Your Complete Guide to Role of an Investment Banker
Investment banking is one of the most complicated professions out there.
There are lots of securities to be worked on and types of deals to be understood. That's why the role of investment banker is to take time in improving their financial knowledge every day.
We are going to discuss some of the most common tasks that investment bankers work on and how you can effectively execute them.
Investment bankers do a lot prettily:
There are different pitch books available:
In general:
For Management Presentations or Bank Overviews:
From JP Morgan:
From Goldman Sachs:
Check the PDF
Morgan Stanley:
Check the PDF
Pitch books' formats are almost always taken from existing templates of the companies. You would usually start by looking for a transaction that is similar to the one you are working now. From there, you are going to work on the old pitch book but with new names and figures.
When working on a pitch book must consider the following:
A pitch meeting is when investment banks meet with clients regarding potential initial public offerings. As the investment banker, your role would include long hours of working on pitch books.
During the meeting, usually only VPs and above would be invited, however, for smaller deals, senior analysts (or even junior analysts) can join. If you have this kind of experience as an associate, you’re lucky.
After the pitch meeting, it would be decided if the IPO would be pushed through. Also, banks who will act as book-runners will be chosen. Banks will be selected based on their experience, expertise, and relationship with the client who is about to offer the IPO.
Kick-off meetings are intended to gather together everyone that will be working on the offering – investment banks, lawyers, bankers, accountants to determine the schedule and responsibilities of each.
Associates are usually only there to listen and take notes.
They will also discuss registration requirements and due diligence.
Some of the tasks include:
Market Due Diligence – this is done to determine the market competition to assess/validate how the company will position itself. This type of diligence includes meetings with experts, market research, and the likes.
This diligence also includes calling target customers (current and prospective) to determine their opinion of the services and products to be offered by the company.
Legal Diligence - most of the tasks here are done by hired lawyers. Their job is to ensure that all necessary registrations are done, as well as no patent or trademark infringements.
Tax and Accounting Due Diligence – this is the work mostly of accountants/auditors. They would review/audit financial books and tax filings, and determine if there are material irregularities that could affect the company after the public offering.
An S-1 filing is a term used in the United States that refers to the registration of public offering of a company.
All the papers compiled through the due diligence activities are the ones filed in S-1. After the Securities commission approves the S-1 registration, the company could proceed with pre-selling the shares.
Before the selling starts, investment bankers will first be trained on how to sell the shares to investors. They will discuss the good points of the company, and how it can be effectively leveraged to clients.
The bank will also discuss the preliminary prospectus. The preliminary prospectus, or red herring, is a summary of the IPO as registered in s-1 but adjusted so that it will like a brochure for the sales.
The prospectus includes offer prices, commissions, net proceeds computations, discounts and commissions of brokers, etc.
After the meeting and the prospectus are ready, investment bankers will start the pre-selling.
The investment bankers will now call and meet prospective major investors to determine the actual demand for the shares. After this, they will be able to set the price they will have for the IPO.
How do they pick investors?
A roadshow is when management teams and investment bankers travel to different locations to promote the IPO. During this time, they get feedback and orders from investors.
Management is usually available during these meetings so that they can answer the questions of the investors. Based on the feedback during the roadshows, the price range set during the pre-selling period might be revised.
Bankers will try to outdo one another by selling as many shares their allocation would allow. Based on the law of supply and demand, the higher the market for the shares, the bigger the share prices on the actual trading day.
First, bank syndicates are groups of investment banks that, together, underwrite or distributes share offerings. Syndicates are not legal entities, but, merely a team that works together in selling and sharing the risks of issuing new shares.
The allocation will be based on the priority lists of banks. They will first prioritize investors with a long-standing relationship with the bankers. They will also prioritize investors who can generate the highest percentage of commissions for them.
During the actual trading, the banks generally have no obligations anymore. They will just monitor the market prices and act based on the changes in rates.
Banks earn millions through commissions. The fees for IPOs is usually around 2-5% of the total amount of shares to be sold.
They can also earn by buying some of the shares, and then sell them when the prices are reasonable already. The initial price of shares is usually undervalued and goes higher once the trading starts.
Also Read: What do Investment Bankers Do?
A fairness opinion is an objective report made by an investment bank about the valuation of a company that is about to be bought or sold. This fairness opinion report is submitted to the Board of Directors before a deal is concluded.
It’s pretty much like the audit report of external auditors that attests the accuracy or fairness of the financial information reported by accountants.
Fairness opinions are usually required by regulatory authorities regardless of the purchase price involved.
It’s common, though the level of being common differs from bank to bank. Fairness opinions are essential to investment bankers because it’s the culmination of what they had learned in investment banking.
Just imagine doing a fairness opinion without even knowing the background of the valuation or how valuation works. In other words, fairness opinions require a high degree of knowledge and experience on valuation. The better you are at valuation, the better you’ll fit with fairness opinion reports.
Fairness opinions are most common in advance economies than others.
Having buyouts or M&As doesn’t automatically mean that there would be fairness opinions. It’s a matter of what the management wants.
Usually, fairness opinions happen when there's a bankruptcy situation. The assets must be valued at the most so that more liabilities more creditors can be paid.
Fairness opinions also happen when there’s a divestiture of a conglomerate. Additionally, when there's a management buyout, there usually are fairness opinions. This is even truer when there are unfriendly takeovers aka hostile takeovers.
Fairness opinions are usually very much time-pressured, time-bound. The reason is that fairness opinions are only done when all parties are already 100% sure that they will push through with the deal. Only that time that they will start fairness opinions.
As such, investment bankers will have to stay late or even all-nighters within a week or two.
