You may have heard of investment bank, but you may not know how it works. Investment banks bridge the gap between large companies and investors. It serves as an advisor to companies and governments by guiding companies and governments to deal with their financial challenges and helping them to obtain financing (whether from stock issuance, bond issuance or derivatives).
For a company trying to raise funds, a key move is to issue stocks and bonds. However, doing so involves a wealth of expertise in financial instruments, so as to maximize revenue while meeting regulatory requirements. An investment bank will enter the scene at this point.
The Intermediary Role
Investment banks are best known for their work as intermediaries between a corporation and the financial markets. They help corporations issue shares of stock in an IPO or an additional stock offering. Besides, they arrange debt financing for corporations by finding large-scale investors for corporate bonds.
The advisory role of investment banks begins with pre-underwriting consultation and continues after the securities are issued. The investment bank is responsible for checking the accuracy of the company’s financial statements and issuing a prospectus to describe the offering in detail to investors before offering them purchasable securities. Clients of investment banks include companies, pension funds, other financial institutions, governments, and hedge funds.
Underwriting is the process of raising capital through selling stocks or bonds to investors (e.g., an initial public offering IPO) on behalf of corporations or other entities. Businesses need money to operate and grow their businesses, and the bankers help them get that money by marketing the company to investors.
There are generally three types of underwriting:
Firm Commitment – The underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
Best Efforts – Underwriter commits to selling as much of the issue as possible at the agreed-upon offering price but can return any unsold shares to the issuer without financial responsibility.
All-or-None – If the entire issue cannot be sold at the offering price, the deal is called off and the issuing company receives nothing.
Once the bank has started marketing the offering, the following book-building steps are taken to price and complete the deal.
M&A Advisory Services
Promoting mergers and acquisitions is a key element of investment banking. Investment banks estimate the value of potential acquisitions and help negotiate fair prices for them. It also helps structure and facilitate acquisitions so that the transaction can proceed as smoothly as possible.
Mergers and acquisitions (M&A) advisory is the process of helping corporations and institutions find, evaluate, and complete acquisitions of businesses. This is a key function in i-banking. Banks use their extensive networks and relationships to find opportunities and help negotiate on their client’s behalf. Bankers advise on both sides of M&A transactions, representing either the “buy-side” or the “sell-side” of the deal.
Investment banks such as JP Morgan Chase and Goldman Sachs manage large investment portfolios for pension funds, foundations and insurance companies through their asset management departments. Their expert analysts can help you choose the right combination of stocks, debt instruments, real estate trusts and another investment medium to achieve your clients' goals. Manage investments of various investment styles for various investors (including institutions and individuals).
Investment banks have a research department responsible for reviewing the company and writing reports on its prospects, usually with a buy, hold or sell rating. This research may not directly generate revenue, but it will help its traders and sales departments.
The research department also provides investment advice to external customers who can complete transactions through the bank's transaction desk, which will bring benefits to the bank.
Research retains the institutional knowledge of investment banks in credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients. They may use the data they collected internally, but they can also make a profit from it by selling it to hedge funds and mutual fund managers.
Sales & Trading
To match up buyers and sellers of securities in the secondary market, Sales and trading groups in investment banking act as agents for clients and also can trade the firm’s own capital. Most major investment banks have trading departments that can trade stocks and bonds on behalf of their clients. Some banks have also conducted property rights transactions before, and they use securities to gamble. However, a new rule called the "Volcker Rule" has stopped this approach.
Today, companies typically pool financial assets from mortgages to credit card receivables, and then sell them all as fixed-income products to investors. Investment banks will come to the scene to provide you with opportunities to securitize income streams, fix assets and sell them to established investors. The term investment bank seems inaccurate for its work. Usually, it does a lot of things besides raising funds for the company.
Investment banks play a vital role in helping companies and government entities make appropriate financial decisions to raise the necessary funds. These banks can also take other measures to help these institutions achieve their business goals. Scale is the asset of the investment bank. The more connections a bank has with people in the global financial world, the more likely it is to profit by matching buyers and sellers (especially for unique transactions).
(Images from the internet)