Investment banking involves several tasks, which can be generally clustered under the heading of being an intermediary between companies and investors. Their primary tasks are:
- Broker the sale of companies. An investment banker searches the landscape within an industry, looking for companies whose owners are willing to sell the business. The banker develops a model that estimates how much a company may be worth, works with the owners to develop a presentation regarding the strengths of the business, and then plumbs the depths of his contact list to find willing buyers. With luck, an investment banker can create an auction between several interested parties to drive up the price. In this type of transaction, the investment banker polishes up a company for sale and presents it to bidders. In exchange for this service, the banker charges a small monthly retainer during the selling process, as well as a percentage of the sale price. The payment to an investment banker from a single deal begins in the mid-six figures and goes well into the millions, depending upon the size of the deal.
- Broker the sale of debt or equity. An investment banker locates companies that are in need of cash, and assists them in the pursuit of funding. This means creating a presentation of the business and its cash needs, establishing interest amount the banker's list of contacts, and organizing a series of presentation meetings. The banker then assists in hammering out the final terms of a deal package, including the price per unit, the number and price of any warrants issued, registration rights, and so forth. If the company is selling shares through an initial or secondary public offering, then the investment banker is heavily involved in the accompanying road shows and regulatory filings. In exchange for this service, the banker charges a small monthly retainer during the selling process, as well as a percentage of the funds raised. The payment to the banker may not be as large as what can be earned from the sale of a large business, but a large fund raising transaction can still create a massive payout.
Despite the high earning level, investment banking is a difficult profession, for the following reasons:
- Contact list. A large part of the value created by an investment banker is derived from his or her contact list of investors who are willing to participate in deals proposed by the banker. It requires an immense amount of ongoing networking to develop an adequate contact list. Further, the banker must develop a track record of bringing profitable deals to these investors, or else they will refuse to participate in any additional funding deals.
- Travel. Investment bankers travel constantly - to meet with clients, to network, and to participate in presentations between clients and potential funders or buyers.
- Valuation modeling. An investment banker must have excellent financial modeling skills. They typically work from a standard financial model and adjust it as needed to create projections of the range of possible sales, profits, cash flow, and financial position of a client company.
- Hours. Investment banking is a services profession, which means that you work whenever the client needs you. This means long hours on any day of the week, abbreviated vacations, and being constantly on call.
In short, investment banking is about being a glorified broker to sell businesses or raise cash. The rewards can be massive, but it requires very particular skills and long hours.