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Investment Banking FAQ – Industry Overview

What is an investment bank? 

An investment bank is a financial institution that assists wealthy individuals, corporations, and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities.  An investment bank may also assist companies with mergers and acquisitions and may provide support services in market making and trading of various securities.  The primary services of an investment bank include: corporate finance,  M&A, equity research, sales & trading, and asset management.  Investment banks earn profit by charging fees and commissions for providing these services and other kinds of financial and business advice.

How do investment banks help companies in M&A transactions?

Investment banks play an important role from the moment companies contemplate an acquisition to the final steps.  When a buyer or seller contemplates an acquisition, the respective board of directors may choose to form a special committee to evaluate the merger proposal, and typically retains an investment bank to advise and evaluate the transaction’s terms and price as well as help the acquiring company arrange financing for the deal.

To provide meaningful advisory, investment banks create different valuation models to determine valuation ranges for a company.  They may also conduct accretion/dilution analysis to assess affordability to the acquirer and the effect of the consideration paid on projected earnings per share.   Banks also help clients assess synergistic opportunities from acquiring other companies and how those synergies can create value and reduce costs in the future.  A buy side M&A advisor represents the acquirer and determines how much the client should pay to buy the target.  A sell side M&A advisor represents the seller and determines how much the client should receive from the sale of the target.

How do investment banks help companies raise capital?

Investment banks primarily help clients raise money through debt and equity offerings.  This includes raising funds through Initial Public Offerings (IPOs), credit facilities with the bank, selling shares to investors through private placements, or issuing and selling bonds on behalf of the client.

The investment bank serves as an intermediary between investors and the company and earns revenue through advisory fees.  Clients want to utilize investment banks for their capital raising needs because of the investment bank’s access to investors, expertise in valuation, and experience in bring companies to market.

Often, investment banks will buy shares directly from the company and will try to sell at a higher price – a process known as underwriting.  Underwriting is riskier than simply advising clients since the bank assumes the risk of selling the stock for a lower price than expected.  Underwriting an offering requires the division to work with Sales & Trading to sell shares to the public markets.

What are the top investment banks?

There is not one correct answer.  The answer depends on what grounds you want to rank the banks.  If you are referring to top investment banks as measured by deal volume or capital raised then you need to access league tables, and even league tables are notoriously sliced and diced by investment banks to make themselves look bigger. Here are league tables for M&A deal volume. Thomson Reuters is the authoritative provider of league tables. Here is a complete list of investment banks.

When it comes to prestige or selectivity, industry guides published by Vault and Wall Street Oasis provide helpful guidance to help you figure out which banks are more “prestigious” and “selective.”  They correlate fairly closely with league table rankings. Generally, be careful not to get too caught up in any rankings because they often change.

What is a bulge bracket bank and what are the different bulge bracket banks?

Bulge bracket investment banks  are the world’s largest and most profitable multi-national full-service investment banks.  These banks cover most or all industries and most or all the various types of investment banking services.  There is not really an official list of bulge bracket banks, but the banks below are considered bulge bracket by Thomson Reuters.

J.P. Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, and UBS.

What is a boutique bank?

Any investment bank not considered bulge bracket is considered boutique.  Boutiques vary in size from a few professionals to thousands and can generally be categorized into three different types:

  1. Those that specialize in one or more products like M&A and restructuring. Well-known M&A boutiques include: Lazard, Greenhill, Evercore, and Gleacher
  2. Those that specialize in one or more industries like Healthcare, Telecom, Media, etc. Well-known industry-focused boutiques include: Cowen & Co. (Healthcare), Allen & Co. (Media), and Berkery Noyes (Education)
  3. Those that specialize in small or mid-sized deals and small or mid-sized clients (a.k.a. “The Middle Market”). Prominent middle market investment banks include: Houlihan Lokey, Jefferies & Co., William Blair, Piper Jaffray, and Robert W. Baird

What are the different types of groups within an investment bank?

Within an investment banking division, bankers are typically bucketed into two groups: product and industry.  The three most common product groups are mergers and acquisitions (M&A), restructuring, and leveraged finance.  There are also product groups within securities underwriting.  Such groups include: equity, syndicated finance, structured finance, private placements, high yield bonds, etc.  Bankers in product groups have product knowledge and tend to execute transactions related to their product in a variety of different industries.  Their specialty is on the product execution not the industry.

Bankers in industry groups cover specific industries and tend to do more marketing activity (pitching).  Industry bankers tend also to have more of the relationships with companies’ senior management than do product bankers (although this is not always true).

Common industry groups include Consumer & Retail, Energy and Utilities, Financial Institutions Group (FIG), Healthcare, Industrials, Natural Resources, Real Estate / Gaming / Lodging, Technology / Media / Telecom (TMT).  Many times these groups can be broken down into sub groups.  For example, Industrials may be broken down into Automotive, Metals, Chemicals, Paper & Packaging, etc.  Financial Sponsors (FSG) is a unique industry group in that bankers in FSG cover private equity firms.


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