Hi guys!

I thought I would post a guide to Investment Banking 101 - what it is, and roughly how investment banks are organized. Feel free to comment and ask more questions, happy to discuss them here!

Introduction to Investment Banking

What is investment banking?

Investment banking designates a special segment of financial services provided by investment banks. Unlike well-known retail/commercial banks who cater to everyone, investment banks only serve wealthy individuals and medium to large enterprises.

The unique role of investment banks is to connect the supply and demand of capital in its various forms, serving as intermediaries between those who have capital (such as investors or depositors) and those who need capital (like corporations or governments).

Recap: Investment banking connects supply and demand of capital

How do investment banks work?

The concept of Material Nonpublic Information (MNPI)

Due to the nature of their business, Investment banks routinely deal with sensitive information provided by their clients and other counterparties.

Such information often includes critical and confidential elements that are key in assessing the potential and value of a business, such as the business plan for a new plant that a large electric vehicles manufacturer would like to finance, the results of a clinical study showing that a promising new drug is working much better than expected, etc.

This particularly sensitive form of information that investment banks most often deal with is called Material Nonpublic Information (MNPI):

• Material: Information is considered material if there's a substantial likelihood that a reasonable investor would consider it important in making an investment decision, such as buying or selling a stock. For instance, it could be information about significant corporate events like mergers and acquisitions, changes in key executive positions, changes in dividend policies, or significant financial performance updates.
• Nonpublic: Information is nonpublic if it has not been disseminated to the general public in a manner making it available to investors generally. In other words, it is information that has not yet been released to the public through a press release or a filing with a regulatory body like the Securities and Exchange Commission (SEC) in the U.S.

When an individual possesses MNPI, they are legally prohibited from trading the company’s securities. The prohibition also extends to "tipping" others. This is because it provides an unfair advantage to certain parties and undermines investor confidence in the fairness and integrity of the securities markets.

Therefore, all Investment banks have adopted a structure clearly articulated around an “Information Wall”, with a "public side" who has no access to MNPI, and a "private side" who regularly has access to MNPI. This division is an important practice to prevent conflicts of interest and maintain regulatory compliance.

The public side

The public side of an investment bank involves businesses that have broad market exposure. These include:

• Sales and Trading: this division buys, sells, and trades securities like stocks, bonds, and other financial instruments on behalf of the bank's clients or the bank itself.
• Equity Research: Equity research analysts focus on a specific industry or sector. Their research reports provide indicative forward-looking pricing of securities and recommendations (Buy, Hold or Sell) and assist traders, fund managers, and clients in making decisions about which securities to include in their portfolio.

The private side

On the other hand, the private side deals with confidential services that involve non-public information. These include:

• Mergers and Acquisitions (M&A): M&A professionals advise businesses on both the buying and selling side of corporate mergers and acquisitions. They help with valuing the company, structuring the deal, and negotiating the terms.
• Equity Capital Markets (ECM): ECM teams work with companies to raise equity capital through IPOs or follow-on offerings. They also advise clients on stock repurchase programs and equity-linked products.
• Debt Capital Markets (DCM): DCM professionals help clients raise funds through the issuance of debt securities, such as bonds. They assist with structuring the debt, pricing it, and selling it to investors.
• Leveraged Finance (LevFin): LevFin teams work with clients to raise high-yield or non-investment grade debt, usually for special circumstances like acquisitions, dividend recapitalizations, and refinancings.

Recap: Investment banking is divided between “Private” and “Public” sides

How do investment banks make money?

Investment banks mostly generate fees and commissions charged as a percentage of the volume being transacted. The details depend on the specific division of the bank involved.

On the public side:

• Sales and Trading: this division makes money from commissions and fees charged for executing trades on behalf of clients.
• Equity Research: the equity research division doesn't directly earn revenue but plays a critical supporting role for the sales and trading operations. The research can attract new clients and stimulate trading activities, which in turn increases the revenue of the Sales and Trading division.

