Introduction
Investment banking is a lucrative and one of the most prestigious professions worldwide. Because of the high-income opportunities and up-and-coming status, people are always curious about what these bankers do! Though rewarding, Investment banking is also known as one of the most rigorous career paths, characterized by long working hours and high levels of stress. Today, we will dive deep into the main activities, responsibilities, and skills of these bankers and see how they impact the financial markets. This may inspire you to become an investment banker!
Who might be considered an investment banker?
Investment bankers are experts in the financial landscape. They provide services to their clients, leveraging their experience, knowledge, analytical ability, and communication skills to manage clients’ corporate finance. They work as advisors to clients ranging from startups and established companies to non-profit organizations and, sometimes, even governments. Investment bankers may work for different banks, but it’s not limited to that. They also work in corporate investment divisions, ensuring the entity's financial growth and development. [1]
What Does an Investment Banker Do?
1. Help Clients Raise Capital
Investment bankers help their corporate clients raise capital by managing all regulatory work, from issuing and selling securities. If a company wants to raise capital for the first time, it must issue an IPO. So, they either make their own investment decision or seek help from an external professional. Investment bankers work very closely with their clients to determine the optimal capital structure (the mix of capital sources) and craft an aligned strategy to onboard investors. They conduct a financial analysis of their clients and evaluate the market condition to prepare an attractive & true prospectus.
Similarly, a company may also decide to finance from bond issuance, or a government may plan to issue bonds for its development projects. In both cases, the investment bankers provide end-to-end solutions to these parties. They determine the amount needed, plan the bond issuance, execute it, deal with the security exchange commission, and finally market the bonds to the public.
2. Private Placement of Capital
Sometimes companies decide not to go to the capital market and issue an IPO. In that case, the investment bankers raise the capital from private sources. Instead of dealing with the security exchange commission, the bankers deal with institutional and individual investors. In the process, they do not receive support from the capital markets, so the deals must be sealed solely by the investment bankers themselves. [2] From identifying potential investors who might align with the company to closing the deal, they manage the entire process on behalf of their clients.
3. Facilitate Mergers and Acquisitions
In the business world, companies acquire or merge with other companies to achieve synergies and integration. But these processes are extremely complex and lengthy, involving various parties. Decisions in any merger or acquisition are highly sensitive, as they can significantly alter a company’s future trajectory and require major financial commitments. In these cases, investment bankers are brought in by both parties to facilitate the entire M&A journey. Investment bankers from both sides negotiate and finalize deals. They play a pivotal role, especially in determining the company's fair value. [2] They assess companies’ financial health, identify potential risks associated with their decisions, and provide value. Their expertise helps clients make data-driven, informed decisions during the M&A process. Investment bankers make these processes successful and help maximize the shareholders’ value.
4. Manage the Risks of The Clients
Investment bankers work to mitigate the risks associated with their clients’ businesses. They work relentlessly to identify macroeconomic factors such as changes in market trends, political stability, natural events, competitors' moves, etc. By doing so, they forecast financial conditions using market data and help clients make optimal decisions to avoid risks in such situations. Potential risk mitigation strategies are prepared even before they appear with the help of these bankers. Investment bankers also shape their clients' investment portfolios by diversifying risk and providing hedging strategies and derivative products. At the end of the day, mitigating risks and maximizing returns on investment is their main job in this part.
5. Help in Corporate Restructuring
Corporate restructuring is undertaken by companies to change their organizational structure, operations, and financial arrangements. Investment bankers work with these companies’ management teams to plan the restructuring process. They assess the company's internal condition, identify areas where restructuring is needed for improvement, and propose alternative options. [3] Based on their market research, company goals, and financial condition, they help the management take the most appropriate path.
6. Underwrite Deals
Underwriting refers to purchasing stocks from the issuer and reselling them to individual or institutional buyers for profit. Investment bankers often get involved in these risky schemes to earn profits for their employers. As we discussed before, a large portion of these bankers work for investment banks whose major operations are underwriting. Sometimes, investment bankers do not intend to take risks. So, they just work as a mediator and sell shares for commission. [2]
7. Manage Client Relationships
Investment bankers are naturally great communicators. One of their major roles is to manage all the relevant stakeholders through effective communication. They use their skills to understand the needs of different stakeholders and tailor solutions that meet individual needs. Usually, investment bankers are highly trusted by their clients, whom they guide through financial complexities and help achieve what's best for the company. By maintaining relationships with all parties, they deliver projects effectively and successfully.
Bottom line
Investment bankers have a significant impact on the financial industry, as they handle the sector's major activities. While the job can be extremely rigorous and stressful, it is highly rewarding. This is a highly sought-after profession in the whole financial sector. They manage investments that foster companies' economic growth and the global economy as a whole. The valuable services of investment bankers shape the financial world, making it trustworthy, attractive, and valuable for individuals and institutions alike. Who knows, one day you might become an investment banker too! Hope this article clearly explains everything an investment banker does and quenches your thirst.
References:
- CFA Institute:
- Investopedia: https://www.investopedia.com/articles/personal-finance/042215/what-do-investment-bankers-really-do.asp
- Corporate Finance Institute:
https://corporatefinanceinstitute.com/resources/career/what-do-investment-bankers-do