What is Investment Banking?
Investment banking is a part of the banking system, catering to the needs of capital markets and market participants. Investment banking firms act as a bridge between the investors and capital seekers, including debt and equity.
These firms provide a range of services to clients, including restructuring, capital raising, underwriting, consultancy, security broking, mergers & acquisitions, primary market services, sales and trading etc.
Investment banking plays an important in the domestic capital markets as well as international capital markets. Investment banking firms assist market participants in complex financial transactions and provide advisory services.
What are the key functions of investment banks?
Mergers & Acquisition: Investment bankers assist companies in finding value accretive growth opportunities through M&A. They propose clients with potential targets along with the rationale behind the transactions.
Companies looking to grow inorganically often seek investment banks for suitable targets, and investment bankers provide the management with prospective opportunities. M&A is not limited to domestic markets and extend to international markets.
Equity Capital Markets: Investment banks provide companies with the necessary advisory and facilitation of new equity issues by companies. They engage with the company and prospective investors to support fresh equity issues.
Under this function, investment banks also help privately held companies making public markets debut through an Initial Public Offering. They have an extensive role in an IPO from drafting prospectus to determining an offer price.
Debt Capital Markets: Investment bankers also provide debt capital market services to organisations, including Government and companies. Debt continues to remain a favourable source of capital for businesses largely due to the relatively cheaper cost of capital and no dilution of ownership in the entity.
Investment banks bridge the investors and capital seekers and price the debt issues of companies and Governments. Debt capital markets are a crucial source of funding of an economy and play an important role in growth.
Leveraged Finance: It means the use of debt capital to finance the purchase of investment assets, including acquisitions, takeover and mergers. Since the cost of equity is higher than the cost of debt, corporate raiders have preferred leverage finance to buyout firms.
Investment banks help companies to raise capital for leveraged buyouts. The key difference between debt capital markets and leveraged finance is that leveraged finance provides access to high-yield debt capital.
Firms can use high-yield capital for leveraged buyouts, mergers & acquisitions, capital expenditure, recapitalisation, refinancing.
Restructuring: Investment banks also provide restructuring services to corporates and organisations. Under a restructuring, they attempt to remediate the bottlenecks in a business that are plaguing the performance.
Investment banks provide full advisory to improve business performance after an in-depth study of the company. After the study, they may suggest companies to demerge a part of business, sell a part of business, restructure organisational structure etc.
Trading & broking: Investments banks also provides trading and broking services for securities, including equity, fixed-income, currencies, commodities, derivatives etc. In addition, they also provide research services for the asset classes covered under their offerings.
Some world-renowned investment banks
Morgan Stanley is a pure-play investment bank based in the USA. Its history dates back to 1935. In the first year of trading, the firm had a market share of 25% in public offerings. The firm is also present in almost all major markets in the world.
Based in Australia, Macquarie Group also have a global footprint with a presence in almost every major market. It provides a range of services, including commodities, equity research, underwriting, IPOs, debt capital markets, investment management.
Moelis & Company
Moelis & Company is an independent investment bank based in the USA. It provides financial advisory, M&A, recapitalisation, restructuring, capital markets, financial institutions advisory. It is present in 20 locations across the Americas, Australia, the Middle East, Asia and Europe.
Credit Suisse is a Swiss wealth manager and investment bank with a strong presence across major markets in the world. It operates in two divisions, which include Global Markets and Investment Banking & Capital Markets.
Deutsche Bank is a German global financial services and banking company based in Frankfurt, Germany. It provides corporate banking services, investment banking services, private bank service, and investment management.
JP Morgan Chase & Co.
JP Morgan Chase is one of the oldest financial institutions in the USA. It has a history of over 200 years. It provides a range of services, including commercial banking, financial advisory, corporate banking, institutional securities, investment management.