Investment banks normally offer an array of finance related services. These include facilitating mergers, issuance of debt or equity securities and underwriting, among many others.
An investment bank usually acts as an intermediary between an issuer and investors when raising capital for a particular company. So where does the capital raised come from? It comes from the private investors. Each private investor normally has a high net worth. The other source of capital can be from the pools of capital that are obtained within the public markets. Any capital obtained from the public markets is usually through an IPO (Initial Public Offer). Nonetheless, SPACs (Special Purpose Acquisition Companies) can be the other source of capital in the public markets.
Investment banks also offer M & A (merger and acquisition) services; this is both on the sell and buy side of a deal.
When it comes to the buy side, it entails identifying and facilitating the acquisition of the target company. The sell side usually entails taking the client company to market at an auction and identifying/facilitating the sale to the highest bidder or acquirer with a strong and sound strategic fit. Alternatively, an investment bank might also help a company restructure its debt or equity. Most often, this is done to ease financial distress.
What does a career in investment banking entail?
A career in investment banking entails raising debt capital and equity for companies. This career path is an ideal and attractive option for recent university graduates. It is also perfect for professionals with several years of experience. As much as competition for different positions in the field can turn out to be downright ferocious, plus the hours involved daunting, this profession surely remains a more than lucrative option for young professionals looking to get a substantial amount of income. Young professionals also like a career in investment banking because of the executive-level experience that comes with it.
Do you have what it takes to be an investment banker?
To excel in the investment-banking career, you must boast of several core skills. These skills include:
- Work stamina
- Personal interaction skills
- Emotional and mental horsepower
- Ability to offer valuation estimations – and to logically back up the calculations
The investment banking career normally opens its doors to graduates of different degrees. The field is also open to those with masters in accounting or finance (whether obtained by self study or through academia). Most people regard this field as highly challenging because of the countless valuation calculations involved in day to day activities.
Analysts who work in investment banks usually perform valuation calculations on different equity or debt securities being offered. The calculations are usually important since investors will pay exactly what they perceive as a fair price for a debt or equity investment. This is usually based on the expected cash yield in the future.
If a security is under or overvalued, an investment bank and/or issuing company normally garners less capital than required.
For an investment banker, critical thinking skills are supremely important. This is because an investment bank’s services usually extend even to appraising entire entities for corporate restructuring, acquisition or pending merger.
How to determine future cash flows
Various internal and external factors normally drive expectations of long and short term future cash flows that go in and out of a particular organization. A team of professional analysts who are working for an investment bank normally do the following:
- Study an entire industry
- Conduct a competitive analysis
- Assess alternative future business situations or scenarios
- Analyze financial statements, organizational structure, go-forward risk and plans and business models
To determine the qualitative data, analysts will additionally use several metrics. They include:
- A comparison of the estimates with the actual return rates
- An evaluation or assessment of stocks versus asset purchases
- Computations of cost of debt and cost of equity. This determines the cost of capital
- Tax ramifications for lenders, targets and acquirers
An organizations’ due diligence demands the understanding of a company’s relationship with both suppliers and customers, together with the numerous stakeholders. In addition to this, a company must be able to understand business systems like information technology, finance, operations, logistics, human resources, and procurement.
Communication is vital
Investment bankers must be effective team players. If you are planning to take this path in terms of career, you must boast of excellent communication skills. This will definitely help you avoid any disconnect and waste of your efforts.
It is important to understand that investment banks constantly communicate with external parties like lawyers, consultants, accountants, and clients. Additionally, most client representatives have a tendency to be extremely thorough, well respected, often short-tempered, and scrutinizing. As an investment banker, you will have to know how to deal with these categories of people.
Investment bankers with several years of experience normally interface at all executive levels, for example, CFOs and CEOs. During interaction with client executives – who most often boast of decades of experience in the industry – an investment banker ought to not only show but also add value to the executives, together with the shareholders she or he represents.
Not the average nine to five
As indicated above, a career in the investment-banking sector involves plenty of hours. Because of this, work stamina is normally required. Whenever deadlines approach for deals, consecutive all nighters are frequent occurrences.
Because of the numerous client demands, infinite number crunching and late night hours, most investment bankers suffer from high burn-out and attrition rates. In countless situations, analysts usually stockpile a number of bonuses and proceed to other careers after a number of years. However, the executive level analysis and intellectual stimulation offers a safe haven for individuals who look for comfort and satisfaction in lucrative and prestigious careers.
How to rise to the top
Whether it is in infrastructure, transport, retail, energy, health care, and real estate, it is very common for rising stars to specialize in certain industries. As you progress in your investment banking career, and get involved in an array of projects, you will be able to quickly apply typical performance benchmarks, forecasts, trends, ratios, and industry norms.
In your first years, you will conduct operational and financial grunt work. As you progress to the director or principal role, you will be required to have higher levels of responsibilities in business development. You must also have the ability to create revenue for the firm or department. In due course, you will assume a supervisory role in a project, and become a primary contact for clients.
How to differentiate yourself from the crowd
Most, if not all, investment banks normally seek high academic achievement, stellar communication skills, and taking part in campus leadership positions. These companies also seek internships at well regarded non-profit organizations and companies. As an applicant, you need to convey raw emotional and mental horsepower. You must have a solid direction sense in terms of objectives and goals. You are also expected to have credible systematic supporting actions, which have been taken to form the objectives.
The following groups of students and/or young professionals should consider applying or reapplying for roles in the investment-banking sector:
- Those who possess non-business or broader academic curricula
- Those who traveled overseas and volunteered
- Those who worked at non-profits
- Those who display a burning desire and curiosity to explore the investment banking field
As long as you convey authenticity in your endeavors and possess the determination and passion to explore this field, there is no doubt that you are ripe for any role in the investment banking sector. There’s mutual respect as well as admiration for those who follow their dreams and conscience. Always remind yourself that most successful business moguls in the world did not study any accounting or finance.
All applicants with a true and genuine passion for organizational analysis, market and finance ought to apply and/or reapply for investment banking roles. These individuals should conduct a self-study on leadership, management, business, and finance. Moreover, they should secure remarkable standardized test scores. If you are one of these individuals, strive to differentiate yourself by volunteering or leading a group or network of both current and ex-investment bankers.
Do you consider yourself energetic? If you are an energetic young professional with excellent valuation skills, then a career as an investment banker is exactly what you need. You will thrive in this career and help countless individuals and firms make wise investment decisions. There is no doubt about that. All you need to do is just take some time alone and analyze your life. Do you meet all the requirements mentioned above? Are you willing to put in the long hours and effort in order to succeed as an investment banker? If this is you, then this is the best career for you.
Charlie Brown has been an investment banker for the past 5 years. He has helped individuals make the right decisions when it comes to managing their finances and portfolios. Click here to know more about national debt relief.