The other half of traditional Investment Banking, Financing or Corporate Financial Advisory, comprises of structuring and executing a variety of transactions including equity offerings and debt issuance to help companies raise money to fund both organic and inorganic growth. Banks also act as intermediaries between investors like Private Equity firms and companies.
Private Financing can be in the form of straight equity, mezzanine- a mixture of debt and equity, and also structure customized solutions using a host of derivative instruments. This should not be confused with the Derivatives desk that sells hedging instruments to corporate as part of their own risk management strategy or proprietary trading. Corporate financial advisory is a pure service and the team acts as a middleman even if the derivative is being sold is by another team in the same company. The conflict of interest that arises when you have to recommend your own firm’s product has been widely debated. Chinese walls have been set up for this reason and many banks have strict communication protocols in place to make sure the client is protected.
Public market financing is the way companies raise money through the primary and secondary public offerings and debt issuances. Investment banks take up the role of a Book Running Lead Manager. The Book Running Lead Manager undertakes the due diligence of the company ensuring it meets all the criteria for listing, creates the IPO Offer Document, markets the offering through road shows and carefully planned analyst meets and finally sells the issue sometimes offering to underwrite. Here again, the underwriting to buy a percentage of shares is not done by the Investment Banking team but by the Securities desk of the same bank.
Going back to our example of Company ABC. Company ABC requires funding to complete its acquisition of XYZ. Sometimes the same team or in larger banks a different team will set about choosing the appropriate method of finance. Private financing in terms of Private Equity, Mezzanine or Debt or say an IPO or a public debt issuance. In this case it is decided that it is time for ABC to go to the markets and do an Initial Public Offering (IPO). The Equity Capital Advisory team then does a due diligence, puts together the offer document and finally sells the issue.
The Buy-Side Sell Side confusion
This is the general line of thought. On the sell-side, you pitch products such as stocks, bonds, or entire companies in the case of M&A, and you persuade investors to buy them. On the buy-side, you raise capital from investors and then make your own decisions (or in the case of mutual fund analysts make recommendations) on where to invest it and what to buy.”
This is perhaps the worst way to categorize financial firms for the following reason. Large financial firms like ICICI have both buy and sell side divisions. If we go back to our earlier blog post, everyone does everything these days. ICICI has a mutual fund and ICICI has a Equity Capital Markets team.
How does this relate to you as an analyst starting off in a firm? Where should you go? We will look at this in a more detailed manner in a later post relating to Careers in Investment Banking.