Investment Banking Primer

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What Does an Investment Banker Do?

The investment banking division (IBD) offers services related to advising on mergers and acquisitions (M&A) and underwriting securities as part of a client’s efforts to raise capital.

In particular, there are two core functions that investment bankers are relied on to deliver by their clients, which can range from corporations, institutional investors, and governmental entities.

1. M&A Advisory Services → The investment bank offers guidance to a client regarding the strategic rationale and financial considerations (e.g. recommended offer price, fairness opinion, buyer list building) prior to a potential corporate transaction, such as a merger, acquisition, or divestiture.
2. Underwriting Services → The investment bank facilitates and manages the process of raising capital on behalf of a client in the form of either debt financing or equity issuances.

The day-to-day job responsibilities of an investment banker are determined by their seniority within the firm and the product or industry group in which they work.

The more senior the position, the more client-facing the responsibilities of the investment banker becomes, where the priority is to generate deal flow.

From a high-level, however, the following list contains some of the more recurring tasks completed by investment bankers.

• Build Financial and Valuation Models (e.g. 3-Statement Financial Model, DCF Model, Trading Comps, Transaction Comps)
• Create Presentations and Client Marketing Deliverables (e.g. CIM, Public Information Book, Pitchbook)
• Conduct Due Diligence on Live Transactions
• Perform Company-Specific and Industry Research
• Participate in “Bake-Offs” and Roadshows
• Source Deals and Network with Potential Clients

Learn More → Investment Banking Industry Guide

What is M&A Investment Banking?

The core function of an investment bank is to advise corporate clients on strategic and financial decisions related to mergers and acquisitions (M&A) transactions.

• Buy-Side M&A → On a buy-side mandate, investment bankers serve as an advisor to the acquirer (i.e. the buyer) and must determine if the client’s decision to pursue the transaction is reasonable. The priority is to ensure the offer price is reasonable to reduce the risk of overpaying for the underlying asset, e.g. an entire company or individual business segment.
• Sell-Side M&A → In contrast, investment bankers on a sell-side mandate are hired to advise the acquisition target (i.e. the seller) and therefore must ensure the offer price is fair, without “money left on the table”.

The performance of the broader investment banking industry is a byproduct of the current state of the economy (and near-term outlook), as well as the prevailing conditions of the capital markets.

Generally, the M&A activity – the total number of mergers and acquisitions – tends to rise substantially amid periods of economic expansion, which reverses in periods of economic contraction.

Learn More → Mergers and Acquisitions Guide (M&A)

What is Underwriting in Investment Banking?

Underwriting, the other type of service provided by the investment banking industry, refers to advisory services to clients seeking to raise funding in the capital markets. On behalf of their client, investment banks can facilitate a capital raise in the form of either debt or equity financing.

The role of an investment bank, under the context of an underwriting mandate, is to act as an intermediary between the entities seeking to raise capital (e.g. corporate clients) and institutional investors in pursuit of potential investment opportunities with attractive risk-return profiles (e.g. university endowments, pension funds, hedge funds, and more).

• Debt Securities Underwriting → The client obtains funding from borrowing capital from lenders in exchange for agreeing to meet periodic interest payments and return the original principal at maturity.
• Equity Securities Underwriting → The client issues shares in itself to institutional investors (and the open markets), i.e. shares that represent partial ownership stakes are exchanged for capital.

Investment banks tend to receive much attention from the press and media coverage regarding their role in an initial public offering (IPO), i.e. a transaction frequently referred to as “going public“.

• Initial Public Offering (IPO) → In an IPO, a formerly private company raises capital by issuing shares to the public for the first time (“go public”), after which its shares are listed on a public exchange and are traded in the open markets.
• Secondary Offering → A secondary offering is the sale of post-IPO shares in the secondary market from shareholders that participated in a past IPO. However, the term can also refer to the issuance of additional shares by a company already publicly traded, i.e. “follow-on offering”.

Similar to M&A activity, an economic slowdown and widespread fears of an upcoming recession usually cause the capital markets to dry up, which is reflected by the reduction in the number of IPOs that stems from the lack of interest from institutional investors.

