What Does an Investment Banker Do? Roles, Skills & Career Path

The Core Functions: The Three Pillars of Investment Banking

To grasp the role of an investment banker, it's essential first to investigate the primary service lines that form the foundation of every significant investment bank. They are commonly referred to as the “three pillars” of an investment banking firm. All three service varying types of investment banking clients and serve complementary functions for the client. The Investment Banking Division (IBD) of an investment bank includes the classic advisory style end of investment banking and capital raising banker. The IBD establishes strategic partnerships with clients.

There is a high level of specialization within IBD, with Product Groups organized according to the transactional nature of a deal: Mergers & Acquisitions (M&A), Leveraged Finance, Equity Capital Markets (ECM), and Debt Capital Markets (DCM). Each Product Group is highly skilled within its defined niche, gaining deep knowledge of the mechanics, regulations, and optimum timing to execute specific types of deals.

Additionally, Industry Coverage Groups develop substantial industry-specific knowledge by covering sectors such as Technology, Media and Telecommunications (TMT), Healthcare, Energy, and Industrials, etc. The Investment Banking teams in these areas have specialised expertise in identifying, analysing and advising on the market conditions affecting their sector, their competitors, and who the significant players are. Some of the best investment bankers serve as a bridge between Product and Industry, comparing and combining the specific Transactional Solutions available to the industry specific challenges.

Sales & Trading (S&T), which is the second of three pillars, is involved in secondary markets. The professionals within S&T may not fit the traditional definition of "investment banker"; however, their contribution is critical to the overall structure of the bank. The S&T team executes trades on behalf of clientele including, but not limited to, Institutional Clients such as Asset Managers and Hedge Funds by facilitating the execution of trades in stocks, bonds, and derivatives, thus providing liquidity, offering market-making services, and facilitating execution expertise.

Additionally, the insight and knowledge gained on the trading floor provides invaluable real-time sentiment to the IBD with regards to the appetite of investors for any upcoming/new stock issuance or the debt of any one particular sector. The third pillar is Equity Research, as an analyst is tasked to prepare an exhaustive report, create a financial model and offer an investment recommendation on companies that are publicly traded and various different segments of the market.

Equity research reports provide a major source of revenue for the bank's subscribe clients as well as serve as an informative source for both IBD and S&T. While this article will focus mostly on the advisory aspects of the IBD, it is important to note the way in which the interrelatedness of the three pillars creates a complete picture for full-service investment banks.

Capital Raising: The Strategic Gateway to Markets

Investment banks have a critical role in connecting companies with the capital markets. Companies pursue many different goals and strategies that require significant amounts of capital. To name a few, companies may need capital to expand their operations, finance research and development, make strategic acquisitions, or bolster their financial position. Investment banks are experienced guides for businesses in navigating the complicated and regulated process to raise capital, primarily by either debt or equity.

One of the most exciting events during this time is the roadshow, a time when the management team of the company (along with the assistance of investment banks) meets with potential institutional investors around the world to present the equity story and seek to generate demand for the shares. During the roadshow, the investment banker must accurately assess the level of interest generated during the presentation and ultimately, set the share price appropriately. Setting the price too high increases the likelihood of a failed offering, whereas setting it too low leaves money on the table for the company.

In the area of financing through debt, bankers help clients with bond issuance and obtaining loan syndicates. The banker’s focus shifts from ownership to credit. When structuring the debt, bankers may also include terms, such as maturity date, coupon interest rate, covenants (conditions borrowers must follow), and seniority in capital structure. A banker’s primary goal is to facilitate the lowest interest expense on borrowings while providing principal repayment terms in alignment with the borrower’s cash flow and strategic flexibility

For example, to accomplish this task, bankers must have an in-depth understanding of credit ratings, investor appetite for varying risk profiles, and the current interest-rate environment(s). As a result, both blue-chip corporations issuing investment-grade bonds and private equity firms funding acquisition(s) via high-yield (junk-bond) financing rely upon banking professionals to play dual roles: as architects and intermediaries connecting borrowers with debt capital markets.

Merger & Acquisitions (M&A): The Art and Science of Corporate Strategy

If raising funds can be compared to fuel, merger and acquisition transactions can be described as structural engineering and strategic alchemy. Investment banking's M&A division is an extremely complex and intimate activity for banks where they assist their clients in the most significant event(s) of a company's existence. The steps taken to complete a merger and acquisition transaction involve careful planning, thinking about abduction, valuation, negotiation, and closely monitoring the execution of the transaction.

The banker represents a company seeking to sell itself or a parent organization divesting itself of a subsidiary, and their goal is for them to obtain the highest possible value for their client while securing the best possible deal for them. The way that the banker will accomplish this is typically by developing and conducting an auction that is competitive in nature, which will ultimately generate the highest bids from all interested buyers. The banker will create a set of confidential marketing documents that highlight the strengths of the company being sold, will identify and approach a group of known strategic and/or financial buyers (such as private equity) in order to find out who might be interested in acquiring the company, and will manage the flow of information into and out of a virtual data room and will control what will happen with the data room after it has been opened.

In addition to helping the seller with the information necessary to negotiate with potential buyers regarding price and payment type (cash, stock, or a combination), the banker will assist in negotiating all of the other terms of the transaction (e.g., reps/warrants, indemnity, post-closing adjustments) that will ultimately be utilized by the seller or its agent. In addition, the banker is also involved in determining/identifying the target, establishing the valuation of the target, and assisting with structuring an attractive bid, developing a negotiation strategy to procure the desired deal, and helping the acquirer navigate the various issues associated with financing the acquisition.

