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It’s no secret that investment banking has been on a roll in recent times, with profits reaching all-time highs. But what exactly do investment banks do to make so much money? In short, investment banks provide two main services to governments, companies, and other organizations. These services are advisory, also known as M&A (mergers and acquisitions), and financing, also known as underwriting.
The large investment banks don’t just have an investment banking division, but also have other client-facing divisions such as asset management, trade sales, trading, and research. So, when people talk about investment banking, it’s not necessarily the investment banking division that they’re referring to.
Mergers & Acquisitions (Advisory)
The first is advisory, also known as M&A (mergers and acquisitions), where investment banks advise companies on the buy or sell side of a deal. They help companies find potential buyers or sellers, negotiate, and find a good price for the deal. Some recent examples of M&A include AT&T merging with Discovery, Amazon acquiring MGM Studios, and Salesforce acquiring Slack for $27 billion.
The second service provided by investment banks is financing, also known as underwriting. This involves raising money by selling stocks or bonds on behalf of a company. The most well-known type of financing is an IPO (initial public offering), which is the first time a company sells its shares in the public markets. Investment banks act as middlemen between companies looking to raise money and investors looking to invest money, connecting both parties and ensuring a fair price is set. Some recent examples of IPOs include Airbnb, DoorDash, and Robinhood.
How Do Investment Banks Make Money?
In short, it’s from fees. On the financing side, investment banks take an underwriting fee percentage of around 3.5% to 7%. However, there are usually multiple investment banks involved in an IPO, so the fees are split between them based on their contributions.
On the other hand, there are advisory fees, which are similar to consulting fees. Investment banks take a fee for their advice and services.
In addition to the investment banking division, large investment banks have other profitable divisions such as investment management, which deals with asset and wealth management, commissions and fees which refers to executing transactions like stock trades for clients, and market making, which deals with market making and credit products, interest rate products, currencies and much more.
In the investment banking industry, there are two types of banks: bulge bracket and boutique.
Bulge bracket investment banks are large household names such as JPMorgan, Goldman Sachs, and Morgan Stanley, and they have thousands of employees and offices all around the world.
Boutique investment banks, on the other hand, are smaller in size and specialize in a particular area or industry. Examples of well-known boutiques include Evercore, Moelis, and Lazard.
When it comes to a career in investment banking, the base salary for entry-level positions is around £80,000 per year, with a considerable bonus depending on performance. However, the work hours are extremely long, averaging around 80 hours a week and peaking at 100 hours depending on the time of the season.
Investment banks typically recruit the best students from what are known as target universities, which are the best universities in the nation. In the US, this includes the Ivy League and a few others, while in the UK it includes Oxbridge, LSE, and a few more.
In terms of skills, investment banks look for candidates who are reasonably good with numbers, have attention to detail, are team players, and are willing to work long hours. However, even ticking all these boxes does not guarantee a spot as the competition is intense.