Introduction To Investment Banking
Introduction To Investment Banking
Introduction To Investment Banking
INTRODUCTION TO
INVESTMENT BANKING
CONTENT
1 What is IB?
2 Types of IB
3 Core activities at IB
IB business
▫ IBs engage in public and private market transactions
for corporations, governments, and investors
▫ Traditionally, these transactions include M&A,
divestitures, the issuance of equity or debt securities
(capital raising), or a combination of both. IBs earn
M&A advisory fees, underwriting fees
▫ IBs today also include other securities business such
as trading, securitization, financial engineering,
merchant banking, investment management, and
securities services (prime brokerage, securities
lending and financing). IBs earn fees, commissions,
and gains from principal transactions
1. What is IB?
The history of IB
▫ Most of the oldest IBs started out as merchants trading
in commodities. The industry received a boost during
the Civil War when banks were syndicated to meet the
government’s need for money to fund its war efforts.
The 1800s also saw the birth of some of the most
famous IBs, such as JP Morgan and Goldman Sachs
▫ The term ‘IB’ gained popularity in the late 19th – early
20th century, largely in relation to the US. This period
marked a dramatic expansion for the IB industry which
benefitted from the prosperous years following the 1 st
World War, with the period sometimes referred to as a
golden age for investment banking
1. What is IB?
The history of IB
▫ The Great Depression – Excessive market
speculation, and unsustainable surges in stock prices
triggered the market crash of 1929 – was a difficult
time for IBs, some of which were forced to merge to
survive.
▫ The crash also triggered more stringent regulation for
the industry, including the famous Glass-Steagall Act
of 1933 which required the separation of commercial
banking from investment banking. JP Morgan for
instance was forced to spin off its securities
underwriting division to form Morgan Stanley & Co as
an independent investment bank.
1. What is IB?
The history of IB
▫ The 2nd golden age continued in the 1990s, characterized
by the dot-com boom and bubble. The enactment of the
Gramm-Leach-Bliley Act in November 1999 effectively
repealed the long-standing prohibitions on the mixing of
banking with securities or insurance businesses under the
Glass-Steagall Act and thus permitted “broad banking”
▫ The financial crisis - the speculative bubble in housing
prices, overreliance on sub-prime mortgage lending which
damaged financial institutions globally. Among the IB
victims were Bear Stearns and Lehman Brothers. The
financial crisis triggered consolidation in the industry, with
JPMorgan & Chase acquiring Bear Sterns, while Bank of
America snapped up Merrill Lynch
1. What is IB?
The history of IB
▫ The future of the industry is a highly debated topic.
There is no question that the financial services
industry is going through something
pretty significant post-crisis. Many banks had near-
death experiences in 2008 and 2009, and remain
hobbled
▫ IBs are facing an intensely competitive environment,
fostered by regulatory changes, by globalization, and
by technological advances. As a result, most IBs have
expanded to comprise all major capital market
activities
2. Types of IB
2. Types of IB
▫Firms Sandler
O’Neill
Greenhill Lazard
Front office
▫ Corporate Finance – also labeled simply IB
Division
Product Groups – focus on a specific deal type,
such as equity or debt issuances or acquisitions,
including
Mergers and Acquisitions (M&A)
Equity Capital Markets (ECM)
Debt Capital Markets (DCM)
Leveraged Finance (LF)
Restructuring (RX)
3. Core activities at IB
Front office
▫ Corporate Finance – also labeled simply IB
Division
Industry Groups – specialize in a specific industry
and often work with individual companies in that
industry
Real estate, Media & telecom, Finance, Consumer
retail, Power & Utilities, Transportation, Healthcare,
Technology, F&B, Oil & gas…
3. Core activities at IB
Front office
Raising Capital and Security Underwriting – IBs are
intermediaries between the issuers of securities and the
investing public. IBs determine the value and riskiness of the
business in order to price, underwrite, and then sell the
securities
Sample Underwriting Scenario: Gillette wants to raise some money for a new project.
One option is to issue more stock (secondary stock offering). They’ll go to JPMorgan,
which will price the new shares. JPMorgan will then underwrite the offering, meaning it
guarantees that Gillette receives proceeds at $(share price*newly issued shares) less
JPMorgan’s fees. Then, JPMorgan will use its institutional salesforce to go out and get
Fidelity and many other institutional investors to buy chunks of shares from the offering.
JPMorgan’s traders will facilitate the buying and selling of these new shares by buying
and selling Gilette shares out of their own account, thereby making a market for the
Gillette offering
3. Core activities at IB
Front office
M&A advisory and other corporate reorganizations –
an important source of fee income for IBs as the fee
margin structure is substantially higher than most
underwriting fees)
IBs usually involve in various aspects of the
acquisition and sale of companies and assets such
as business valuation, negotiation, pricing and
structuring of transactions, as well as procedure
and implementation
When an IB takes on the role of an advisor to a
potential seller (target), this is called a sell-side
engagement. Conversely, when an IB acts as an
advisor to the buyer (acquirer), this is called a buy-
side assignment
3. Core activities at IB
Front office
▫ Sales and Trading – helps institutional investor
clients (pension funds, endowments, insurance
firms, and wealthy individuals) to buy and sell
securities. The salespeople and traders must
divide up the large orders, match buyers and
sellers, and get desirable prices
Equity trading – primarily companies’ stocks and
their derivatives, such as options
Fixed income trading or FICC - “everything that
isn’t equities,” including rate, municipal bonds,
corporate bonds, CDS, FX, commodities, money
markets, and more
3. Core activities at IB
▫ Middle Office
Risk management: involves analyzing the market
and credit risk that an IB or its clients take onto their
balance sheet during transactions or trades
Corporate treasury: responsible for an investment
bank's funding, capital structure management, and
liquidity risk monitoring
Internal control: tracks and analyzes the capital
flows of the firm
Internal corporate strategy: tackling firm
management and profit strategy
3. Core activities at IB
▫ Back Office
Handles things such as trade confirmation, ensuring
that the correct securities are bought, sold, and
settled for the correct amounts, the software and
technology platforms that allow traders to do their
job are state-of-the-art and functional, the creation of
new trading algorithms, and more
3. Core activities at IB
▫ IB financial performance
IB business is intensely competitive and volatile
With the exception of boutiques, IBs offer a wide
range of services on a global basis. Diversification of
business lines is necessary and makes good
business sense. However, each house has focused
on a strategic framework that is its core competence