On the private side:

• Mergers and Acquisitions (M&A): banks charge an advisory fee for their services, usually a percentage of the value of the deal being transacted (usually between 1% to 3%). Banks mostly only operate on a success fee basis, meaning they only get paid if a deal gets done, but they can also charge a monthly retainer (a fixed sum of money) per month for certain projects, although this is quite rare.
• Equity Capital Markets (ECM) and Debt Capital Markets (DCM): banks charge fees for underwriting these issuances, which typically involves marketing the securities, setting their price, and taking on some degree of risk in the process.
• Leveraged Finance (LevFin): banks earn money from arrangement fees charged to clients for structuring and syndicating the loans.

Investment Banking Careers

Types of investment banks

Investment banks fall into several categories, each serving clients and markets in different ways.

The generalist or full-service investment banks offer multiple products. They also typically leverage their balance sheet to lend money to their clients. These include:

• Bulge Bracket Banks: these are multinational banks that offer full-service investment banking capabilities, including sales and trading, M&A advisory, ECM, DCM, and more.
• Examples include J.P. Morgan, Goldman Sachs, and Morgan Stanley.
• Large Local Banks: these are banks that dominate their local market and may have a strong presence in certain sectors or industries.
• Examples include Barclays in the UK, BNP Paribas in France, and Deutsche Bank in Germany.

Specialized banks or boutiques are typically more focused. They also typically do not have a balance sheet and do not lend money to clients. These include:

• Elite Boutiques: These are smaller banks that offer specialized M&A advisory and occasionally restructuring services. Examples include Lazard, Evercore, Greenhill and Centerview Partners.
• Specialized Boutiques: These are even smaller firms that typically specialize in certain industries or types of transactions. Examples include Torch Partners and G.P. Bullhound (Tech).

Investment Banking career paths

A career in investment banking is quite linear, meaning that most people spend a set number of years in a specific role, and providing performance is satisfactory (within a favourable market environment) are then promoted into their next role. People who are not promoted into their next role are typically fired. This competitive culture is therefore qualified as “up or out”.

A career in investment banking often begins as an Analyst, usually a role held by recent university graduates. With good performance and typically after two to three years, an Analyst may be promoted to an Associate position.

Associates take on more responsibilities, overseeing the work of Analysts and directly handling client relationships.

Further progression leads to Vice President (VP), Director (or Senior VP), and finally Managing Director (MD), who takes on significant client management and revenue generation responsibilities.

Recap: Investment banking career path and roles

Investment Banking compensation: how much do you get paid?

In London, the compensation for investment banking roles is highly competitive and tends to increase with experience and responsibility. Salaries comprise two elements:

• A base salary: fixed and contractual, paid monthly.
• A bonus: variable depending on individual, group and firm performance, paid on an annual basis (often in January-February or in July-August). Bonuses for Analysts and Associates are paid in cash, while VPs and above can expect to receive some part of their bonus paid in the bank’s stock, sometimes deferred over 3-5 years.

At the entry-level, an Analyst can expect a base salary ranging between £60,000 to £80,000, with bonuses often between 50-80% of the base salary, sometimes exceeding 100% in exceptional years.

As one progresses to the Associate level, the base salary typically rises to between £80,000 to £120,000, again with the potential for an equivalent or greater amount in bonus.

As one moves up to Vice President (VP) and Director levels, total compensation (base salary and bonus) can range from £250,000 to over £500,000.

Finally, at the Managing Director (MD) level, the base salary typically starts at around £250,000, but the bonus component can be multiple times the base, leading to total compensation easily exceeding £1 million.

Recruiting: how to get into investment banking?

Investment banks have put in place very structured recruiting processes involving a range of internships that cater to students at various stages of their academic careers to select and hire their future Analysts.

The first kind is a Spring Week Internship (also known as a Spring Insight Program), which typically takes place between March to May. These are short programs (about one to two weeks long) where students get an overview of the various divisions within an investment bank. These programs are mostly learning-oriented and include workshops, presentations, and networking events.

The next type is the Summer Internship, often between penultimate and final year of study. This is a more in-depth experience, usually lasting 8-12 weeks. Summer interns often work in a specific group, such as M&A, sales and trading, or research, and are given substantial responsibilities. They're also considered for full-time positions upon graduation.

