Making sense of the investment banking departments
I have to be honest. I didn’t know that much about the different investment banking departments when I first started.
Yes, I studied finance in school, and I knew what an IPO was, but I had little to no idea about what people in the different departments were doing every day, or what set the divisions apart from each other.
Did I want to be in equity research and be quoted as a specialist in the newspapers? Or did I want to give up all my free-time to work on prestigious deals and dream of large bonuses?
This introduction is meant to give a quick view of some of the most common functions in a large investment bank. It only covers front-office positions (those who face clients), and not back-office (internal functions in the bank).
I haven’t worked in all of these departments myself, but I have at some point collaborated closely with most of them.
Corporate Finance, or classical M&A
Working in M&A is traditionally what most people think about when Investment Banking is mentioned. This is where the analysts and associates spend weekends and nights crunching numbers and correcting formatting on powerpoint slides.
For analysts and associates, the work can mainly be divided into pitching and execution. Pitching is when you try to convince a company to use your team on a deal. The execution is actually working on the deal.
Pitching mostly consists of light modeling of the company you’re looking at, and you spend a lot of time comparing key metrics of your company to the other companies in the sector.
Then there are the slides. Who wants to do more of those? Everything has to look pretty. You will spend hours correcting fonts and colors. And don’t forget aligning boxes.
Long-term relationships and deep knowledge of companies
When your team has actually won a deal, the serious fun begins. Execution can be a lot more varied than pitching.
Someone is usually in charge of more detailed financial modeling of the company. Depending on the capabilities of the client’s team, the bank can do this alone or together with the client. This is where you need some serious modeling skills, which you can read up on here.
Depending on what type of deal it is, you can spend your days being on calls with lawyers, preparing for negotiations, or create presentations for your client. Or you can prepare hundreds of pages in documentation for the authorities.
The most fun part of working with clients in M&A, is that your work is often long-term. Deals can last from a few months to a few years, and you usually know the management team well after working with them.
When you get more senior, you’ll be responsible for sourcing deals as well. You’ll have direct contact with management in the companies you cover, and you need to be the one that finds ideas to what your team can pitch.
More of your time is spent networking with clients (and yes, there can be some fun wining and dining here at times). This is, however, true for most banking departments.
Equity Capital Markets (ECM)
ECM is also traditionally a part of (or at least closely linked to) the Corporate Finance team. Your core job is to do everything for a company that is related to the stock market, with IPOs being the most known deal type.
It’s all about procedure
People on the ECM team become experts on documentation and following step-by-step procedures. Listing a company in an IPO, buying back shares, or just getting new equity to a company that is already listed, needs to follow specific rules.
All the different exchanges have different demands and rules the companies listed there need to follow, and you usually specialize in a few or just one country.
The rules are mostly there to protect the investors buying the shares. The company needs to give them enough information to make qualified choices. And the bankers help them do just that.
This can often involve writing detailed prospectuses where all risk factors in investing with the company are listed. It’s often tedious work, and lawyers will read through every single word.
If something is wrong in the prospectus, the bank can be liable if the share doesn’t perform as wanted. No one has ever heard of an investor coming after a bank for not mentioning a risk factor if the share outperforms.
Debt Capital Markets (DCM)
In some banks, this is also a part of the corporate finance team. However, those who work in this part of the bank specializes in doing transactions with bonds.
This can be everything from listing new bonds, buying back bonds for the companies that listed them, or going into deep and difficult negotiations with the bondholders if the companies don’t have money to pay back their debt.
Listing new bonds and buying them back can be quite similar to listing equity. The big difference here comes when you have to spend time on restructurings. This is where you’ll learn the most, and also be the most frustrated.
You’ll work together with banks, lawyers, bondholders, equity owners, and management, and represent either one of them.
Structured Finance / Project Finance
This department has many different names. The work is more closely related to what you do in M&A, but this department has a balance sheet to use.
This group works on preparing financing for specific projects, and it’s often the same projects someone from the corporate finance group is working on.
If a company is going to IPO, and they are preparing their debt structure first, the structured finance team may work on the last part, while someone else handles the IPO.
This work is also modeling heavy, and you need to be better at building detailed models here than in any other banking department.
These are the people you know from newspaper articles or Bloomberg segments on companies.
