Investment Banking: What It Is, How It Works, and Major Examples

Introduction to Investment Banking

Investment banks are financial service providers for corporations, institutions and government agencies. These banks assist in facilitating large and complex financial transactions such as capital raising, mergers and acquisitions, financing, and risk management.

What is Investment Banking?

The term "investment bank" refers to institutions that are involved in financial services, including the launch of an initial public offering (IPO) and when a corporation merges with a competitor. In addition, these banks have an advisory wing that provides asset management and risk management services for their clients.

Hence, investment banking, by definition, is an intermediary that performs underwriting services (capital raising), mergers and acquisitions (M&A), financing, asset management, and advisory services.

How Investment Banks Work?

Investment banks play a pivotal role in helping organisations access the capital markets to raise funds for expansion or other significant ventures.

For example, if car company XYZ wants to build a new gigafactory for its EV production and needs funding, an investment bank can assist by finding underwriters for issuing stocks and bonds to finance the expansion.

In the case of mergers and acquisitions, when one company buys another, an investment bank often determines the company's valuation to help decide its worth.

Basically, investment banks act as intermediaries between security issuers and investors, ensuring that the capital flow is seamless and efficient.

Key Functions of Investment Banks

The functions of investment banks can be divided into three types - financial advisory, mergers and acquisitions, research, and trading. These services are offered in exchange for either a flat fee or a commission-based fee. Let’s take a deeper look and understand the various services offered by investment banks:

1. Underwriting Services: Investment banks assist companies in raising capital by underwriting and issuing securities. This involves buying securities from the issuer and selling them to the public or institutional investors.

2. Mergers and Acquisitions (M&A): They provide advisory services for mergers, acquisitions, divestitures, and other corporate restructurings. This includes valuation, negotiation, and execution of deals.

3. Sales and Trading: Investment banks assist in buying and selling of securities. They provide market-making services and liquidity for clients, ensuring that there is always a buyer and a seller in the market.

4. Equity Research: This division conducts research on various companies and provides recommendations to clients regarding buying, holding, or selling stocks.

5. Asset Management: Investment banks offer asset management services, helping clients manage their investments and wealth.

Types of Investment Banks

The field of investment banks is dominated by reputed firms offering a wide-array of services to their clients. These banks can be broadly categorised into three types:

1. Bulge Bracket Banks: These are the largest and most prestigious investment banks, often involved in major deals. Examples include Goldman Sachs, JPMorgan Chase, and Morgan Stanley.

2. Middle Market Banks: These banks serve mid-sized firms and offer a wide range of services similar to bulge bracket banks but on a smaller scale. Examples include Jefferies and Houlihan Lokey.

3. Boutique Banks: These are smaller banks specialising in specific areas of investment banking, such as M&A advisory or asset management. Examples include Lazard and Evercore.

Top Five Global Investment Banks

The global investment banking industry is dominated by several key players who have established themselves as leaders in the field. Some of the major examples of top investment banks include:

1. Goldman Sachs: Known for its influence and presence in the global financial markets, Goldman Sachs offers a wide range of investment banking services, including underwriting, M&A advisory, and trading.

2. JPMorgan Chase: One of the largest and most diversified investment banks globally, providing services in capital markets, M&A, and risk management.

3. Morgan Stanley: A leader in global financial services, Morgan Stanley offers investment banking, securities, wealth management, and investment management services.

4. Credit Suisse: This Swiss bank provides comprehensive investment banking services, including capital raising, advisory, and asset management.

5. Deutsche Bank: Known for its strong presence in Europe, Deutsche Bank offers investment banking services in equity and debt capital markets, M&A advisory, and trading.

Apart from these, Bank of America, Barclays Capital, and Citigroup Investment Banking are among the key players in this domain, having a presence in the Indian market.

The Current Landscape of Investment Banks in India

The number of investment banks in India is evolving rapidly, with several banks making significant strides in this sector. But domestic investment banks often differ in the services offered and are less pronounced as compared to their global peers. Here are some of the top investment banks in India:

1. ICICI Securities: Known for its comprehensive financial services, including investment banking, asset management, and retail broking.

2. Kotak Mahindra Bank: A prominent name in investment banking companies in India, offering services in M&A, equity capital markets, and structured finance.

3. Axis Bank: With a strong presence in the investment banking sector, Axis Bank provides a range of services, including capital market solutions, advisory, and treasury services.

4. HDFC Bank: One of the largest private sector banks in India, HDFC Bank offers extensive investment banking services, including IPO management, M&A advisory, and debt syndication.

5. State Bank of India (SBI): As the largest public sector bank in India, SBI has a robust investment banking division offering services in equity and debt capital markets, project finance, and advisory.

Notably, investment banks are also employers of a large number of professionals around the world, particularly from the finance domain. Some of the common investment banking job roles include: Analyst, Associate and Sales Manager.

Conclusion

Investment banking is a critical component of the financial ecosystem, providing essential services that facilitate capital flow, economic growth, and corporate development. Through underwriting, M&A advisory, or asset management, investment banks are pivotal in shaping the financial landscape. With a clear understanding of what investment banking is and how it operates, individuals and organisations can better navigate the complex world of finance and leverage the opportunities it presents.