment bank, there is no corresponding get-out-of-jail-free program to avail oneself of the end of a two-to-three-year stay. There is no light at the end of the proverbial tunnel. The associates are recruited under the expectation that they know what it is they’re signing on to do, and that once on board, they’ll dutifully climb the corporate ladder to the top of the golden pyramid. Vice present, senior vice president, managing director. The path is clear.

In reality, the attrition level for associates is fairly high. They leave for competing investment banks. They leave to work for clients of the investment bank. They leave when they realize that sex with themselves is becoming the norm. Whatever the reason, between the moles brought on board to climb the ladder, and those helicoptered in the to replace the departing lemmings, the flood of fresh-faced associates is constant."
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Vice President ("VP")

• ‍Responsibilities: VPs manage the overall execution of deals, coordinate between clients and the internal team, and develop new business opportunities. They are also involved in strategic decision-making and client relationship management.

• ‍Skills Required: Excellent negotiation and communication skills, a deep understanding of financial markets and products, and the ability to lead and mentor junior team members.‍

• Career Path: VPs aim to become Senior Vice Presidents (SVPs) or Executive Directors (EDs) in 3-4 years.

Executive Director ("ED")

• Responsibilities: EDs and SVPs focus on high-level client management, strategic planning, and significant deal origination. They have a substantial role in shaping the direction of the team and the bank’s strategic initiatives.‍

• ‍Skills Required: Extensive industry experience, strong client networks, and the ability to drive revenue growth through new business.‍

• Career Path: Progression to Managing Director usually takes 2-3 years, with a focus on building a solid track record of successful deals and client relationships.

Managing Director ("MD")

• ‍Responsibilities: MDs are the leaders of the investment bank. They are responsible for originating deals, maintaining high-profile client relationships, and driving the overall strategy and profitability of the bank.‍

• ‍Skills Required: Exceptional leadership, extensive industry knowledge, a broad network of contacts, and a proven ability to generate substantial revenue.‍

• Career Path: MDs often have decades of experience and are seen as the faces of the firm. Their success is measured by their ability to bring in large deals and maintain strong client relationships.

Quote:

"Above the associates are the vice presidents, the senior vice presidents (or junior managing directors, depending on the firm), and the managing directors. The associates all have the same goals. They want to make vice president in three to four years, senior vice president in five to seven years, and managing director in seven to nine years.

They all hope to be making seven figures by the time they hit managing director. Sometimes, though, from the associates' perspective, it seems like there are just three levels in the banking hierarchy: analysts, associates, and everybody else.

After all, anybody senior to an associate has the institution's divine sanction to shit on the associate's head, and if you're the one getting shit upon there isn't usually much reason to further subdivide the hierarchy of those doing the shitting."
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Buy Side vs. Sell Side

You will often hear the terms "buy side" and "sell side", typically when referring to PEs and investment banks, respectively. Both play integral roles in the financial industry, but their functions and objectives differ substantially.

Sell Side

The sell side primarily deals with the creation, promotion, and sale of securities to the public and institutional investors.

Key players include investment banks, advisory firms, and brokerages.

Their main activities include:

• ‍Advisory Services: Sell side firms offer strategic advice on mergers and acquisitions (M&A), helping companies buy, sell, or merge with other firms. This includes valuation, deal structuring, and negotiation.‍

• ‍Underwriting: Investment banks on the sell side underwrite new securities for companies going public (IPOs) or issuing additional shares. They help determine the initial price of the securities and ensure their successful launch in the market.‍

• Research and Analysis: Analysts on the sell side conduct in-depth research on various companies, industries, and markets. Their reports and recommendations influence investment decisions made by buy side clients.‍

• ‍Market Making: Sell side firms often act as market makers, providing liquidity by buying and selling securities from their own inventory. This helps ensure smooth market operations.

Buy Side

The buy side represents firms that purchase securities and manage assets with the goal of generating returns for their clients.

Major players include mutual funds, hedge funds, private equity firms, and pension funds. Their focus is on:

• ‍Asset Management: Buy side firms manage portfolios of investments, making decisions on asset allocation, security selection, and risk management to maximize returns.‍

• ‍Investment Research: Although they rely on sell side research, buy side analysts conduct their own proprietary research to inform their investment strategies and decisions.‍

• Trading: Buy side traders execute buy and sell orders based on the decisions made by portfolio managers and analysts. They aim to achieve the best possible prices while minimizing market impact and transaction costs.

Key Differences:

• ‍Objective: The sell side focuses on facilitating transactions and providing advisory services, whereas the buy side aims to manage assets and generate returns.

• ‍Revenue Model: Sell side firms earn revenue through fees, commissions, and underwriting spreads, while buy side firms make money from management fees and performance incentives (typically in a "2-20" structure, for 2% management fees / 20% carry).‍

• Client Interaction: Sell side firms work directly with companies issuing securities and provide services to buy side firms, while buy side firms primarily serve investors looking to grow their capital.