You cover specific companies within a sector, usually with a larger team to begin with. You need to prepare and keep (less detailed than in M&A or leverage finance) models on each company, and investors expect you to know everything going on with them.
If the company sends out a press release, your job is to be at your desk and send out a snapshot saying what this means for the valuation of the company.
It all revolves around the reporting seasons
Most listed companies report their results every quarter. A lot of time in equity research can revolve around the reporting seasons of the companies. You need to post previews, first looks, reviews and participate in earnings calls.
The analysts prepare estimates for the companies, telling investors how they think the companies will perform. The average of what the analysts estimate is called consensus, and it’s widely quoted by media.
When the companies report, you need to plug in the numbers, read through their reports, and listen to the investor calls. And ask questions. Usually to show management that you’re actively listening.
A different type of stress
Anytime something interesting happens, you need to send out reports and comments, and this needs to happen quickly.
Your hours are usually shorter than if you start at the corporate finance team. However, I wouldn’t say the work is any less stressful. You work under a lot of time pressure when the market is open, and that can be challenging.
You start your morning very early (at least before 7 am). You need to read up on the news and present your view internally before trading starts.
Fighting for your view
You will present your thoughts to the traders and brokers during the daily morning meetings. Get used to the question “so what does this really mean in one word? Should we buy or should we sell?”
People will often loudly disagree with you, and you need to be prepared to defend your views without hesitating.
Although they shouldn’t, management in companies can also try to fight you. Some CEOs take it very personally if you downgrade their company to “Sell”. I’ve had more than one of them calling to yell because they disagreed with a report.
Your work will mainly be the same as in equity research. However, you cover bonds instead of equity, and you’re not looking for upside, but for how much investors can lose.
Some banks have close relationships between equity and credit research. Some even share models for the companies they cover. If they do, the equity analysts usually have the final say, and the credit analysts usually cover a lot more companies.
This is more of a traditional bank job. You have a portfolio of clients and try to decide how to best lend the bank’s money.
You can’t call yourself an investment banker if you work in this department. Not to be demeaning or anything, but your hours and your tasks are completely different from investment bankers’.
You model the companies you cover, and you try to decide if it makes sense to lend or not. You don’t decide this yourself though. You routinely present your thoughts to a credit committee.
If a company is about to default on its loans, you’ll need to be a part of the restructuring, trying to defend the bank’s position.
You can expect to eat dinner at home and have your weekends off, but you also miss out on all of the fun doing deals. And bonuses are rare.
Wealth Management / Private Banking
You manage the money for wealthy individuals, and your goal is to get more of them to use the bank’s services.
You need to read up on the research from your bank and always know where the market is going. Based on the preferences and risk profiles of your clients, you try to find out where they should invest.
A big part of this is also to attract new clients. A role on a senior level here will, therefore, be very relationship driven. Many banks try to hire people from wealthy and connected family backgrounds here because they want to use their personal network.
The traders or brokers are the people you see on pictures with four or five screens yelling into at least two phones at once. Or maybe just typing away on their Bloomberg chat.
Traders can both perform orders for clients, or trade on the bank’s book. If they are trading stocks for the bank, they can incur great losses if they don’t perform.
The brokers present investment opportunities for clients. Think of them as the link between the analysts and the investors. They also execute the trades when the clients wish to do something.
Big, swinging dicks are fewer now
The fees for trading shares used to make up the ballpark of an investment bank’s earnings. This is not the case anymore, and few banks make enough money to even cover their costs like this.
This is why a lot of the trading teams at larger banks now work more closely with the other departments of the bank.
They work a lot with executing deals from the ECM or DCM teams, and they’re an important part of the closing the deals. Note that there will be separate teams for dealing with equities and debt.
Meaning they are calling the investors and trying to get institutions to participate in an IPO, or to buy new shares in an equity offering.
Banks create new investment banking departments all the time
There are many other investment banking departments out there, and some of the ones mentioned here also go under different names. Yes, it can be confusing, I know. This is also just a short list trying to catch some of the biggest differences for those trying to decide which department may be right for them.
Banks are also known for shuffling their divisions around sometimes and give them new names, but they will usually revolve around the same basic ideas.
Have you worked in any of these departments and want to add something? Feel free to comment to improve!