IBD – Investment Banking Division

What is the Investment Banking Division?

The Investment Banking Division, or IBD, is a division of investment banks that provides different corporate finance and advisory services.

Investment banking services include facilitating initial public offerings (IPOs), helping with additional stock offerings, executing mergers and acquisitions (M&A), and other services for companies that need to raise funds through the listing process.

IBD is generally divided into Product and Industry/Sector Groups.

The Product Group is usually divided into three major parts: mergers and acquisitions (M&A), leveraged financing (LevFin), and restructuring. Members of this group must have specific product knowledge and execute various transactions. 

Product Group:

• Mergers and Acquisitions (M&A): Advising on mergers and acquisitions transactions.
• Leveraged Finance (LevFin): Provides loans to businesses that need to make acquisitions.
• Equity Capital Markets (ECM): Advising equity and equity derivatives markets (e.g., shares, options, futures).
• Debt Capital Markets (DCM): Advising on raising and structuring debt to finance acquisitions.
• Restructuring: Restructuring companies to be more efficient and profitable.

Bankers in the Product Group must be familiar with a merger or LBO model rather than profoundly understanding individual industries. 

M&A Advisory and Capital Raising

For a better understanding, M&A Advisory and Capital Raising can be further categorized into debt financing and equity financing.

Debt Financing

When a corporation or government needs to borrow money to raise funds, it typically contacts an investment bank.

The loan forms generally include the following:

1. Loans: Funds provided directly by banks, usually secured by fixed assets;
2. Notes/Bonds: They typically are funded by bond investors/buyers (such as investment funds). Bonds can be publicly traded;
3. Convertible Securities: Convertible securities allow investors to convert their bonds into shares in the future at a predetermined exchange rate.

So, how does IBD help clients who need to borrow? 

Debt Capital Markets or Leveraged Finance Groups in the Product Group first provide borrowers with market information and help design the bond structure, allowing clients to understand the "reasonable" structure that attracts investors. 

"ater, many "investment banks would help clients find large potential investors, build investor interest, underwrite transactions, and assist with regulatory filings.

The Industry Group then analyzes the impact of debt on clients from a financial and business perspective. They work to:

• Provide clients with industry-related research
• Produce marketing documents
• Present industries and companies to investors
• Help provide regulatory- and compliance-related materials

Investment banks use their expertise to advise companies and leverage their resource network to help customers raise funds. It is worth noting that some large banks also provide funds for borrowing companies.

Equity Financing

Clients (governments or companies) intend to sell part of their shares for financing (so-called equity financing) and will also seek help from investment banks.

Public equity financing includes the following offering types:

1. Initial Public Offerings (IPOs): A private company raises money from the public for the first time through a new stock issuance;
2. Follow-on Offerings: A company raises funds from the public again after its IPO;
3. Private Placement: In addition to public trading, investment banks sometimes help clients raise funds through private placements. It is a sale of stock or bonds to a few pre-selected institutional investors (such as insurance companies or pension funds). 
   • The main advantage of the private placement is that less information is disclosed to the public, and the regulatory requirements are less stringent.

The responsibilities of the Industry Group and Product Group here are similar to those of debt financing.

In addition to completing the design and valuation of the equity structure, investment banks also cooperate with their corresponding capital market departments to complete the buying and selling of financial products in the secondary market.

Underwriting

Underwriting is a process whereby a securities issuer entrusts a financial institution with securities sales qualifications, and the financial institution raises funds for the issuer in the form of equity or debt securities.

Underwriting is an essential business for large investment banks such as Goldman Sachs. 

Essentially, investment banks serve as intermediaries between issuers and investors, as they ensure the buying public commits to investing in the issue of securities before the securities hit the market.

Below are some critical functions of underwriters:

• Identify the investment rationale and investor demand 
• Formulate the method and the structure of an offering
• Set the price for the new securities
• Sell the new securities
• Stabilize prices in the aftermarket

Underwriters profit from the spread between the price at which they buy the securities and the price at which they sell them to the market. To share risks and help sell the issue, underwriters often form a syndicate. A lead manager in a syndicate is responsible for pricing the securities.

There are two main types of underwriting commitment:

Firm Commitment

A firm commitment is the most common underwriting commitment in the US.

In a firm commitment, the issuer sells the entire issue to the underwriting syndicate, which then resells the issue to the public. 

The underwriting syndicate makes money on the spread. However, it also risks taking full financial responsibility if it fails to sell the entire issue.

Best Efforts

The underwriter"makes a “be"t effort” to sell the securities at an agreed-upon price. However, the issuing company bears the risk of the issue not being sold.

The offer may be pulled if there is insufficient interest at the offer price. If the offer is pulled, the company will not only not raise any capital but also will incur substantial flotation costs. This method is not as standard today as it was in the past.

Mergers & Acquisitions

If a company plans to acquire another company, investment banks can help it do research and make critical decisions, such as who to develop and how to obtain them. This involves valuing the target company and a long preparation and negotiation process.

The Product Group and Industry Group are responsible for different things throughout the M&A process:

• The M&A Group in the Product Group and the Restructuring Group are generally responsible for designing the transaction structure, helping execute the entire transaction, and assisting with regulatory compliance work.
• The Industry Group mainly researches and advises on acquisition targets. It also does due diligence, models valuations, and recommends financial impact.

Industry Group

The Industry Group mainly focuses on a specific field (technology, retail, oil, gas, media, financial institutions, medical insurance, etc.) Bankers in this group need to have in-depth industry knowledge in various fields.

