Investment Banking

What is this industry?

Investment bankers advise companies when they are looking to participate in an M&A transaction or when they’re looking to raise money via either debt or equity.

  • M&A stands for mergers and acquisitions, so this means that investment bankers advise companies when they want to either buy another company, merge with another company, or be sold to another company

Investment bankers also advise companies when they want to raise money (aka raising capital). 

  • For example, maybe a company needs more money to build a new factory or in is an economic crisis caused by a pandemic and needs to make sure it has enough money to weather the storm

There are two types of ways that companies primarily raise money: Equity and Debt

Equity 

  • If you’ve ever watched shark tank where tiny companies look to raise money by giving the investors a certain percentage of their company, that’s what equity is. Or if you’ve ever bought a stock of Apple in a simulation trading game, that’s equity. It’s basically raising money by selling a percentage of your business.
  • If this is the first time the company is issuing stock and they’re issuing stock to public investors on a stock exchange, it’s called an IPO (initial public offering)
  • Companies also can raise more equity in secondary offerings and can raise equity privately to only select investors in a private placement process
  • Investment bankers in equity capital markets (ECM) groups help companies through the process of an equity raise and market that equity to potential equity investors

Debt

  • Companies can also raise capital via taking out a loan; for example, if you could not afford the full $60k+ Wellesley tuition, you probably got a student loan, which enabled you to go to college despite not having all the money up front. Similarly, to build the factory mentioned above, a company could add more debt to its balance sheet
  • Investment bankers in debt capital markets (DCM) and also leveraged finance (LevFin) groups help companies raise money via issuing debt. They help to syndicate the debt and then market that debt to potential debt investors.
  • The difference between DCM and LevFin is that DCM helps investment grade companies raise debt versus LevFin helps high yield companies raise debt. 
  • Essentially, investment grade companies are of better quality meaning they are more likely to repay the debt in full and make all interest payments compared to high yield (aka below investment grade debt or junk bonds)
  • A good example in everyday life to illustrate this: banks usually don’t want to give a loan to buy a house to someone who has a bad credit score (i.e., in the past, they have missed interest payments, etc). Credit scores for individual people are pretty parallel to credit ratings for corporations in that they measure whether the person or corporation is reliable enough and in good enough financial standing to lend them money.

Typically investment banking departments are broken up into two main umbrella groups: product groups and industry groups

  • Product groups include ECM, DCM, LevFin, Restructuring, and M&A (although M&A groups can differ by bank)
  • Industry groups include natural resources, industrials, consumer retail, healthcare, financial institutions (FIG), technology media and telecom (TMT)
  • The core difference between these types of groups is that the product groups focus on execution of certain types of transactions and build up a lot of knowledge around the mechanics of executing different types of deals. They’re also usually more markets facing. By contrast, in industry groups, you build up a knowledge set around analyzing companies and learning about the business models for the companies in your industry.
  • The two groups work very closely together. For example, in an IPO of a tech startup, the ECM team will keep a close eye on the markets and be crucial when it comes to pricing the IPO (i.e., determining the initial price of the stock when it starts trading) to make sure it’s optimal for the company based on investor demand, and the TMT coverage team will work with the company to craft the story of the IPO and create investor presentations to market the IPO.
  • One quick disclaimer: a lot of firms are called “investment banks,” but those firms do a lot more than just investment banking, especially the largest investment banks (often called “bulge brackets”). These investment banks also have other divisions such as sales & trading, asset management, etc (see the main page for descriptions of these industries). So essentially, investment banks such as Goldman Sachs, JP Morgan, etc do have investment banking groups but also have a lot of other groups that you could join outside of investment banking. 
  • There are also boutique investment banks which focus on more specific corporate advisory. These boutiques tend to work more on M&A advisory, and restructuring mandates as these transactions do not require the investment bank hired to have a large balance sheet. Well known boutiques in the space are Centerview, PJT, Moelis, Evercore, Perella Weinberg, Greenhill, among others.

What is a “day in the life”?

Overall structure of work as a banker in an industry group [TBD FOR PRODUCT GROUPS IF DIFFERENT]

As an investment banker, no matter what level you are, you have a set of clients. These clients are different companies that you cover. When you first start out as an analyst you get “staffed” (banker speak for assigned) to a certain set of clients, which are different companies in the industry you cover. Example, I am a TMT analyst and get staffed on the Microsoft, AT&T, and Facebook teams.

