What is Investment Banking?
Investment banking can be defined as a specific decision of the banking industry that engages in advisory based financial transactions on behalf of their clients that ranges from individuals to corporations and governments. Investment banking division is responsible for raising capital for their clients from the public or private investors. Investment banks leverage their large network and expertise to connect investors with excess funds and clients with profitable business opportunities looking for investors.
In the broad sense of things, the investment banks help to channel funds in the economy efficiently using their expertise in the domain. Investment banks also provide their services related to the underwriting of debt and equity securities for various corporations. They also help with the mergers and acquisition deals, facilitate the sale of securities, broker trades for corporations and investors and provide financial guidance to their clients on profitable investment avenues.
Role of an Investment Banker
Now that we have understood what investment banking is and what the investment banks do, let’s understand the role played by investment bankers and how they add value in this industry. We will look at the role of investment bankers in context to the functions of an investment bank in the economy.
- Role of Investment Banker in IPOs and Underwriting: One of the major functions of investment banks is facilitating the underwriting services to private corporations and other entities. You must have heard of Initial Public Offerings (IPO), during IPOs the private company are seeking funds from the public by selling the company’s shares at a predetermined price. A lot goes in selling the share of a company to the public; a major role is played by investment bankers in facilitating the IPOs.
First and foremost, before offering the shares to the public, the valuation of the company is done to determine the optimum prices for shares. Investment bankers play a huge role in researching and conducting financial analysis to analyze the financial well-being of the firm. After conducting a complex analysis the price of the security is determined. Selecting an optimum price is important to avoid any under subscriptions or oversubscription scenario. Investment banks act as a mediator in the IPOs and also acts as underwriter for shares issued.
- Investment Bankers in Mergers & Acquisition: Another important role of investment bankers is highlighted in the mergers and acquisition deals. Mergers and acquisition deals are carried out by companies who are looking to benefit from coexistence and mutual synergy. It helps companies to avoid competition and collectively profit from improved synergy. In the case of acquisitions, a company acquires another in the process and takes over its operations and customer base. Mergers and acquisition might look simple but it involves a lot of work on the part of investment bankers.
They are responsible for finding the best competitor for the deal so that their client s could benefit from the M&A deal. Investment bankers have to leverage their network and expertise to identify the perfect fit. It also involves doing the valuation for companies so that a fair price is established for the sale or purchase of another entity. Investment bankers help to determine if the price offered by another company is fair or not (in case the company is being acquired) and determine the fair value of the other entity (in case the company is acquiring).
- Investment bankers as financial advisors: In addition to M&A deals and underwriting services, the investment banks also provide advisory services to its clients. Generally, the advisory services provided by investment banks are limited for corporations, government entities and high net worth individuals. Various new financial instruments are complex and need expert guidance during investment, for example, alternative investments. The investment banker also guides their clients on these investment avenues after factoring in their risk appetite and return expectations.