Finally, there are Off-Cycle Internships. These internships are less structured and are usually available in the spring or fall, outside of the typical summer internship period. They can range from a few weeks to six months and can provide the opportunity to gain experience in a specific division of an investment bank. Off-Cycle internships are popular in Europe and are typically used by graduate students or by those who wish to gain experience in investment banking after having interned in a different industry. These internships can also lead to full-time job offers.

Recap: Investment banking internship formats

We will cover recruiting processes, preparation tips and application deadlines for the Spring and Summer internships in a separate article.

Exit opportunities: what do you do after investment banking?

Investment banking serves as a solid foundational experience for a multitude of career paths due to the robust skill set it develops, and the required discipline and work ethic required to perform. The intense, fast-paced environment and exposure to high-profile transactions equip investment banking professionals with valuable skills in financial analysis, deal structuring, and project management.

One popular exit path, particularly for Analysts and Associates, is to move into Private Equity (PE). The financial modelling skills, transaction experience, and deal-sourcing networks formed in investment banking transition well to PE, where the focus shifts from advising on deals to owning and managing companies.

Another common route is Venture Capital (VC). Investment bankers who have worked with high-growth sectors, like technology or biotech, may be well-suited to venture capital roles, where they will be involved in funding startups and other early-stage companies.

A move into Hedge Funds is also an option. Hedge funds value the financial modeling, valuation, and market understanding that investment bankers can bring to the table. However, the type of role and fund can vary significantly, from long-short equity funds that may resemble public-market PE roles, to global macro funds, where the skillset changes dramatically.

Corporate Development is a choice for those looking to work within a company, focusing on strategic acquisitions, joint ventures, and internal initiatives. In these roles, bankers use their deal-making skills to help drive growth and strategic initiatives within the company.

Transitioning into management consulting or strategy roles can also be a good fit, given that the problem-solving, project management, and client advisory skills acquired in banking align well with consulting needs.

Many investment bankers leverage their experience and network to start their own business. The comprehensive understanding of what drives a business, how to fundraise, and what potential buyers look for, can be invaluable for an entrepreneur.

In context: a day in the life of a M&A Analyst

Emma, 25, graduated from Oxford University 1 year ago, and interned at a large American investment bank in London. She started as an Analyst in their M&A group, based in Canary Wharf.

Emma's day begins at 9 AM. Sitting at her desk, she checks the emails that came overnight, and begins refining a financial model for a client's potential acquisition target, adjusting for the latest earnings release. Her goal is to value the target company accurately and model different deal scenarios.

At 10 AM, Emma attends a meeting with her deal team, where they discuss the latest updates on their ongoing M&A transactions. Emma presents her findings from the financial model she's been working on.

Post the meeting at 11 AM, she starts drafting a section of a Confidential Information Memorandum (CIM) for a different deal after receiving some observations from the Vice President in the deal team. She works with the company's management to understand their business model and growth strategy, translating these into a compelling narrative for potential investors.

A quick lunch at her desk at 1 PM is followed by a conference call with a client in the United States at 1:30 PM, discussing the timelines for due diligence.

After the call, around 2:30 PM, she reviews a due diligence report for an ongoing sell-side mandate, identifying any red flags or potential negotiation points that could impact the transaction.

At 4 PM, she listens into a call with a potential buyer for another transaction, while the Director in the team is running the buyer’s team through the investment highlights and answering any preliminary questions they have about the business.

By 5:30 PM, she is back to her financial model, incorporating feedback from the morning meeting. She also begins creating a presentation for another client meeting scheduled for the next day.

Dinner is at her desk at 7:30 PM, while she discusses the day's developments with her fellow analysts.

Post dinner, around 8 PM, she takes some time to provide feedback to an intern who is assisting her with industry research.

She spends the remainder of her evening, from 9 PM to 11 PM, working on various tasks: updating deal logs, finalizing client presentations, and preparing for the next day's meetings.

Her day officially ends at around 11 PM, although there might be days when she must stay back longer to prepare for an important client meeting or work on an urgent deal.

Even though the hours are long and the job is demanding, Emma finds her role intellectually stimulating and enjoys the thrill of working on significant transactions that reshape industries.