What does an Investment Banker actually do?

Last Updated on 9 July 2021 by Dan

Hello all! One of those “oft wondered” but not frequently easily answered questions is what someone who is an Investment Banker actually does. People have lots of preconceptions and in some cases semi-mythical views about this role, and so I’d thought I’d run an explainer on it.

Defining the role of an Investment Banker

Now one of the complications we have here is that you can talk about being an “investment banker” in a few different ways, from broad to narrow:

  1. Anyone who works for an investment bank.
  2. Anyone who works in a “front office” function at an investment bank.
  3. Those who work in the client facing front office in the investment banking function of an investment bank.

It’s really only No.3 that meets the classic definition of an investment banker.

Definition 1 will also incorporate those who do other functions such as risk or operations that support the company.

Definition 2 in most banks would include “global markets and trading” or staff managing private wealth. These roles are all prestigious and have their own complexities, but are quite markedly different from traditional investment banking and separated out internally.

Definition 3 is what I’ll be looking at from here on out.

What an Investment Banker does

An investment banker is mainly concerned with helping corporate institutions or Governments raise or release money (sometimes refers to as capital) in the most effective way possible to drive forward their operations.

There’s quite a few forms this takes, and an investment banker will help steer a company achieve what they’re planning through in the most efficient way possible or avoid necessary risks.

To do this effectively, the investment banker must understand both the commercial market the client is in and the investment market, which can combine some unusual skillsets.

Let’s look at a few ways an Investment Banker might do this…

Products an Investment Banker may offer

It’s not an exclusive list, but some of the main types. We’d broken them into ‘what is’ explainers by the product type.

What is an IPO?

An IPO (Initial Public Offering) is where a company moves from being privately owned to selling shares (sometimes known as “floating”) on the stock market.

There’s a couple of aspects that are difficult for companies to do on their own:

  • Becoming a public company means much more disclosure to potential shareholders about the financial performance and structure of the business to make sure investors are well-informed. Depending on where you list, there are specific legal and regulatory requirements the firm needs to follow to ensure that this takes place a lot of which can be complex in nature.
  • There’s then the question of when you do go to market what the shares are potentially actually worth as a flotation price. This is where the investment bankers expertise in the market comes into play – but it can be tricky to understand both the tone of the present market, whilst managing the expectations of the company owners on what they think their company is worth rather than what’s realistic!

An Investment Bank may also underwrite the shares as well as a guarantee to the company doing the floatation that they will get a certain value (what this simply means is that the bank guarantees to buy shares if demand means the share price falls below a certain level – introducing significant potential risk to the bank).

A large jar of money from investment banking

What is an equity or debt issue?

This is a similar action for the company where they are either looking to raise money by offering additional equity to the market beyond their IPO, or ask the market to fund taking on debt through new bonds.

The investment banker takes a key role in advising here because:

  • Issuing new debt or equity can have significant impacts on the overall financial health of the company, as it may have effects like diluting (reducing the value) of existing shares which needs to be approached with care.
  • The corporate structure of a firm through their mix of funding through debt and equity can have implications for the valuation of a company, tax treatments and long term implications.

On a related note, you can read more about the differences in investing in equities and debt (i.e bonds) right here.

What is M&A (Mergers and Acquisitions)

This section of the market relates to a company expanding to take on another company – which could be a hostile takeover (where the company being acquired would not be by choice) or more commonly via agreement with both parties.

These deals are complex because especially at the larger end of the market, the purchasing company will rarely be able to simply buy their target in cash, so it’s wrapped in with a need for financing.

The investment banker takes a key role in advising here because:

  • A large amount of due diligence is required to make sure the price being paid for acquisition is fair, and there any nasty surprises which may trip up the purchasing company if they go through with the deal.
  • Again, the merging of two companies can have complex effects on the overall value of the newly created joint entity, and the banker needs to understand the financial implications to both companies.
  • The banker will also need to assess what financing may be required to make sure the deal can complete, and help each party put in place a sustainable structure for the financing (as well as looking out for the bank’s interest!)
  • Sometimes the work can be pre-deal, where a client is looking to make an acquisition to expand as they have a spare cash, but aren’t actually sure who they might want to take over.

Why do Investment Bankers get paid so much?

When most people think of investment bankers, this is often the question they’re really wondering! There’s a few reasons that drive this, and I’d suggest putting them in the context of the activity above:

An Investment Banker’s contacts

All of the above deal types that Investment Bankers do (especially amongst large companies where there’s the prospect of deal fees in the multi-million zone) are pretty rare. You might get a few really “big” IPO’s a year for example – usually of successful tech firms that are going public.

Naturally, any self-respecting investment bank wants a piece of these deals – so you’ve got a lot of people chasing a very lucrative deal. Meaning as a banker it’s often your contacts at the top of these companies, and the fact that because the owners may know you and are more likely to come to you that help determine your worth.

I make that sound like simply a matter of “knowing people”, but in reality investment banks throw a lot of resource into understanding what their market is. They’ll know who’s who, and spend lots of resource on market analysis and identifying likely prospects for deals to happen ahead of the time before they actually do.

An Investment Banker’s hours

The level of analysis work that’s required when a deal is going ahead is colossal, and things can change quickly in the business world so once a client has decided to go ahead with a deal, they’ve got a certain expectation that it happens as quickly as possible.

That means throwing all your resources at it, and bankers can often quite literally be spending every waking moment putting their analysis together.

This is coupled with an expectation for absolute ruthless attention to detail – to a client taking their business public for example, it’s potentially the biggest business deal they’ll ever do. As a result there’s no tolerance for any mistakes in the numbers or errors in presentations, which takes time to review.

An Investment Banker’s skillset

To be a successful investment banker requires a really quite rare combination of skills – all of these are relatively common individually, but rare together:

  • Advanced financial analysis skills are needed in order to assess what various actions may have on the balance sheets and financial structure of the companies they are engaged with.
  • Detailed market understanding is needed to appreciate what is happening in the specific industry of the companies being dealt with, and understand any trends that may affect pricing or demand.
  • Interpersonal skills and networks are needed in order to build up the contact book to make sure the deals come your way.
  • Resilience and tolerance of work stress is needed to “drop all else” to deliver for the client when something comes in.

Not to mention everyday work skills such as handling managers – banks can be political places!

Any questions?

If you’ve got any comments or questions then please do put them in the comments bar below! This isn’t meant to be the completely exhaustive guide to Investment Banking, but I hope gives a sense of what the industry is about.

And that’s it!

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