Investment Banking Series
Series Introduction
I am starting a series of posts on investment banking. There is a dearth of books out there that tell about investment banking, some of them even actually written by i-bankers, and I am not in any way trying to compete with them, but merely want to reflect on what I was doing up until about a year ago, how it worked and what where the lessons I learnt while being there. This will be about the way it is done in Japan, and more specifically in Japanese companies, and this is very different from the way it is (or was until very recently) done on the Wall Street.
This post will be an introductory one, outlining the investment bank's functions and typical departments. The following posts will go into more details on specific products and real-life situations.
This post will be an introductory one, outlining the investment bank's functions and typical departments. The following posts will go into more details on specific products and real-life situations.
Post 1: Introduction to an Investment Bank
1. What does an investment bank do?
This is a simple question the answer to which may prove rather elusive. Historically, investment banks evolved as underwriters for companies when they were in need of capital. In other words, they assumed the responsibility for distribution of the company's securities by buying them, and then selling to investors. This is still important, but hardly the only function that investment banks have performed in the recent years. New related and unrelated business functions emerged over the years, most importantly dividing the primary market (underwriting, corporate finance, M&A advisory, principal investments) and secondary market (brokerage, sales, trading) functions organizationally, and putting the Chinese Wall between them. So, the answer to the question above is really "anything that you can make money on and that regulators would allow".
2. Departments in a typical investment bank
Here I will briefly describe the Front Office departments. The list is not exhaustive, but covers the most prominent areas of i-banking business.
Corporate Finance
When people think of a stereotypical "investment banker", this is what they usually imagine. Although the department names and actual responsibilities vary widely from firm to firm, basically these people are the brains behind the deals. They are the ones putting together the endless pitch books, building financial models and (if they are lucky) executing deals. Often there are bankers specialized in certain industries or covering selected companies within industries.
Capital Markets
Bankers in these departments are a kind of go-between for Corporate Finance and Sales and Trading, and play an important role in deal execution. They are often subdivided into the Equity and Debt Capital Market departments.ECM
This is the department where IPOs and secondary equity placements are usually arranged. The products they work with is ordinary shares, preferred shares and sometimes also convertible bonds and exchangeable bonds. These bankers will suggest the good timing for the offering, coordinate with Sales on the appropriate way to sell without sending stock price down, and sometimes arrange syndication (i.e. ask other firms to assume distribution of a portion of shares being placed) in order to maximize the deal size.
DCM
This department arranges placement of fixed income instruments, in my experience predominantly corporate bonds, although the range of products is fairly broad. For instance, in the firm I worked for they had a team specialized in Samurai Bonds. DCM is similar in its function to that of ECM, only the products are different.M&A Advisory
Although it has generated a lot of hype, this is actually a relatively new part of the investment banking business, and is sometimes packed in Financial Advisory department, or the likes. These bankers do the messy job of making two (or more) very different companies look like one, at least on the financial statements, and sometimes also advise companies on strategic issues.
Corporate Coverage
This department can have different names, or sometimes even not be an independent department, but it's fairly simple in its function: establish and maintain relationships with prospective/existing clients and come up with business ideas. This is the sales of investment banking, the difference with the actual Sales (and it took me a while to figure this out) is that they work not with investors, but with corporates. In my experience, the core competency in this department is the ability to absorb large amounts of alcohol in a way that would keep client entertained.
Sales
Now this department works with investors, and mostly with securities already on the market. Consuming alcohol is an important part of their jobs as well.
Trading
This is the part of investment banking business that grew in its significance over the 2000's. There are all kind of traders: execution, sales, prop and algorithmic... They can trade either in client's (execution and sales) or in the firm's account (prop, execution, often algorithmic).Research
Often a separate entity, this part of the investment bank provides guidance to the investors and bankers with regards to the economy, markets and particular companies.Other departments
There are as many organizational structures as there are firms, and many have departments unique to their organizations. For instance, in the firm I worked for there were an IPO dept., an Underwriting dept., a Corporate Research dept. (I still can't figure out what is it there for), and an International Finance dept.This concludes my first post on my experiences in investment banking.
Links to other posts in the investment banking series:
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