Considering a career change?
Work Experience (Video)
Extracurricular Activities (Video)
Making The Most Of Holidays (Video)
16 September 2015 |
Investment banks are confusing organisations to understand at first, especially in light of the fact that a plethora of acronyms are used to describe everything from divisions and geographies to financial products and markets. The easiest way to familiarise yourself with the relevant jargon is to spend time inside investment banks and talk to those who spend most of their days (and many nights!) working in them. This overview is aimed at those looking to gain a basic insight into the workings of an investment bank. It should enable the reader to present him or herself with the necessary confidence and understanding of the industry to succeed during interviews and internships. Remember that the fundamental role of an investment bank is to connect organisations seeking capital (money) with investors looking to invest funds in order to grow their own capital.
Seek a return on their investment that at least matches the rate of inflation. They usually invest in companies or securities if the potential return on investment exceeds the return that could be achieved via other means (such as saving in a bank account or purchasing government bonds). In this context, investors are typically high net-worth individuals, private equity firms* or corporate entities referred to as investment funds. The latter includes the companies to which we pay our pension contributions (pension funds**) and insurance premiums (insurance companies), mutual funds and sovereign wealth funds***.
Organisations Requiring Capital
Companies require capital to acquire other firms and assets, invest in new ventures, expand into new regions and finance operations. Governments require capital to facilitate investment or repay older debt that has fallen due.
Intermediaries between investors and organisations requiring capital. The way in which the financial markets operate is often very complex, but banks are essentially the conduits of capital. Without the service of wholesale, investment or merchant banks, companies would find it far more difficult to raise capital (and thus expand and invest) and investors would struggle to access investment opportunities that could grow their capital.
The term ;investment bank; may be slightly misleading at times, as not everyone who works at an investment bank is strictly an investment banker. However, the below summary should help to clarify the roles of various departments within investment banks. More detail on some of the teams and departments mentioned is included later on in this handbook.
Investment Banking Division (IBD)
This division;s fundamental role is to advise corporates, governments, high net-worth individuals (or families) and other institutions on corporate finance matters, most notably mergers and acquisitions (M&A) and raising finance. This includes work involving the equity capital markets (ECM) and debt capital markets (DCM). The Investment Banking Division may also offer services such as liability management, risk hedging, derivatives advice and restructuring. Bankers work together with companies to assess their options and then implement their chosen courses of action.
Markets / Sales, Trading & Research / Securities
The Markets Division of an investment bank is typically split up into three separate departments: Sales, Trading and Research. These each have their own individual roles, but also work together to help clients achieve their investment objectives. As with any other front office role within an investment bank, the main objective of each role is to help to generate financial gains for clients and the bank. The Sales team essentially generates trade ideas and provides market information for clients, based upon its own research and research conducted by the Research teams. Traders then execute trade requests made by (or on behalf of) clients.
Investment Management / Asset Management
Investment/Asset Management departments manage and invest in securities (such as shares or bonds) and assets (such as real estate) on behalf of clients. These clients are typically large, institutional investors**** such as pension funds and insurance companies.
Private Banking / Wealth Management
Private Banking (or Wealth Management) focuses more on providing services such as investment advice, efficient tax planning and financial planning. Typically, advice is individually tailored to help satisfy the unique personal and professional financial objectives of high net-worth individuals or families.
The Finance team in a bank manages the bank;s internal finances. This includes reporting trades executed by the Markets teams into financial accounts; preparing the bank's management accounts and financial statements; analysing the bank's financial performance; and conducting internal auditing (which involves liaising with external auditors). Those working in Finance teams are usually expected to take accounting qualifications.
The Operations Division provides general support to the revenue generating (or 'front office') departments, helping to run and streamline a bank's internal processes. Examples of the work conducted by Operations employees include controlling and managing the processing of trades made by other divisions of the bank and trying to ensure traders receive confirmations of trades earlier and quicker than anyone else in the market (thereby ensuring they have a commercial advantage).
Compliance / Legal
Work that banks undertake is often governed by substantive and complex regulation and legislation. One of the core functions of the Compliance/Legal departments is to ensure that a bank complies with this regulation and legislation within the jurisdictions in which the bank operates. This can involve liaising with regulators; ensuring sufficient controls are in place to reduce the risk of non-compliance; keeping employees up-to-date on their legal obligations; and providing legal advice (whilst at times working alongside external legal counsel). Candidates should have a good basic knowledge of relevant regulation when applying for this role.
*Private Equity Firms
These aggregate funds from institutional investors and private individuals. They aim to purchase mature businesses with established strategies and reliable cash flows, at low prices, using large quantities of debt. Through improving operational efficiency (e.g. cutting costs) and using financial engineering techniques (e.g. paying down (paying off) debt using operating cash flows), private equity firms aim to increase the value of companies in which they have invested. Typically, they look to then sell on the companies for a profit after 3-5 years of ownership and improvements.
**Pension Funds & Insurance Companies
Pension funds invest the pension contributions made by employees/employers in order to generate a return that will enable them to provide retirement income for employees when they reach the end of their working lives. Insurance companies invest insurance premiums in order to make a profit and to ensure enough capital is generated to cover insurance claims in the future.
***Sovereign Wealth Funds
State-owned investment funds that invest for the benefit of a country's economy and citizens.
****Institutional Investors / Investment Funds
Institutions with specialist knowledge that trade (buy and sell) securities (such as shares, bonds or derivatives) in large quantities, usually on behalf of others. Examples include: asset managers, mutual funds, hedge funds*****, pension funds and insurance companies.
These are sophisticated investment firms that aim to generate high returns from investments using advanced investment strategies. These firms typically have short-term investment horizons and invest capital that has been borrowed from investment banks. Hedge funds try to make money regardless of whether the market moves up or down.
Venture Capital Firms
These also aggregate funds from institutional investors and private individuals. They invest in companies at a very early stage (sometimes before companies have generated any profit) and often use industry experts to help grow the business.