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What is investment banking?

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Last editedFeb 20212 min read

When your business grows to the point that it’s ready to take part in larger, more complicated transactions, it’s time to think about enlisting the help of an investment banking partner. Find out more about what’s involved in corporate investment banking below.

Understanding investment banking

While many international banks have investment divisions, investment banks stand alone as a full-service portal for all investment activity. They assist with valuations, advising clients about the best course of action regarding acquisitions, sales, and mergers.

One of the primary goals of investment banking is raising capital for businesses. This can be accomplished by issuing securities and helping a client go public. The bank underwrites debt and equity securities, aids in their sale, and helps provide guidance about issuing stock. Banks act as the middleman between investors and corporations, linking capital with growth.

Some of the big names in investment banking include:

  • Barclays Capital

  • Credit Suisse

  • Deutsche Bank

  • Goldman Sachs

  • J.P. Morgan

  • Morgan Stanley

These work with a wide range of international corporations and government agencies.

How does corporate investment banking work?

In the case of corporations, investment bankers play a key role in identifying project risk and investment opportunity. You might use the services of an investment bank to gain of-the-moment insight into the current market, which is vital if you’re thinking about acquiring another company or planning a new development.

One of the most important roles of corporate investment banking is in the issuance of stock and bonds. Investment banks price these financial instruments according to all regulatory requirements, ideally maximising revenue for the client company. If you decide to take your company public with an initial public offering (IPO), the investment bank purchases your shares directly. They’ll then act as the go-between for investors, selling your company’s shares on your behalf.

What’s in it for the investment banks? They’ll sell the shares at a mark-up price, turning a profit while absorbing risk. In order to make sure both client and bank make a profit, investment bankers must be experts about the current state of the market. If stock is overvalued, the bank will lose money on the deal.

Asset management vs. investment banking

Full-service investment banks include a multitude of departments, performing numerous roles within the financial services industry. Typical services include:

  • Mergers and acquisition

  • Sales and trading

  • Equity research

  • Underwriting

  • Commercial banking

  • Retail banking

Asset management is also one major component of investment banking, although sometimes the terms are used interchangeably. You can’t necessarily delineate the difference between asset management vs. investment banking; one is part of the other. Asset management takes place within investment banking, dealing directly with the everyday management of a client’s portfolio.

Skills used in investment banking

Successful corporate investment banking involves the heavy use of financial modelling. Here’s a look at the various skills investment bankers use in the workplace:

  • Financial modelling – Analysts use a range of models in the workplace, including discounted cash flow models, 3-statement models, and others.

  • Document preparation – An investment bank will prepare official financial documents on your behalf, such as confidentiality agreements and investment teasers.

  • Business valuation – Bankers will use valuation methods like a DCF analysis and comparable company analysis to determine what your assets are worth.

  • Business development – It’s the job of an investment banker to pitch new development ideas, seeking out ways to add value to your business and boost capital growth.

Communication and negotiating skills are also important in the everyday line of business.

Is investment banking worth it?

As a small start-up, you might not need to enlist any investment banking services. But as your company grows in scope, you might start to wonder, ‘is investment banking worth it’? The answer can be yes, if you’re in need of new ways to raise capital.

If you’re at the stage where you’re thinking about selling shares in your company and taking it public, investment banks are well worth the price. They’ll also provide valuable advice about mergers and acquisitions, using the latest modelling to maximise profit.

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