Investment Banking
Overview
Investment banking is a specific division of banking related to the creation of capital for other companies, governments, and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors. Investment banks also provide guidance to issuers regarding the issue and placement of stock.
History
The history of investment banking traces back to the 20th century when the United States was in the midst of the industrial revolution. The need for large amounts of capital to fund growth and expansion led to the rise of investment banks. The first investment bank in the U.S. was Goldman Sachs, founded in 1869 by Marcus Goldman. Investment banks played a significant role in shaping the financial and economic landscape of the country.
Functions
Investment banks perform a variety of functions. They act as intermediaries between a company that wants to issue new securities and the buying public. They also provide strategic advisory services for mergers, acquisitions, and other types of financial transactions. They also act as brokers and dealers in securities trading and execute transactions on behalf of their clients.
Underwriting
Underwriting is the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt capital). The word "underwriting" means agreeing to accept the risk of buying the securities in case they cannot be sold to the public at the stipulated price.
Mergers and Acquisitions
Investment banks advise companies on mergers and acquisitions. This can involve identifying potential acquisition targets or merger partners, providing valuation analyses, and suggesting optimal transaction structures. The investment bank could also help negotiate the terms of the merger or acquisition, and execute the deal on behalf of the client.
Sales and Trading and Equity Research
Investment banks have sales and trading desks, which trade securities, and their research teams publish reports about industries and companies that could encourage trading by the bank's clients.
Types of Investment Banks
There are several types of investment banks, each with its own focus and range of services. These include bulge bracket banks, middle market banks, and boutique banks.
Bulge Bracket Banks
Bulge bracket banks are the largest global investment banks with clients that include corporations, institutions, governments, and individuals. The term "bulge bracket" originates from the way investment banks are listed on the "tombstone", or public notification of a financial transaction.
Middle Market Banks
Middle market banks provide services to mid-sized businesses. They typically work with companies with revenues ranging from $50 million to $500 million. These banks offer a narrower range of services and have a regional focus.
Boutique Banks
Boutique banks are smaller firms that typically do not offer full-service investment banking, but do offer at least one investment banking financial service. Boutique banks often have only a local or regional presence, although some operate globally.
Regulatory Environment
Investment banking activities are supervised by regulatory bodies, such as the Securities and Exchange Commission (SEC) in the U.S., the Financial Conduct Authority (FCA) in the U.K., and the Securities and Futures Commission (SFC) in Hong Kong. These regulatory bodies set standards and practices that investment banks must follow to maintain the integrity of the financial markets.
Careers in Investment Banking
Careers in investment banking can be highly rewarding but also intensely challenging. Positions in investment banking include analysts, associates, vice presidents, and managing directors. Each role involves different responsibilities and requires specific skills.
Criticisms and Controversies
Investment banking has been criticized for a range of reasons, including perceived conflicts of interest, the high pay of bankers, the role investment banks played in the financial crisis of 2007–2008, and the power they wield in financial markets and the economy.