By Victor Paquet and Pierre Six (Mergersight Operations) & Carlo Leopardi, Tommaso Arona and Edoardo Tosti di Valminuta (Boston University partners)
Walkthrough
Definition
An investment bank (IB) is a financial intermediary that offers sell-side services within mergers, acquisitions, or financing transactions. Essentially, a middleman, agent, or broker facilitating transactions between two parties. Being compensated through fees based on the deal size, investment banks are incentivized to obtain the highest valuation possible from a transaction.
M&A Advisory
Investment banks provide advisory services for mergers and acquisition transactions via various industry specific teams. Investment banks will prepare financial models to pinpoint a valuation for the transactions and help companies go to market. They do so by compiling a list of potential buyers, coordinating lawyers and consultants, and supporting the negotiation and due diligence processes (see MergerSight IB Deal Cycle Process available on the website).
Financing
IBs will help firms gain access to capital markets (the financial ecosystem that deals with stocks, bonds, and investments), through either equity or debt transactions.
For example, if a company wants to raise capital through equity, investment banks will act as an underwriter and help find institutional investors for an Initial Public Offering (IPO) via a roadshow (See MergerSight IPO Technical on the website).
In contrast, if a company wants to raise capital through debt, investment banks will help them find institutional creditors willing to invest in their financial products such as corporate bonds. Investment banks will utilize their sales and trading division to gain access to the capital markets and execute the above-mentioned financing transactions.
What other services does an Investment Bank offers?
Despite investment banking being their fundamental business, some bulge bracket investment banks will also offer other financial services:
Asset Management – Pools raised capital from clients to invest into different asset classes, going from equities and fixed incomes to futures or options, based on the client’s reward-risk will.
Wealth Management – Manages ultra high net wealth individuals’ estate by investing into different asset classes and devising fiscal and succession strategies.
Sales and Trading – This department is where salesmen and traders sell or buy different assets on the public markets to support financing activities. This involves interacting with institutional investors such as hedge funds, pension funds, and sovereign wealth funds to execute trades.
Equity Research – This division analyzes the future and current market trends, then passes the data gathered to the other investment banking divisions, or sell them to third-parties.
However, these additional services are predominantly offered at bulge bracket banks, as most elite boutiques do not have balance sheets that provide financing services.
Bulge Bracket vs. Elite Boutiques
Elite boutiques or independent advisors are smaller firms that are purely focused on investment banking advisory. As they do not have corporate balance sheets, they do not have the financial means to perform debt financing. In contrast, bulge brackets offer advisory, financing, and other above-mentioned services. Generally speaking, bulge bracket banks will have a more international presence and stronger brand recognition.
Bulge Bracket Investment Banks Examples:
JP Morgan, Goldman Sachs, Morgan Stanley, Merrill Lynch (Bank of America), Citi Bank
Elite Boutiques Investment Banks Examples:
Lazard, Evercore, Centerview Partners, Moelis, PJT Partners