In the Industry Group, it is common for one analyst to cover multiple industries, and the work is more about marketing activities (pitching) than in the Product Group.

The industry groups advise companies in specific industries on all different deal types, including mergers, acquisitions, debt and equity issuances, IPOs and spin-offs, divestitures, and all restructuring deals. 

What Is The Investment Bank?

Investment banks are a special financial institution that works as intermediaries between businesses and the financial markets.

Investment banks help in the following capacities:

1. Entities who have the intent to invest their money to earn a return; and
2. Institutions that need money to raise capital.

Many people think that an investment bank's primary function is to make investments. However, it is worth noting that an investment bank is not an investment institution and hardly takes investment as its primary business.

An investment bank is a financial institution that provides various investment services. Its core business is financing and Trading, and it also provides consulting, research, asset and wealth management, and other related financial services.

From the perspective of buyers and sellers in traditional financial markets, an investment bank is a typical sell-side institution (financial service provider).

Investment banks emerged in the United States after the Great Depression of the 1930s. There was little financial regulation at the time, so banks could conduct nearly all financial-related activities. 

Banks collected deposits from depositors, helped large companies with financing, and provided various market-making services. However, over time, various risks began to be exposed gradually, and depositors' deposits could not be guaranteed. 

After the Great Depression, the United States passed the Glass-Steagall Act, which strictly separated investment banks from commercial banks and prohibited commercial banks from using depositors' funds to participate in the investment banking business.

As a result, modern investment banks began to take shape. The main difference between investment and commercial banks is that they cover different parts of the financial market.

Commercial Banks

Commercial banks mainly cover the money market, accepting deposits and granting loans. Their clients are mostly individuals like you and me, as well as small- and mid-size businesses.

Their profit primarily comes from the interest difference between deposits and loans. 

Investment Banks

Investment banks mainly serve the capital market, serving large, publicly traded entities. Their primary sources of income are various underwriting, consulting fees, and commissions for market-making transactions and brokerage businesses.

Investment banks are generally divided into:

• Investment Banking Division (IBD), 
• Sales and Trading, 
• Research, 
• private banking, 
• Quant, and
• Other support departments.

Why IBD?

People can chose investment banking division for many reasons. They can an IBD because of their ability to immerse in the larger market, or they can aid in quickly build the network around you and your business, or even they help you advance in the career.

The reasons for choosing or opting for an IBD are as follows.

Comprehensively Enhance Soft Power

An IB position allows you to immerse yourself in a large amount of market information and financial dynamics, preparing you to become a sharp finance professional and enhancing your soft power.

Soft power can help one efficiently manage one's own time, handle multiple tasks simultaneously, and withstand pressure.

Quickly Build A Powerful Professional Network

The reason why lots of people want to work in investment banking is that they hope to establish a powerful professional network that will be crucial for their future career development. 

Investment banking opens many doors for young professionals. It provides new graduates with exposure to different business models and industries and opportunities to work with the largest companies in the world. 

Investment bankers often move to other fields after a few years of IB's rigorous, high-intensity grill.

Continued Personal And Professional Development

Investment banking is for you if you enjoy working in a fast-paced environment and have a steep learning curve. 

As an investment banker, one must proactively keep up with the latest market trends to provide clients with effective investment strategies in the volatile financial market. Therefore, continuous knowledge acquisition is the most basic requirement for people in IB.

In addition, a new graduate can also learn how to dynamically work with different teams working in IB. Often, working on a project in IB involves collaborating across different teams, learning about various products, and communicating directly with top executives in significant industries. 

Quickly Understand Business Insights And Models

Investment banking is probably the only profession that allows new graduates to quickly understand the dynamics of different industries and learn the details of company operations.

Investment banking projects involve a lot of non-public information and important decisions made by senior officials of large corporations. As an IB analyst, you can learn a lot of knowledge that other financial positions do not provide.

Essential skills for IBD

To be successful in an IB position, you will need to have the following skills:

Technical: Financial Modeling & Company Valuation Analysis

Technical skills include basic accounting skills and the ability to predict future company operations. 

You should be able to understand and analyze the Income Statement, Balance Sheet, and Cash Flow Statement and be able to link the three tables together.

Furthermore, you also need to be proficient in financial modeling. This requires a deep understanding of various financial ratios and profitability metrics.

In addition, it is important to have the sound judgment of a company’s operating capabilities and a deep understanding of industry trends.

Smart & Quick Learner

Investment banks are known to favor intelligent individuals, especially those who have strong analytical skills and who can quickly learn and apply new concepts. An ideal investment banking candidate should possess both intellectual curiosity and agility.

Investment bankers must evaluate investments, analyze financial statements and assess market data. In addition, they are responsible for generating reports and translating complex information into understandable languages for highly demanding clients.

Hence, being able to examine data and make logical conclusions is crucial for potential candidates. 

Discipline & Work Ethics

Investment banking is an industry that recruits a wide range of talents; not only those with a finance degree are suitable for investment banking. 

If you want to stand out in a high-pressure working environment, you must be someone who can plan your time efficiently and has a strong work ethic. Usually, people with a legal, athletic, or military background are highly sought after by investment banks.

Strong Interpersonal Skills

Investment banking is a people business, and it is about building relationships. Therefore, having strong interpersonal skills is a must.

If you would like to learn more about IB interviews, here is the Investment Banking Interview 400 Question, and make sure to check out our course below. It is developed by Wall Street professionals to guide you through your interview preparation process:

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Financial Analyst Job Description
• Investment Banking Overview
• Managing Director (MD) Job Description
• Type A personality
• Venture Capital Job Description