What Are the Types of Investment Banking?
Investment banking refers to management services and consultation for complex financial transactions. The purpose of investment banking is capital creation for organisations, corporations, and governments.
Investment banks are financial entities that act as intermediaries between a corporation and the financial markets. It provides various types of investment banking services. Global investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse, and Deutsche Bank.
Over the last decade, there has been a significant increase in investment banking transactions. Consequently, there is an increased demand for investment banking professionals. Currently, investment banking is one of the most lucrative career opportunities.
Let’s discuss the meaning of investment banking, types of investment banking services and career opportunities for an investment banking professional.
Types of Investment Banks
Investment banking is an extensive and diverse phenomenon. One may categorise investment banks into different types based on particular parameters. To understand these parameters, read on.
Investment Banking Services
Investment banking products or services are a distinctive factor for investment banks. An investment bank may choose to carve a niche in a specific service. Alternatively, an investment bank may cater to each financial requirement of the client.
These services include the following.
It refers to raising capital from the direct market and is a primary service provided by investment banks. Underwriting includes initial public offerings and debt financing.
Investment banks analyse the capital requirement, target market, market conditions, investor perception and confidence, and economic and political conditions. It structures and launches the public issue based on the evaluation. In most public issues, the investment bank also commits to invest a fixed percentage of capital in case of under subscription.
● Transaction Advisory
It includes facilitating mergers, acquisitions, leveraged buyouts and consolidation and is at the heart of investment banking. These transactions include two or more financial entities, each employing an investment bank to derive maximum value for its stakeholders.
The primary role of an investment bank is to evaluate the feasibility of the transaction and assist in the negotiation between the parties. The investment bank charges a fee or a fixed percentage of the deal value in exchange.
● Sales & Trading
Investment banks also provide sales and stock placement services. It handles investment and broking for corporates and high-net-worth clients.
The investment bank approaches clients with profitable ideas. The product may be equity, debt, commodities, derivatives, or a mix. The onus to evaluate the profitability and conduct due diligence lies with the investment bank. In exchange, the bank charges a commission or brokerage on the transaction.
Almost all investment banks have a research department focused on high-value creation for clients. Research is an ancillary function of investment banks to support their profit centres. Most investment banks have an in-house research division for detailed coverage of financial products and industries. Thus, an investment bank may focus on specific financial products or activities.
Size of Investment Banks
One may classify investment banks into various types based on their size. Size is a relative term, and various factors determine the size of an investment bank. For example, the services offered, number of clients or employees, average deal size, number of offices or locations serviced, etc.
Generally, there are three categories of investment banks - bulge bracket banks, middle-market banks, and boutique banks. These banks often include regional boutiques and elite boutique banks.
Regional Boutique Banks
Regional boutique banks are the smallest investment bank by size and average deal size. Clients for regional boutique banks include smaller firms and organisations based in their areas or the local and state government. Regional boutique banks have dozens of employees with specialised skill sets.
Below are some distinctive features of a regional boutique bank –
● Services Offered – Regional boutique banks offer a restricted number of services due to their small size. Instead, it focuses on a specialised area, such as handling mergers and acquisitions for a specific industry.
● Location - Regional boutique banks cater to specific regions in a country. Its offices and operations are focused on specific regions in the country.
● Deal Size - The average deal size for regional boutique banks is $50 to $100 million or less.
For example, a Mumbai-based investment bank with a single office and less than 30 employees specialises in mergers and acquisitions for FMCG companies.
Elite Boutique Banks
Elite boutique banks differ from regional boutique banks and resemble bulge bracket banks.
● Service Offered - The similarity between a regional and an elite boutique bank is the scope of services offered. Elite boutique banks do not provide a complete range of investment banking services. It concentrates on mergers and acquisitions and related issues. At times, it may provide restructuring or asset management services.
● Location – Elite boutique banks have a sizeable national and international presence and operate in multiple locations and nations. However, it lacks a global presence.
● Deal Size - The average deal size for elite boutique banks is $1 billion, although it may also manage smaller deals.
Most elite boutique banks start as regional ones and progressively handle more extensive deals for prestigious clients.
As the name suggests, middle-market banks are between regional boutique and bulge bracket banks.
● Services Offered – Middle-market investment banks provide a full range of investment banking services like a bulge bracket bank. Its services include raising equity and debt capital, financing and asset management services, and restructuring deals. It may specialise in a particular industry or sector, like a regional boutique bank.
● Location – Middle-market banks have a wider reach than regional boutiques, although it does not have a bulge bracket bank international reach.
● Deal Size – The deal size of middle-market banks commences at the regional level and escalates to the bulge bracket level. The average deal size ranges from $50 to $500 million.
Bulge Bracket Banks
Bulge bracket banks are the biggest, easily recognisable investment banks with a global presence. Bulge bracket banks lead in terms of employee strength, number of offices and the biggest corporate clients. Most clients of a bulge bracket bank are in the Fortune 500 list of companies.
Bulge bracket banks tend to have three divisions – trading, advisory and retail and each division is a centre for revenue and profit generation. The advisory division earns from transaction services and capital generation for clients. The trading division profits from market outperformance, whereas the retail division gains from loan disbursal to businesses and consumers.
● Services Offered – Bulge bracket bands offer various services, such as mergers and acquisition services. Different means for financing, equity research and issuance of reports, and asset management services. In addition, bulge bracket banks have a commercial and retail banking division to generate revenue from cross-selling financial services.
● Location – Bulge bracket banks operate internationally and have a significant domestic and global presence.
● Deal Size – Bulge bracket banks handle the most complex and largest deals. Generally, bulge bracket banks handle multibillion-dollar deals. It may sometimes venture into deals worth a few hundred million due to the economy or for a particular client.
Examples of bulge bracket banks include Bank of America, Credit Suisse Group, Goldman Sachs, Deutsche Bank, and Morgan Stanley.
Working in Investment Banking
If you wish to build a career in investment banking, you must consider the following points –
A. Skills Required
You must have in-depth knowledge of financial modelling and valuation methods. Additionally, you must be comfortable preparing presentations and pitchbooks, financial documents like term sheets, agreements, investment teasers, etc. Negotiation is a crucial skill required to ensure a smooth deal conclusion.
B. Type of Work
You must fixate on the type of work for specialisation. Each investment bank offers a different type of service. For example, a boutique bank offers different services than a middle market or bulge bracket firm. Therefore, a bulge bracket firm is your best bet if you are interested in trading desks. In contrast, a regional boutique bank will present better and faster growth opportunities if you prefer advisory services. You must decide the type of work before job applications.
This factor may not be very different for a bulge bracket and boutique bank. While the deal size is massive for bulge bracket firms, the number of transactions tends to be lower. In a boutique bank, the number of transactions is frequent even though the transaction size may be small. Furthermore, the fixed overheads of a boutique bank are much lower than a bulge bracket. Thus, the overall profitability is similar.
Investment banking provides a host of opportunities for each professional. The sky is the limit for those focused and diligent investment banking professionals.