The financial crisis of 2008 has shaken investment banking activities in all aspects–down IPOs, trading losses, anemic M&As, wealthy-clients withdraws… But the industry will go on as business and capital will always be the inseparable pair in economic developments. However, leading investment banks as stand-alone financial institutions will not. Merger, bankruptcy, and changing forms now have left the once-exclusive investment-bank name plate to only the boutique ones and they may evolve into some form of bank-holding companies someday themselves just like today’s Goldman Sacks and Morgan Stanley. Even before the crisis, some investment banks were eager to merge with a commercial bank, like J.P. Morgan and Chase, to create an one-stop financial shopping center for corporations.
As the most innovative financial services provider in the financial industry, investment banks also have long sought to incorporate private equity and hedge fund into their traditional investment banking activities, along the way having created Special Purpose Acquisition Entities and Blank Check Corporations. Their efforts may have to come to a halt in today’s political environment. But after all, investment banking is all about moving capital around for business uses to create the most effective flow of capital between investors and corporations.
Investment banking is one of the most intricate businesses ever created. While no one article can cover all complex issues at once, the following two areas are the most basic to better understanding investment banking.
The Skills for Investment Banking
Core investment banking skills are industry/business knowledge and financial engineering expertise. To become a full-fledged investment banker, one must have both a strong business passion and the ability of financial maneuvering. Investment banking services serve as the conduit for investment-capital flow from investors to businesses. In providing the services, bankers must be able not only to talk to both the corporation and the investor on their respective terms, but also help the two parties understand each other’s different concepts. To investment banking, business and finance are a perfect twist. A typical investment banking division is often comprised of an industry/business coverage group and a financial-product coverage group. It takes interactions of the two groups and combining each other’s work to complete a perfect sale pitch to both a corporate client and the investing public.
The Business of Sell Side and Buy Side
When an investment bank represents a corporate client advising on raising capital, it’s said that the bank is working on the sell side on behalf of the corporation to sell securities to potential investors that the bank may or may not represent. When an investment bank takes in an investor as a client advising him or her on investing, it’s said that the bank is working on the buy side on behalf of the investor to buy securities from all potential sources that may or may not include the bank’s own offerings.
Some smaller investment banks opt for sell-side business working with corporations only and do not conduct brokerage activities on the buy side that deal with the investing public. Big investment banks, however, have business on both sides and that’s where the so-called conflict of interest may arise. Sometimes a bank may find itself representing both the corporation and the investor in the same deal. And if the bank manipulates the buy-side business of investor’s investing by issuing favorable investment ratings for the benefit of gaining the sell-side business with the corporation, that’s the classic instance of conflict of interest. Other times an investment bank may reserve hot IPO deals for its preferred brokerage clients and that shouldn’t be viewed as conflict of interest.
Many other investment banking questions can be easily answered, once the nature of investment banking is well understood, that is, serving both the business community and the investing public. Still, a company is sometimes called investment bank but broker/dealer other times just for the fun of using the two terms interchangeably.