In addition to buy / sell assignments, M&A bankers assist with hostile acquisitions, defence mechanisms, partnerships, collaborative ventures, and the restructuring of corporations. They have to contend with tax issues, as well as critical regulatory issues (such as those pertaining to antitrust and investment into the USA by outside source), along with financial & strategic considerations, and critical human and cultural components to joining two companies. A properly executed M&A transaction can change an entire industry, provide the basis for a market leader, and be a major driver of shareholder wealth. An M&A banker acts as the principal architect and advisor to the transaction.

A Day in the Life: Beyond the Glamour

When you watch a movie or read a book, the investment banker is always presented as having some sort of drama – whether it be a tense negotiation that takes place in a boardroom, an over-the-top (but still somewhat accurate) celebration at a restaurant after closing, etc. What you may not understand is that the daily environment of an investment banker is focused on the analytical process, communication and preparation. The typical day for a junior level banker revolves around building and/or maintaining complex excel spreadsheets (tie-in valuation modeling with scenario modeling), building presentations (Upgrading PowerPoint presentations for internal and/or external meetings), and performing due diligence or research on Companies or Industries that will bear relevance to the banker and their customer.

A junior level banker spends a majority of the day (40 hours/week) at meetings, whether it be internal meetings to update their superiors on the progression of deals or telephonic calls with clients to review strategies and/or provide significant updates. As bankers move up in seniority, the daily responsibilities are filled with management of customers, making telephone calls to originate additional business, and overseeing several live transactions on a daily basis.

It is normal for bankers to have a very erratic schedule, with late nights and weekends expected for most bankers, especially during the busy “live deal” environments. It is true that the role of an investment banker requires sacrifice of many things in one's personal life; it is also true that the investment banking career will be an incredible springboard for someone who wants to learn the complexities of operating in a global environment, as well as for those who want an opportunity to be successful in growing their financial knowledge as they continue their journey in the world of finance.

The Essential Skillset: The Making of a Modern Banker

To be a successful investment banker, you need strong finance and accounting skills. These are the minimum qualifications. You also need strong quantitative and analytical skills, which involves being able to build and break down complex financial models and create sophisticated valuation analyses, and understand the nuances of accounting standards such as GAAP and IFRS. This technical skill set is just the beginning.

You'll also need outstanding communication and sales skills. As an investment banker, you must be able to take large volumes of complex data and strategic reasoning, and synthesize them into compelling narratives. You will exhibit these skills through your carefully constructed pitch book, the poise with which you present to management teams, your persuasive negotiating skills, and the clarity of your emails to clients. Essentially, investment bankers are selling their own ideas, strategies, and ultimately their own credibility.

Professional resilience and work ethic are part of your DNA. You must be resilient in maintaining concentration, accuracy, and professionalism even when working under extreme time constraints or lack of sleep. In addition, developing strong interpersonal relationships with your clients to build the foundation of trust for your ongoing business relationship is crucial. Building effective relationships requires effective management of complex dynamics between members of a high-performing team as well as the ability to navigate the complex, emotional issues that may arise between the parties involved in a multi-party negotiation. In addition, fluent use of technology is becoming increasingly important as data analysis, AI technology, and sophisticated software programs become fully integrated into the process of acquiring assets or forming alliances.

Career Trajectory and the Evolving Landscape

Investment banking is a career path whose structure is well defined with a very clear hierarchy and an “apprenticeship” model. The first step on the ladder is usually the Analyst position, which is an intensive two-to-three-year training program for recent graduates that includes some of the longest working hours of any finance job, but offers the best training in the area of financial modeling and execution of deals. The next step on the ladder is typically the Associate level (either from promotions from the Analyst position or from MBA programs), which involves more direct contact with clients and increased responsibilities, including managing Analysts and assuming more ownership for deal components.

The Vice President (VP) level is essentially the project manager of the deal, and is responsible for daily execution of the deal and acting as the main contact person for the client. As you progress up the ranks of investment banking, at the Director/Senior VP level, you start to transition into a more relationship-focused role and begin to develop new business, and then once you reach the last level of managing director (MD) you are basically a “rainmaker” and your primary role is to maintain good relationships with clients, to create new business, and to give a high level of oversight of the entire banking operation.

Conclusion

Investment banking is much more than the stereotypes that surround it indicate; it is a well-thought-out, multi-faceted career with significant effect on our economy. An investment banker does not simply “trade” or “sell,” they are an organization’s partner in its success, using their unique skill set to develop strategies, engineer solutions and develop innovative ways to help organizations navigate the complex financial and corporate landscape of our economy. Investment bankers enable organizations to access capital efficiently, accelerate innovation, create jobs for people and ultimately create a more prosperous future.

Mergers, acquisitions and divestitures are very significant ways investment bankers contribute to the development of, and the transformation of, an organization, an industry and ultimately the allocation of all global resources. Through this process of producing financial solutions for the organization, an investment banker connects the provider of capital to the ultimate user of that capital, thus forming a critical link in the chain of capital global markets that generate economic growth for the nations and people of the world. The profession of investment banking combines the mind of a strategist and the heart of a financial engineer.

An investment banker must possess the ability to think strategically while simultaneously executing with precision and detailed attention to all facets of their work. It also takes great interpersonal skills and tremendous persistence in order to thrive as an investment banker. For those who succeed in this industry, the rewards—beyond the considerable financial compensation they receive—are the sense of achievement they receive from watching their strategic vision come to fruition through the successful execution of the solutions developed by investment bankers and the transformation of an organization, or the revamping of a financial or capital market. In a world that continues to grow more complicated and interconnected, the role of the investment banker as the architect of capital and as a trusted advisor on corporate strategies will remain, and is increasingly becoming, vital to the future of all global economies.