- Investment Banks provide two main services: Advisory and Capital Raising (Debt & Equity).
- Investment Bankers are like Real Estate Agents who help clients with the buying and selling of businesses (instead of houses).
- Internally, most Investment Banks are broken into two categories of groups: Industry ‘Coverage’ Groups and ‘Product’ Execution Groups.
- The three primary categories of Investment Banks are: Bulge-Bracket, Elite Boutiques, and Middle-Market
To an outsider, the inner workings of Investment Banks can seem quite confusing. They have numerous (and often overlapping!) internal divisions whose functions vary across different banks.
It’s no wonder that many people are left scratching their heads when they first learn about these firms. In this article, we’ll de-mystify the inner workings of Investment Banks in a way that you can easily understand…even if you’re new to this world!
To that very point, we’ve put together the explainer video below to help you get started. We recommend you watch the video and then come back to the article for an even deeper dive!
The 10,000 Foot View…Part 1: The Four Core Functions of an Investment Bank
To keep it simple, Investment Bankers are very similar to Real Estate Agents, but instead of helping clients buy (or sell) houses, they help with the buying and selling of businesses.
In addition, Investment Bankers can also help clients raise Debt or Investor (‘Equity’) Capital to make an acquisition or to fund their ongoing operations.
Below are the core services offered by an Investment Bank:
- Mergers & Acquisition (M&A) – advise clients on the purchase or sale of a business.
- Restructuring – advise clients when they run into financial challenges.
- Capital Raising
- Debt – market the client’s company to Lenders who offer money in the form of Loans or Bonds.
- Equity – market the client’s company to Investors who offer money in the form of Stock.
The 10,000 Foot View…Part 2: Bulge Bracket vs Elite Boutique vs Middle Market
Investment Banks come in a variety of shapes and sizes ranging from one-person shops to firms with tens of thousands of employees. At a high level though, there are three types of Investment Banks:
- Middle-Market (‘MM’) Banks – provide Advisory as well as Debt and Equity Capital raising services to small and medium-sized businesses.
- Elite Boutiques – typically offer only Advisory services and focus on medium and large-sized businesses.
- Bulge Bracket (‘BB’) Banks – large, “full-service” banks that offer Advisory as well as Debt and Equity Capital raising services to medium and large-sized businesses.
While you may find some corner cases that don’t neatly fit into these buckets, these three are the primary types of Investment Banks.
Industry ‘Coverage’ Groups vs Product ‘Execution’ Groups
Internally, most banks are broken down into groups that have a particular focus area. The two major categories of groups within an Investment Bank are:
- Industry ‘Coverage’ Groups – sector specialists that focus on a particular industry (e.g., Industrials, Consumer, etc.) without specializing in one particular type of transaction.
- ‘Product’ Execution Groups – execute a particular type of transaction (e.g., Mergers & Acquisitions, Leveraged Finance, Equity Capital Markets, etc.).
As we’ll see shortly, the delineations between these two categories aren’t always clear cut, but these two categories are a solid foundation for understanding how Investment Banks work.
Industry ‘Coverage’ Investment Bankers – A Day in the Life
Although coverage group naming conventions do vary, the categories in the image below lay out the most common names for product groups as well as sample clients for each group.
Bankers in these groups focus on single sector (and often further specialize in sub-sectors as they become more senior) so that they can be an expert advisor to their clients.
To succeed as an Industry Banker, you need to understand ALL the trends across an industry. Industry Bankers use their expertise to build relationships with company CEOs within their coverage universe.
Junior Bankers in these groups follow industry trends and keep a close eye on everything from secular trends and core company fundamentals to valuations and recent merger and acquisition activities in their sector.
Junior Bankers in a ‘Coverage’ Group go very deep within an industry. However, they are often less likely to play an active role in the nuts and bolts (modeling, process management, material creation, etc.) of executing deals. As we’ll see shortly though, this can vary quite a bit, depending on the bank.
‘Product’ Execution Investment Bankers – A Day in the Life
Product Bankers focus on executing a particular type of transaction, which is what they do all day every day. These bankers are often brought in after a deal is signed (i.e., the client has agreed to work with the bank). While they typically aren’t experts in a particular industry, they are deeply knowledgeable about the intricacies of executing deals which makes their input highly valuable.