The dim outlook of the economy among investors and corporations results in a more conservative approach to raising capital and participating in M&A across all sectors, albeit there are certain firms like distressed funds that strive to opportunistically capitalize on (and profit) from mispriced securities in the capital markets.

Learn More → Initial Public Offering Primer (IPO)

What are Product Groups and Industry Groups?

The structure of an investment banking division (IBD) is unique to each firm, however, the most common segmentation is the separation into product and industry groups (or “industry coverage groups”).

• Product Groups → An investment banking product group specializes in a particular product that is offered to clients, such as a specific deal type (e.g. M&A advisory, restructuring, leveraged finance). In most cases, a product group is industry agnostic, meaning the group offers its services across all industries.
• Industry Groups → An investment banking industry coverage group – as implied by the name – specializes in a particular industry niche and can work on a variety of different transaction types instead of being tied to only one product.

Product Groups	Industry Groups
Mergers and Acquisitions (M&A)	Technology, Media and Telecom (TMT)
Equity Capital Markets (ECM)	Healthcare and Life Sciences
Debt Capital Markets (DCM)	Financial Institutions Group (FIG)
Leveraged Finance (LevFin)	Oil and Gas (O&G)
Corporate Restructuring (RX)	Consumer Goods and Retail
Structured Finance	Financial Sponsors

What is the Investment Banking Career Path?

Historically, the traditional career path and progression of roles in investment banking have remained rather rigid, even to the present date. The seniority structure from most junior to most senior is as follows.

1. Investment Banking Analyst → The analyst is the entry-level position in investment banking. Therefore, the analyst must handle most of the mundane tasks, such as company research, analyzing financial statements, creating financial models, and preparing presentation material.
2. Investment Banking Associate → The responsibilities of an associate are relatively comparable to an analyst, aside from marginally reduced hours and the added task of reviewing an analyst’s work. While the associate may be more actively involved in the discussions around deal engagements and pitches, the role is not client-facing.
3. Vice President (VP) → The vice president is responsible for managing the firm’s teams of analysts and associates to oversee the workflow and ensure the quality of the material meets the standards of the managing director (and all deadlines are met).
4. Managing Director (MD) → The managing directors are the centerpiece of the firm’s deal origination process, managing the pitch to the client and ensuring the closure of deals. The firm’s deal flow is directly a byproduct of the managing director’s existing connections with corporate executives and institutional investors, as well as their ability to build their network.

^{Investment Banking Career Path Progression}

Learn More → Investment Banking Career Path

How Many Hours Does an Investment Banker Work?

The investment banking profession is rather notorious for its long hours, in which work weeks consisting of 90 to 100 hours can be common for an analyst.

The untimely conflict of several different active engagements can result in multiple consecutive weeks of minimal sleep. However, these periods typically only happen occasionally, especially with the increased attention to the physical and mental health of analysts as of late.

Still, the traditional culture of investment banking remains, wherein analysts are frequently pushed to their physical limits and are expected to work grueling hours.

An investment banking analyst must be “on-call” and remain available at any given moment, which is attributable to the unpredictable nature of the industry’s workflow and the fact that client requests can come in abruptly without notice.

While that inefficiency frequently results in time spent waiting for deliverables from a client or their advisors, it has historically been and will continue to be a routine part of the business model.

Why Investment Banking?

In spite of understanding the hours and demanding workload in the investment banking profession, especially at the analyst level, many of the top university students continue to pursue a front office role at an investment bank post-graduation.

Of course, not everyone decides to become an investment banker for the same reasons. But one of the most cited reasons is because of the doors that open because of working at a prestigious firm.

Most analysts tend to work a one or two-year stint in investment banking as a “stepping-stone” to a different career path. Understanding the trade-off between working as an investment banker and the lack of a traditional work-life balance is critical, or else the state of burnout is an inevitable outcome.

But over the course of working in the investment banking industry, analysts not only learn financial modeling in Excel and creating client presentation material – contrary to a common misconception – but also become well-versed in performing industry analysis and grasping the “ins and outs” of different business models.

Upon graduating from an undergraduate university, an analyst is trained to become a more reliable, detail-oriented worker that can work at an efficient pace, even in high-pressure situations, which is a transferable skillset applicable to practically all industries.

