When most people think of banking, traders and M&A analysts spring to mind. These are two important roles, but there are also many other highly important functions within an investment bank to which you can apply for an internship or graduate position.
There are 3 main advisory services within the Investment Banking Division (IBD):
Mergers and Acquisitions (M&A)
The work of M&A analysts ranges from working on pitch books to win over clients to financial modelling of target companies for deals. Whilst the former requires practised presentation skills, the latter requires insightful and in-depth financial analysis. Valuation techniques and metrics such as discounted cash flow (DCF), by which the value a company is derived from estimated future cash flows, trading and transaction comparables are key to analysts’ work. Analyst teams are usually grouped by sectors, for example: Energy, Financial Institutions Group (FIG) and Health Care. Whilst some banks have a rotation policy for analysts to try out different sectors, others may require that analysts specialise from the very beginning.
Global Capital Markets (GCM)
This includes Equity Capital Markets (ECM), Debt Capital Markets (DCM) and Leveraged Acquisition Finance (LAF).
ECM: When clients wish to raise money through equity or issue shares, this is the work of ECM. Analysts advise clients on
- Initial Public Offerings (IPOs), where privately owned firms undertake their first listing on a stock market
- Rights Issues, where companies want to sell shareholders more shares in proportion to the amount they already own
- Convertible Bond Issuance, where companies issue debt that is convertible into equity at a set price in the future
DCM: Companies wanting to raise money through debt, in the form of bonds, work with DCM analysts. Analysts link the clients with the debt markets. Main aspects of the job include advising on a sustainable debt ratio and advising what the price of the debt should be. There are 3 groups with which DCM work: corporates, Financial Institution Groups (FIG) and (less often) governments.
LAF: Analysts work on leverage buyouts (LBOs). This is where a company is acquired using a lot of debt. As such, these transactions are generally carried out by private equity funds rather than corporates.
Naturally, in the aftermath of the 2008 Financial Crisis many more corporates have experienced financial troubles. Analysts in Restructuring work with clients to improve their balance sheets, debt obligations and business strategy.
Sales and Trading
Sales and Trading make up the two front office roles markets division of banks. Whilst Sales is about managing client relationships, Trading is concerned with managing risk and pricing instruments. When working with clients wanting to buy or sell, salespeople are the middlemen between the client and the trader. The trader then prices the product and the trade.
There are, however, many roles linked to the different products within the division itself. For example, the trading floor itself is furthered classified into two broad divisions: fixed income, currencies and commodities (FICC) and equities. These divisions have yet again many functions within them. Note that products could also be categorised according to liquidity (the ease with which an asset can be bought or sold) or grouped as either micro or macroeconomic.
Prime Brokerage belongs in the markets division of banks. It offers many different services to hedge funds. These services range from Trading through securities lending, where prime brokers lend stocks to hedge funds who go on to sell what they borrowed and then buy it back at a cheaper price (this practice is called short selling), to roles similar to those in Operations, where prime brokers facilitate contact between hedge funds and other broker dealers.
Research falls broadly into two categories: equity and credit. Equity research analysts formulate the opinions on a company’s share price, whilst credit analysts look at the spreads of the company’s bonds.
Researchers can work on either the sell-side, in an investment bank, or the buy-side, in asset management or a hedge fund. Research on the sell-side is located within the markets division of the bank. Analysts are responsible for following a given sector and they will report on 10-20 stocks discussing whether the status is buy, sell or hold. Researchers use financial modelling, including discounted cash flow (DCF), but also look into companies in terms of how they are affected by their economic climates or by their management teams.
Researchers often work with and advise Sales and Trading. All the information they use to formulate their opinions is public. They rarely, if ever, work with Investment Banking because they cannot get involved in deals that have not yet been publicly announced to the market.
Researchers working on the buy-side, in asset management and hedge funds, will instead work closely with and advise portfolio managers on stocks that they should buy.
Strategy (Macroeconomic Research)
Rather than producing a buy, sell or hold rating, strategists will give an insight into the market and a view on where products are going according to macroeconomics. Strategists on the sell-side produce reports on their chosen sector, e.g. European interest rates, and work closely with Sales and Trading to help them form views on where the markets are moving.
Working in Finance within a bank entails reporting to the CFO but also offering accounting, advisory and reporting service to all other divisions. Crucial information and statistics are provided by Finance to give both management and shareholders a clear overview of the bank’s varied and numerous operations.
The bottom line in Risk is that things can go wrong. For returns to be made risk must be taken. However, those potential gains must be considered alongside potential losses. In turn, those losses must be anticipated and thoroughly prepared for. Calculating the appropriate return given the amount of risk involved is a key skill for analysts.
The division itself is split into two main divisions: Credit Risk and Market Risk. The former revolves around judging the financial state of those borrowing from a bank. The latter is concerned with how institutions are affected by movements in the financial market and controlling the risk facing those institutions.
As technology develops, its role within the banking industry becomes increasingly important. The huge role of technology in the automation of Trading is one example. Work within this division ranges from IT support staff to developing and coding new software.
Since Operations is a market function, it goes hand in hand with Sales and Trading. Operations ensure that trades are completed correctly. Analysts obtain a broader overview of trading, market structures and the actual practical process of a trade.
Asset Management involves generating returns for clients by investing on their behalf. There is a long-term focus in this division and the aim is to achieve steady returns for clients. Asset managers are generally split into funds concentrating on different asset classes or sectors. Apart from Investment, asset managers also have other functions such as Operations, Tax, Legal and Marketing functions.
Wealth Management (Private Banking)
Private banks cater specifically to wealthy individuals and offer their clients a full range of services including asset management, financing solutions, retirement planning and more. Private Banking is very relationship-orientated and private bankers act as the clients’ central contact for other services offered within the bank.