We live in a world where mergers and acquisitions happen every now and then. Have you ever thought that what sector or which bank facilitates multi-billion dollar deals between huge companies? Well, there is a branch of banking that performs other functions. These include facilitating mergers and acquisitions, that branch is investment banking. So, here is a brief introduction to investment banking and investment bankers.
What is Investment Banking?
Like I already told you about one of the functions of Investment banking, however, it is not the primary function.
Investment Banking is a segment or a branch of banking that helps individuals, governments, or organizations to raise funds and provide financial consultancy services to them. In a way, they act as intermediaries between security issuers and investors.
Apart from this, some of their other functions are :-
- underwriting debt and equity securities for all type of corporates.
- They aid in the sale of securities.
- They help to facilitate mergers and acquisitions, reorganization and broker trades for institutions and private investors, both.
Role of Investment Banker
A banker is the one who performs functions of a bank. Investment banker possesses the knowledge of all types of investment assets and, performs various investment banking functions
However here are some of the functions of investment banker:
- Underwriting – Private companies issue shares for the public to raise funds. Investment bankers help them to raise capital and underwrite the debt. They act as a bridge between investors and companies. This function serves in the primary market.
- Sales and Trading – This function serves in the secondary market. They act as agents for clients and match the buyers and sellers of securities in the secondary market.
- Mergers and acquisitions (M&As) – Investment bankers help these companies in finding, evaluating, and completing acquisitions of businesses.
- Equity Research – Investment bankers also help the investors by performing detailed research of particular equity and providing information to them. This aids in making investment decisions.
- Asset Management – They also manage the assets of a wide range of investors. This includes different institutions, in a variety of assets.
Just to avoid confusion
Please do not get confused in an investment bank for any other commercial bank. Investment banks do not take deposits from customers as commercial banks do. The customers of investment banks are generally the one who want funds (organizations or government) and the one who wants to invest. They help the government in raising funds from the public through bonds, as the government does not have the expertise and knowledge about raising funds as good as investment banks do.
Example for Investment Banking
Let’s finish this with an example to understand better how investment banks work.
Think of a company ABC, who wants to buy another company XYZ. Now, ABC does not know about the worth of XYZ company and the long-term benefits in terms of revenue, cost, etc. ABC Co. will reach to investment bankers for their expertise and help. Now, investment banks will go through all the processes, like determining the value of the company, negotiating on behalf of ABC Co., settle a deal by helping the company to prepare necessary documents and, lastly, advising the company on the right time for the deal.
Here, as you know, the investment bank is working on the buy-side. However, some investment banks must be working on the sell-side of the XYZ company. Investment banks earn from the commission of the deal, bigger the deal and so would be the commission.
Today the majority of the countries are mixed economy, and as a result, their government and private enterprises depend on investment banks for their services when they need funds. And as mentioned earlier, investment banks act as a bridge between potential investors and potential sellers of stocks, or in short they ‘add liquidity to the market’. I hope this article would be helpful for you. Please comment on any suggestions and ideas, and do follow us on Facebook, Instagram, and LinkedIn to our latest blogs.