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:
Working on Pitch Books
What are the different types of pitch books?
There are different pitch books available:
- Deals-related – these are pitches that present a present transaction. Examples include M&As (buy or sell side), public offerings, security issuances, etc. There are also called “Targeted Deals” pitch books wherein the bank will present the dilutive or accretive effect on shares of a proposed acquisition deal.
- Bank pitches – these are pitches that pitches the banks, it’s products, services, and what it can do for the clients.
- Fairness Opinion – this is a presentation about how fair the valuation of a specific company is. That is, the bank is validating whether the amount to be received or amount to be paid by a company is fair or not.
- Management presentations – these are presentations to actual investors during public offerings.
- Updates – these are presentations that aim to give updates to the clients regarding ongoing deals such as M&As.
- Market overviews – presents facts about the market where the client operates.
What are the standard features of pitch books?
In general:
- Title
- Table of Contents
- Slides about the bank
- Market Overview
- Situation Overview
- Valuation Summary
- Potential Buyers / Potential Sellers
- Executive Summary
- Recommendations
- Appendix
For Management Presentations or Bank Overviews:
- Company Overview, including Organizational Chart
- Market Overview
- Products and Services Offered
- Sales overview
- Historical Financial Statements, and Projected Ones
- Marketing Methods
- Market Demographics
How can you create an excellent pitch book?
What are some clients examples of pitch books?
- From JP Morgan:
Check the PDF - From Goldman Sachs:
Check the PDF
Check the Article - Morgan Stanley:
Check the PDF
Check the PDF
What are the things you should focus on when doing pitch books?
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:
- 100% update of all information – one of the most common mistakes that an investment banker does is not to update all the information.
They tend to copy some facts from the previous template. As such, the banker is faced with a lot of red marks for it.
The banker should always recheck the work multiple times. - Proper punctuations, footnotes, and other small stuff should be correctly and adequately provided.
- Multiple revisions, sometimes hundreds. A single pitch book can go through a lot of changes.
To get you correct, put the version number at the end of the file name. - Small tasks. These involve the bankers taking too much time on small and unimportant items such as font size, font type, etc.
As a solution, the banker should use the standard fonts, styles, etc. of the bank.
This way, he/she doesn't have to decide every time and will reduce the time needed for unnecessary tasks.
Working on Initial Public offerings
What are the steps involved in an IPO?
What is a pitch meeting, and what is the role of investment bankers?
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.
What do investment banks do in a kick-off meeting?
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.
What are the tasks involved in 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.
What is an S-1 Registration?
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.
How do banks pre-sell 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?
What is a roadshow, and how do investment banks conduct it?
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.
How do bank syndicates allocate the shares to the investing public?
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.
What are the roles of investment banks once share trading starts?
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.
How do banks earn from initial public offerings?
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?
Working on investment banking fairness opinions
What are investment banking fairness opinions?
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.
What do investment bankers do in fairness opinions?
Are fairness opinions typical jobs of investment bankers?
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.
Why do companies require fairness opinions?
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.
How do investment bankers work out fairness opinions?
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.
What advantages do banks have when providing fairness opinion services?
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.
Working on Equity Sales Team Memo
When are the circumstances that equity sales team memo must be issued?
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.
Why do investment bankers need to write equity sales memos?
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.
What are the things that are written in a sales team memo?
Offering Summary
This section includes a general summary of the offering :
- The issuer name and ticker name
- The type of offering
- No. of shares to be sold and deal size
- Overallotment provision
- Fully Diluted Shares Outstanding
- Bookrunners, co-managers, etc.
- Purpose of offer – Is it for expansion? Debt repayment?
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.
Working on Equity Confidential Information Memorandums
What are Confidential Information Memorandums?
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?
- Company Overview
- Key Investment Highlights
- Company Products/Services and Market
- Organizational Charts
- Sales figures
- Financial Performance and Projections
- Interest details, if the deal is debt-related
- Appendices
Valuations are not included in the CIM because it’s merely a marketing document that features the good things about the company.
What is the difference between CIMs and Pitch Books?
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.
What are some examples of CIMs?
- NPC International, Pizza Hut to Barclays and Goldman Sachs
Download the PDF - Draft from Middle Market Business Advisors:
Download the PDF - SBI Capitals Limited:
Download the PDF - Prysmatic Advisors
Download the PDF
Working on Stock Purchase Agreements
What is a Stock Purchase Agreement?
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.
What are the things included in a Stock Purchase 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.
- The parties involved, the type of transaction they entered into and the price agreed upon.
- How Existing shares, options, and other dilutive securities will be treated
- Warranties and Representations – this portion is added to avoid conflicts with existing laws and regulations. This portion would show the limits each party would act about the upcoming mergers and acquisitions.
- Covenants – Covenants are for deals related to raising debts. Covenants will tell the company what it can do and cannot do during the term of the loan.
- “No-shop” or “Go Shop” clauses – "No Shop" clause would prevent the seller from finding other buyers who could potentially buy them. This is to protect the seller from increasing the price of the deal. A "Go Shop" clause would allow the seller to find other potential sellers
- Financing – this will show what will be the financing be used for
- Penalties/Payments in cases of Termination, including indemnifications
- Clauses related to unforeseen and material adverse changes – in case of unexpected material and adverse changes (e.g. economic depressions), this portion will tell the parties what each would do in such a situation.
- Conditions to close – summarized form of all the things that need to happen to close the deal.
What are some examples of Stock Purchase Agreements?
- National Paralegal College:
National Paralegal College Example - Draft Stock Purchase Agreement:
Draft Stock Purchase Agreement Example
Working on client acquisitions and relationships building
What are the different ways they find and retain their clients?
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.
When will you be tasked to find new clients on your own?
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.
How many deals should you expect to close in a year?
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?
- Parties don’t agree on one or some terms, and nobody wants to give way to the other. It took so long they just don’t proceed with it. (e.g. management fees, working capital requirements, non-compete terms, covenants, and warranties)
- Too long in looking for the right company to buy, or partner with. Sometimes it is the investment bankers who make this too long; they provide a long and continuous list of prospects until the client got so tired with the process.
- Due Diligence took so long – In due diligence, both parties should be cooperative. There’s a lot of documents and reports to submit to complete the due diligence documents. Sometimes, one or both of the parties do not prioritize the due diligence. The result? Not all documents can be achieved, and nothing can be submitted to the governing authorities.
Would you still want to work in investment banking?
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!
Got any questions, send us a message!
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