The following list outlines the most common exit opportunities for investment banking analysts.

• Private Equity (LBO) → Private equity firms, or “financial sponsors”, are investors specializing in leveraged buyouts (LBOs), which are transactions where a majority stake in a private (or public) company is obtained. In order to fund the buyout, a substantial portion of the purchase price stems from debt capital provided by lenders.
• Hedge Fund→ Hedge funds are a form of active management that invests in public securities, such as stocks and bonds, to achieve stable risk-adjusted returns. Compared to other industries, the strategies employed in the hedge fund industry tend to be more diverse, e.g. value-oriented funds, long-short equity (L/S), short-only funds, and quantitative funds.
• Venture Capital (VC) → Venture capital firms obtain minority stakes in high-risk, early-stage startups that are rarely profitable yet are attempting to disrupt an existing market through a differentiated offering. While the failure rate among startups is quite high – in fact, most are expected to – even one successful investment in a portfolio can be enough to return the value of the entire firm, i.e. the “power law of returns”.
• Growth Equity (GE) → Growth equity firms acquire minority interests in late-stage companies exhibiting high growth with proven market traction, where the investment strategy is to provide expansion capital to a company on track to “go public” via an initial public offering (IPO). Unlike venture capital firms, the bets undertaken by growth equity investors tend to carry less risk since the potential to disrupt the target market and demand from customers has been validated.
• Real Estate Private Equity (REPE) → REPE funds specialize in the acquisition, development, and implementation of operational improvements into properties, such as buildings, on behalf of their limited partners (LPs).
• Miscellaneous: Other exit options available to investment bankers, other than on the buy-side, are roles in corporate development, startups, entrepreneurship, FP&A, and more.

What is the Average Salary of an Investment Banker?

The compensation structure in the investment banking industry consists of two parts:

1. Base Salary → The base salary component is the fixed portion of the analyst’s salary that is guaranteed to be received, assuming the analyst is not laid off by the firm.
2. Performance-Based Bonuses → The bonus component, on the other hand, is variable and contingent on various factors, namely individual performance. The bonuses issued by investment banks can easily exceed the base salary of their analysts.  The performance of the firm and group, aside from the individual performance review, is also a critical factor that determines the size of bonuses (i.e. the “top-bucket” analysts receive the highest bonuses).

The compensation chart below summarizes the average salary earned by investment banking analysts.

^{Investment Banking Analyst Salary Range (1st to 3rd Year Analyst)}

Note that the ranges portrayed above reflect the typical base salary and bonuses received by investment banking analysts. The economic conditions and revenue performance of the firm can significantly impact the “all-in comp”, which is largely a function of the transaction volume with regard to M&A activity and conditions of the credit markets.

Learn More → Investment Banking Analyst Salary Guide

Who are the Top Investment Banks?

The top investment banks (or tier 1 banks) – in terms of prestige, deal flow generation (i.e. the number of transactions and size) and the types of clients engagements – can be designated into two categories:

1. Bulge Brackets (BBs) → Bulge bracket investment banks are full-service investment banks that provide a comprehensive suite of offerings to their clientele, such as commercial banking, corporate banking, investment banking, sales and trading, and equity research. In general, the bulge bracket firms tend to be more established with a long-standing track record (and roots that date back to the earlier lifecycle of the industry. For example, the formation of JP Morgan can be traced to the merger between the Chemical Bank of New York and Chase Manhattan Bank. The post-merger entity, Chase Manhattan, later on, acquired J.P. Morgan & Co. (and rebranded as JPMorgan Chase).
2. Elite Boutiques (EBs) → Elite boutique investment banks are specialists in a particular product group or industry. The pay is on par with the bulge bracket banks, with a comparable amount of prestige. However, the one drawback is that name recognition is essentially non-existent outside of the finance industry. Since an elite boutique incurs far fewer overhead costs, more of the fees generated from its deals can be distributed to the firm’s deal team.

While bulge bracket firms possess the option to leverage their historical branding and other business segments on pitches to potential client mandates, elite boutique firms can frame their services as independent advisers free of any potential conflict of interests. Hence, many of the elite boutiques deliberately market themselves as “pure play” independent advisory investment banks.