Unrelated Term in M&A Transactions

In M&A, "sell side" and "buy side" carry different meanings. Sell-side M&A involves investment bankers representing a client selling a business or asset, assisting in finding buyers and negotiating terms. Buy-side M&A refers to bankers representing a client looking to purchase a business or asset, focusing on identifying targets, conducting due diligence, and negotiating purchase terms.

Investment bankers often prefer sell-side engagements because sellers are typically committed to selling, making transactions more likely to complete and thus earning fees for the bank. Conversely, buy-side pitches don't always result in deals, making sell-side mandates more predictable and profitable.

Bulge Brackets vs. Elite Boutiques

Within the investment banking landscape, both bulge bracket banks and elite boutique firms stand out, each offering distinct experiences and advantages.

Bulge Brackets

These are the largest and most prestigious banks, known for handling the biggest deals and having a global presence. Examples include Goldman Sachs, Morgan Stanley, and JP Morgan.

Advantages:‍

• Exposure to High-Profile Transactions: Working at a bulge bracket bank offers the chance to be involved in some of the most significant and high-profile deals in the market.

• ‍Extensive Training Programmes: These banks provide comprehensive training and development programmes, equipping employees with a wide range of skills.

• Prestige and Recognition: Being associated with a globally recognized brand can enhance your professional credibility and open doors in the industry.

• ‍Networking Opportunities: The large size and global reach of bulge bracket banks provide vast networking opportunities with industry leaders and professionals.

• Resources: These banks have extensive resources and infrastructure to support their employees and clients.

Challenges:

• Highly Competitive Environment: The competition within bulge bracket banks is intense, requiring consistent high performance.

• ‍Long Hours and Intense Pressure: Employees often face long working hours and significant pressure to meet demanding targets and deadlines.

Elite Boutiques

Elite boutique firms are smaller and more specialized, focusing primarily on advisory services and often excelling in particular sectors or types of transactions. Examples include Lazard, Evercore, and Moelis & Company.

Advantages:

• Entrepreneurial Environment: Elite boutiques often provide a more entrepreneurial and flexible working environment.

• ‍Closer Client Interaction: These firms offer the opportunity for more direct and personal interaction with clients.

• Significant Responsibility Early On: Employees at elite boutiques typically take on significant responsibility earlier in their careers.

• ‍Leaner Deal Teams: Smaller teams allow for greater individual impact on transactions.

• Higher Compensation: Elite boutiques are known for offering higher compensation.

Challenges:

• Focused Experience: While offering a deep and focused experience, elite boutiques may lack the breadth of services provided by larger banks.

• ‍Limited Global Reach: They often do not have the same global presence and resources as bulge bracket banks, which can limit international exposure and opportunities.

Both bulge bracket banks and elite boutique firms have their own sets of advantages and challenges. Deciding between the two depends on your career goals, preferred working environment, and personal aspirations.

Compensation

Why so many people flock to investment banking despite the long hours and intense pressure? The answer is simple: the compensation is just too attractive to ignore. The financial rewards in investment banking are a major draw, offering highly competitive pay that reflects the demanding nature of the job and the expertise required.

In the UK, for instance:

• ‍Base Salary: The base salary for entry-level analysts typically ranges from £70,000 to £80,000 per year. Associates earn between £90,000 and £120,000, with further increases as they rise up the ranks.‍

• ‍Bonuses: Annual bonuses play a significant role in total compensation and are performance-based. Analysts can expect bonuses ranging from 30% to 70% of their base salary, while associates might see bonuses between 50% to 100%. For senior positions such as Vice Presidents and Managing Directors, bonuses can be substantial, often equalling or exceeding their base salary, leading to total compensation well into six figures.‍

• Other Benefits: Investment bankers in the UK also receive a range of other benefits, including comprehensive health insurance, pension schemes, or travel perks, enhancing the overall compensation package.

Conclusion

We have covered the basics of what investment banking entails. This foundation provides a solid starting point for anyone interested in a career in investment banking.

For those looking to dive deeper into the investment banking world, there are several classic books that offer invaluable insights and entertaining narratives:

• "Monkey Business: Swinging Through the Wall Street Jungle" by John Rolfe and Peter Troob: This book provides a candid, humorous, and sometimes sobering look at the day-to-day life of investment bankers.

• ‍"Liar's Poker" by Michael Lewis: An engaging account of the author’s experiences on Wall Street during the 1980s, highlighting the culture and excesses of the time.

• "Barbarians at the Gate: The Fall of RJR Nabisco" by Bryan Burrough and John Helyar: A detailed and riveting story of one of the largest leveraged buyouts in history, offering deep insights into the world of high-stakes finance.

• ‍"The Intelligent Investor" by Benjamin Graham: While not exclusively about investment banking, this classic provides timeless advice on investing, making it essential reading for anyone in the finance industry.

These books will give you an insider’s perspective and a broader understanding of the financial world, helping to enhance your knowledge and prepare you for a successful career in investment banking.