Since fairness opinions are like backing up the numbers, it's also like putting the company's name on the line. If the valuation is validated by the investment banker but turns out not right in the end, the reputation of the bank is on the line.
As such, investment bankers are expected to be very precise with their work on fairness opinions.
The twin pressures of time and high level of precisions makes fairness opinions one the most challenging jobs an investment banker makes.
Banks earn commissions from fairness opinions even if the deal is not yet closed (or will not close). It is the opposite of working on mergers and acquisitions deals where investment banks only get paid if the contract is already closed.
The investment bank only needs to complete the fairness opinion, and get the okay of the client, and they can already earn.
How much do banks earn?
The investment bank earns about 1% of the total for deals below USD 1 Billion and about 0.2%-0.5% for deals above this amount. As such, for big deals, the bank earns about a few million, whereas hundreds of thousands can be earned from smaller deals.
Equity issuances are done for several reasons:
Companies need funds for expansion – this is the most common reason why companies issue equity. They would rather have equity than have liabilities with fixed payments of interest and amortization.
Investors want a right exit – IPOs always spell good news for investing public. They think that companies do IPO because the future looks suitable for the company. As such, it brings higher valuation to the company. IPOs are great opportunities for the original investor to exit. They will earn the significant return on their income if they exit IPOs.
Companies need funds for debt repayments and working capital.
A group of investors would want to exit, and IPOs are good ways to finance the purchase of those shares.
Equity sales team memos are needed to educate the sales team about the company, its products and services, its future and also the way the company wants to be represented.
Equity sales team memo is a tool used to make the sales team sell more shares. The more shares the bank can sell, the better is its chances of getting more deals in the future.
These memos are also used to get an overview of the company shares, and to assess which possible investors are suited to such securities. This way, they can target their marketing to such investors. They also can determine which locations they should go on roadshows.
For example, if the company is a tech company, the bankers could determine which cities have the most number of investors that are interested in tech securities.
Offering Summary
This section includes a general summary of the offering :
Company Overview
Shows what are the services or products of the company, target market, history, sales figures summary, plans
Investment Highlights
The way valuation was done, reasons why the shares should be bought, strength of the company
Financial Summary
This is a summarized report on Revenues, Sales, Profits, EBITDA, Net Income, Earnings Per Share
Summary Valuation
This presents the significant items of valuations used, meaning the metrics and multiples. Some of these items are the computations for Equity and Enterprise Value, Share Price, EV/Sales, EV/EBITDA, etc.
Sources and Uses
Focuses on how the funds generated will be used by the company
Risk Factors
A summary of the specific risks involved when the investor will buy the shares of the company.
Confidential Information Memorandum is a document which details the crucial financial and non-financial information about a company selling itself. Thus, Confidential Information Memorandum is part of the papers when the investment banker is on the sell-side of a mergers and acquisitions transaction.
Investment bankers create executive summaries that are about 5-10 pages long. These summaries indicate only a snapshot of the selling company. These are then sent to prospective investors. If anyone is interested, the CIM can be sent to them after signing a Non-disclosure agreement.
CIMs are usually 60-100 pages long. It is also known as Information Memorandum or Offering Memorandum.
What are the parts of a CIM?
Valuations are not included in the CIM because it’s merely a marketing document that features the good things about the company.
Though CIMs and Pitch Books could both contain information about the company, there’s still one big difference. Pitch books are used when you are always pitching; that is, you are still trying to get hired by the client.
On the other hand, CIMs are used when the investment bank is already hired by the company. CIMs are used to show the company how it would present the company for it to be saleable.
NPC International, Pizza Hut to Barclays and Goldman Sachs
Draft from Middle Market Business Advisors:
SBI Capitals Limited:
Prysmatic Advisors
A stock purchase agreement is a document which shows the final agreed terms of the buyer and seller in mergers and acquisitions.
Stock Purchase Agreements are also called Definitive Merger Agreement.
Stock Purchase Agreement is usually taken from pre-existing templates of the bank. So, an investment banker will only have to change the figures, and reword some portions so that it would fit the current scenario.
Here are the things you will be working on a Stock Purchase Agreement.
National Paralegal College:
National Paralegal College Example
Draft Stock Purchase Agreement:
Draft Stock Purchase Agreement Example
Investment bankers win deals not just by good pitches, but more by good relationships.
They get a lot of clients through their acquaintances. MDs, VPs usually have catch-up meetings with industry contacts even if they don’t have an immediate transaction to discuss.
They usually get new deals during the discussions.
For IPOs, for example, bankers get a lot of referrals from Venture Capitalists and Private Equity Firms.
Entry-level analysts and associates are not given the responsibility to find clients. AT this level, you are tasked to do the computations and due diligence. At this point, your employer would determine if you are ready to take on the task of connecting with clients.
How can you show them that you are ready? You must be able to at least communicate very well with the other members of your team. You should also be able to showcase your networking skills whenever you are out for meetings with your seniors.
VPs and above are the ones that are tasked to find and win deals.
Managing directors, in fact, are usually not busy in doing current deals like IPOs. They are more on working on with new or existing relationships. Once they get a deal, much of the work is passed on to the other officers of the investment bank.
On your first year, you won’t probably close more than one deal. If you got more, you’re lucky. Why? Because most of the deals started won’t get closed.
Most of the time, the reason is that it took so long for both counterparties to agree to the same terms. What are the things that delay the deal?
There’s still a lot more in investment banking that what is discussed here. This is just an enumeration of what the common tasks that investment bankers face in the workplace. There are a lot of challenges a financial analyst could face at work.
Reading can get you ahead, but, nothing beats real experience. So go out there and get real-life experiences!
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