The following ranking chart from the Wall Street Journal (WSJ) and DealLogic lists the leading global investment banks based on the total amount of revenue generated for fiscal year 2022.

^{Global Investment Bank Ranking Chart by Revenue in 2023 (Source: WSJ Deal Logic)}

The following list contains examples of some of the top bulge bracket and elite boutique investment banks at the forefront of the industry in 2023.

Bulge Brackets Investment Bank Examples (BBs)

• Goldman Sachs (GS)
• Morgan Stanley (MS)
• JP Morgan (JPM)
• Citigroup
• Barclays
• BofA Securities

Elite Boutique Investment Bank Examples (EBs)

• Moelis & Company
• Evercore
• Lazard
• Centerview Partners
• PJT Partners
• Qatalyst Partners
• Rothschild & Co.
• Greenhill & Co.

Middle-Market Investment Banks (and Global Banks with International Presence)

• Houlihan Lokey
• BMO Capital Markets
• Raymond James
• TD Securities (TD Cowen)
• Harris Williams
• Piper Sandler
• Jefferies Group
• Baird
• Truist (BB&T)
• Stifel Financial
• Keefe, Bruyette & Woods (KBW)
• Cantor Fitzgerald
• Brown Gibbons Lang & Company
• D.A. Davidson
• Needham & Company
• Stephens
• Wedbush Securities
• Oppenheimer
• Solomon Partners
• Lincoln International
• Macquarie

There are also up-and-coming firms such as LionTree (TMT) and FT Partners (FinTech) held in high esteem in their respective niches, as well as prestigious firms such as Allen & Co. and M. Klein & Co. that intentionally maintain a low profile.

The investment banks listed earlier and in the graphic below are well-regarded firms in terms of their historical reputation, track record of past transactions, and involvement in the largest “headline” M&A or underwriting transactions (IPOs).

^{Examples of the Top Bulge Bracket vs. Elite Boutique Investment Banks}

What is the Structure of an Investment Bank?

While the services offered by investment banks are relatively similar for the most part, the organizational structure and divisions of the bank itself can differ substantially based on its categorization.

The difference between bulge bracket investment banks (BBs) and elite boutique investment banks (EBs) is that the former is more institutionalized (and thus, has a balance sheet).

To elaborate further, the phrase “has a balance sheet” implies the revenue sources of the investment bank are well-diversified, with a lending division (i.e. corporate banking) rather than purely offering M&A advisory services.

Instead of advisory services representing the entirety of the investment bank’s business model, there are other divisions at a bulge bracket investment bank, such as the following:

• Equity Research Division (Sell-Side and Buy-Side)
• Sales and Trading Division (S&T)
• Asset Management Division (or Wealth Management)
• Corporate Banking Division
• Commercial Banking Division

The elite boutique investment banks (EBs) often describe themselves as “independent advisors” as a marketable tactic to emphasize the fact that their advisory services are entirely in the “best interests” of their clients, i.e. no conflict of interests.

The absence of a balance sheet can be favorable for an elite boutique (EB), such as Moelis & Company, where historically close to all of the investment bank’s revenue came from M&A advisory and restructuring services.

On the other hand, the bulge bracket investment banks (BBs) can benefit from more diversified sources of revenue – which stabilizes their financial performance across periods of different economic cycles and market conditions – as well as the optionality to provide staple financing arrangements, for instance.

The drawback, however, is that multiple divisions within the bank that serve clients on both sides of transactions (i.e. the seller and the buyer) can create the potential for conflicts of interest, a risk that can deter prospective clients.

^{Structure of Divisions of an Investment Bank}

Learn More → Finance Careers Infographic

What is the Difference Between Front Office vs. Back Office?

Thus far, we’ve discussed the core functions of an investment bank and the role of an investment banker. However, the distinction between the various types of roles within the investment banking division (IBD) must also be understood.

In most cases, an investment bank is split into three sections: the front office, middle office and back office.

1. Front Office (FO) → The front office describes the part of the investment bank that generates revenue, such as the M&A advisory and capital markets division, as well as the sales and trading (S&T) division.
2. Middle Office (MO) → The middle office is intended to support the front office, particularly in the context of risk management and ensuring the firm is in compliance with regulations.
3. Back Office (BO) → The back office refers to roles that support firm-wide operations, such as the human resources (HR) department, accounting staff, and information technology (IT).