  • You typically do a lot of PPT and excel work for your teams. Here are some examples of work you might do if you’re the analyst on the Facebook team:
  • As the analyst on the Facebook team, your associate tells you that the MD has scheduled a meeting with the CEO and you need to prepare a presentation on potential M&A opportunities (e.g., what are some smaller AI start-ups that Facebook could acquire to ramp up its AI efforts). You create profiles of the startups, and the pages cover AI industry trends among other things.
  • Then, Facebook decides to hire your investment bank because they’ve decided to buy one of the startups. You create an initial PPT deck with a various models to put a price on the AI startup (such as a DCF, precedent transactions, and comparable companies analyses). You also do a merger model to see if the deal would be accretive for Facebook. You lay out the results of these analyses on a football field chart to go in the deck.
  • Facebook decides that given this analysis, they would like to proceed. You are then mandated on this deal, and you work with Facebook to negotiate with the AI startup on price, etc.
  • So this is how the workflow for banking is structured, you just get work from your teams as it comes up. So there are times when you’re doing literally nothing and have nothing that needs to be done and other times where 5 of your teams are contacting you asking you to do work at the same time. This also means the workflow can be unpredictable, so you might find out on Saturday morning that you have work that needs to get done on Saturday.
  • Also, because the work is client-facing (i.e., you work at the beck and call of your clients and want to get work done quickly for them), the hours are long and unpredictable at times
  • Lastly, the work flow is usually quick turnarounds on smaller things as opposed to school where you have a month to write a long paper or a week to do a PSET. So you’ll usually have work you need to get done either asap, the next few hours, later that day, or the next day typically (I’ve rarely had instances where this is not the case).
  • Another element of the work is that given that you’re staffed on different teams, you work with different people across the group, not just the same 5-6 people. This can be an advantage because if you work somewhere where you work with the same small group all the time, not liking someone you work with can have a very big effect.
Gina Scorpiniti [Wellesley ‘19, Goldman Sachs IBD, First Year Analyst]
  • I typically start working at around 10am
  • I check my email and basically just throughout the day see what work needs to be done and do it for my various teams
  • Other than getting the work done as it comes up, I also listen to calls with clients and take notes
  • I already described the overall structure above, and none of my days are the same so there’s not one set day to describe here. I do like that element of the job, because I would get bored doing the same thing every day
  • Pre-covid, we have a gym at the office, so I’d usually try to go to the gym to workout around 9pm every day and then would leave around midnight or 1am

How to ace your interview

It’s important to have an understanding of what investment banking is and exactly why you’re interested based on that knowledge (e.g., just saying that you like finance isn’t enough because there are many areas of finance besides IB). This should come from a well-crafted story that concludes on why you’re interested in IB

Prep answers to various behavioral anecdotal questions

  • You can easily google investment banking behavioral questions (and also technical qs as well)
  • These are usually structured like “tell me about a time when [you worked on a team, you experienced an ethical dilemma, you showed good judgment, etc]”
  • It’s helpful to have just a few main clubs you’re involved in or a past internship that could serve as the base for these questions and then think of examples of situations that came up in those organizations to use as the base for questions that you can then mold to the exact situation they’re asking about

Technical prep is key

  • The main technical information you need to know for interviews are primarily testing knowledge of accounting and of valuation
  • Valuation is when you create an excel model to put essentially a price tag on a company 
  • The three main methodologies tested in IBD interviews are discounted cash flows (DCF), precedent transactions, and comparable companies
  • DCF: valuing a company based on the present value of its future free cash flows
  • Comparable companies: deriving value of a company based on how similar companies are valued
  • Precedent transactions: deriving value of a company by using the multiples paid for other similar companies in M&A transactions in the past

Other categories of questions

  • Brainteasers (e.g., how many planes are there in the sky right now)
  • Mental math
  • Questions about the news, your opinions on current finance / business-related news
  • Relatedly, if you’re interviewing for IBD, you need to have a couple of recent M&A deals that you can talk about (or IPO if you’re interested in ECM or a bond offering if you’re interested in LevFin or DCM)
  • For interview prep, the Mergers & Inquisitions 400 Questions packet is very commonly used and covers most of the typical types of questions you could expect
  • Also interview questions are very easily googleable, as well as just explanations of different terms in finance, accounting lessons, and explanations of what IBD is, so don’t be afraid to just google a bunch of stuff! You’ll find a lot.

Resources for learning about this industry

Websites

Online training

News

  • Wall Street Journal

Podcasts

  • Wall Street Journal has a bunch of different podcasts
  • Bloomberg Deal of the Week
  • Any economic / finance news-related podcast
  • For Debt: Debtwire and Reorg podcast

Typical challenges in this industry – and how to deal with them

  • Pretty long hours that are not just long but also unpredictable
  • You have to figure out that you’re interested in IBD around sophomore year of college so you can prepare because junior summer internship applications are due in your sophomore summer (around July) 
    • If you don’t intern in IBD, it’s nearly impossible to get a full-time job in IBD
    • You could potentially switch to a different firm from your junior summer to full-time but going into IBD for the first time full-time is nearly impossible
    • If you aren’t able to get an internship, you’re most likely only going to be able to get into the role if you go to business school and then go to banking post-MBA (which is another pipeline that is very common)

Typical industry entry process

As described above, the two primary ways to get into banking are via a full-time offer from an internship and post-MBA, but getting a full-time IBD job out of undergrad directly is possible, especially at smaller banks

Typical career trajectory

The IBD levels in banking can vary by bank but are typically analyst -> associate -> vice president (VP) -> managing director (MD) -> potentially Partner depending on the firm

Companies to know in the industry

On-Campus resources related to industry

Wellesley orgs (wwib, isoc, consulting club, westart, smart women securities)