For those wanting to become an investment banker, in all likelihood, the role you’re referring to is a front office position, i.e. the cornerstone of an investment bank (and the most competitive among applicants).

While the prestige of investment banking might be mostly weighted on the client-facing front office roles, the contribution from the middle office and back office roles is an integral part of the business model.

Learn More → Front Office vs. Back Office

What is the Difference Between Buy-Side vs. Sell-Side?

Generally speaking, the term “sell side” refers to the field of investment banking, whereas the “buy side” is an all-encompassing term composed of institutional investors ranging from private equity firms, hedge funds, mutual funds, insurance companies, pension funds, and university endowments.

• Sell-Side → Investment banks, or the “sell side”, attempt to provide their clients with sound advice given their specific situation, such as considering a buyout offer or acquiring another company for strategic purposes. The investment banking revenue model is based on providing guidance to clients through critical corporate decisions. That said, investment bankers generate revenue via advisory fees that are based on a set percentage of the transaction value, which is specified in their engagement contract with the client.
• Buy-Side → In contrast, the “buy side”, which includes investors such as private equity firms, instead prioritizes generating profitable returns on behalf of their limited partners (LPs). The limited partners (LPs) of a fund are the investors that contributed capital, which will, in turn, be deployed by the general partners (GPs) into investments (i.e. post-LBO targets, or “portfolio companies”) to, at a bare minimum, reach the minimum target return set in the initial stages of raising capital. The private equity industry, in contrast, specializes in leveraged buyouts (LBOs) and realizes a profit from the investment after an “exit”, which could be a sale to a strategic buyer, a secondary buyout (SBO), or an initial public offering (IPO). The private equity firm is paid an annual management fee to cover the overhead costs, followed by an agreed-upon split on the profits earned from the fund’s investments (i.e. the traditional ”2 and 20” fee structure).

Learn More → Sell Side vs. Buy Side

What are the Pros and Cons of Investment Banking vs. Private Equity?

To further elaborate on the prior section, the private equity industry tends to be the most sought-after exit for investment bankers, typically after one or two years of working on the sell side.

In fact, the interest in exiting to the buy-side from junior investment bankers (and the competition among private equity firms to recruit and secure the top talent) in 2022 was competitive to the point that the recruiting cycle kicked off before the analyst class had a chance to be staffed on an actual deal or even finish new hire training.

• Private Equity (PE) → The hours and workload on the buy side tend to be more manageable with an improved work-life balance (and compensation). Yet, the statement that working on the buy-side is “easier” per se is a misinformed notion. In fact, the hours and workload on the buy-side are actually comparable to investment banking (i.e. a marginal improvement relative to the sell-side), especially right after exiting investment banking into an associate role at a private equity firm.
• Investment Banking (IB) → The rationale for investment bankers to exit to the buy-side, aside from the higher compensation, is most often tied to the type of work performed on the daily basis, i.e. advisory services to institutional and corporate clients vs. an investment role in either the public or private markets. As an investment banker – especially at the analyst level – a substantial proportion of the work is following instructions carefully and performing menial tasks (e.g. editing marketing deliverables and client material), whereas the tasks completed by investment professionals on the buy side tend to be more intellectually challenging – a factor that many finance professionals perceive as necessary to a long-term career.

Learn More → Investment Banking vs. Private Equity

What is the Difference Between Investment Banking vs. Commercial Banking?

The investment banking and commercial banking function provides two distinct types of services:

• Investment Banking → To reiterate, investment banks offer advisory services that pertain to mergers and acquisitions (M&A), as well as securities underwriting, i.e. capital raising in the form of debt or equity financing. The clients served by investment banks tend to most often be institutional investors, such as private equity firms, and corporations.
• Commercial Banking → On the other hand, commercial banks offer services primarily related to managing deposit accounts – such as checking and savings accounts – in addition to underwriting smaller-sized loans (i.e. lending) and processing transactions. The clients served by commercial banks range from individual, everyday consumers to businesses of all sizes.