Junior Bankers in a ‘Product’ Group are typically responsible for creating and managing all of the analyses and presentations that support the deal process.
This can range from internal memos to detailed multi-tab financial models that lay out a company’s projected performance in significant detail. Junior Bankers in these groups often receive a more ‘Technical’ experience which can lead to better exit opportunities, which often makes these groups (particularly M&A and Financial Sponsors) highly sought after.
Again though, the internal group structure of particular Investment Banks does vary, which can dramatically change the type of experience for Junior Bankers in ‘Product’ Groups.
Let’s dive into the details below for each type of Product Banker.
Product Group #1: M&A Advisory
The first type of Product Banker is a Mergers & Acquisitions (or M&A for short) Banker. This group is often viewed as the sexiest group within the bank because they work on industry-transforming deals that end up on the front page of publications like the Wall Street Journal.
M&A Bankers typically work on one of two types of projects:
- Buyside M&A – advise clients on the purchase of a business.
- Sellside M&A – advise clients on the sale of part or all of the client’s business.
M&A is a non-stop, high intensity profession and as a result, this group is often one of the hardest working groups within a bank.
Product Group #2: Restructuring Advisory
The next Product Banker is a Restructuring Banker. These bankers are brought in when a company is in financial distress.
While there’s quite a bit of nuance behind what these bankers do, but to keep it simple, we can equate this back to the Real Estate analogy from earlier in the article.
If the value of a home declines below the value of the Mortgage, we would say that the home is ‘underwater’. When the value of a business declines below the value of its Debt, we would call the firm ‘distressed’.
In short, Restructuring Bankers work with companies that are in financial ‘distress’ and help them find an amicable agreement between the various investors and lenders involved with the company.
Product Group #3: Debt Bankers
The next category of Product Banker is a Debt Banker. These bankers help companies raise Debt Capital.
Very briefly, there are many large (or ‘Institutional‘) lenders whose sole job is to lend money to companies. However, it doesn’t typically make sense for a company to maintain relationships with thousands of lenders who might lend them money down the road. Instead, companies go to Debt Bankers who act as an intermediary between their company and the lenders.
Debt Bankers maintain relationships with these lenders and help companies market themselves to the lenders to attract interest.
The bankers will then manage the process of ‘building a book’ of interested lenders who then lend money to the client company. The Investment Bank manages this process from start to finish and collects a fee in return.
Depending on the financial profile of the client, they will work with one of three Debt groups:
- Debt Capital Markets (‘DCM’) – serves high-quality (or ‘Investment Grade’) companies with low levels of Debt.
- Leveraged Finance (‘Lev Fin’) – serves lower-quality companies (or ‘High Yield’) with higher levels of Debt.
- Financial Sponsors – serves Private Equity Funds as they raise Debt Capital to fund acquisitions.
Product Group #4: Equity Bankers
When a company wants to raise investor money, they come to our final group of Product Bankers which are the Equity Bankers.
Similar to the Debt Bankers in the previous section, individuals in these groups maintain relationships with investors of all sizes and help clients manage the process of raising capital from those Investors.
Equity Groups within an Investment Bank typically break down in terms of the type of Investor capital that they raise.
If a company is raising common equity (or ‘Stock’) from the Public Markets, they will typically work with the Equity Capital Markets (‘ECM’) Group. This group specialized in helping companies list their shares for the first time through what is called an Initial Public Offering (or ‘IPO’). They can also help companies navigate the tricky process of additional equity (a ‘Secondary Offering’) after their IPO is complete.
On the other hand, if a company is looking to raise capital from Private investors, they will then turn to the Private Equity Placements group. Bankers in this group cultivate relationships with large investors around the world with significant amounts of money in reserve. Private Equity Placement Bankers work to connect their clients with these investors and help them to tell their story so they can raise investor funding.
Blurry Lines: Introduction
Now we get to the frustrating part of this explanation for newbies. ☹
While all of the above is a solid framework for understanding the inner workings of a bank, there are quite a lot of variations across different banks in the distinctions between the groups laid out above and, as a result, the lines between the groups are often a bit blurry.
Blurry Lines #1: Product Groups vs Industry Groups
The first blurry line is between Product Groups and Industry Groups.
Some Investment Banks maintain full separation between Product Groups and Industry Groups as illustrated below.
However, many other Investment Banks combine the functions of these two groups.
For example, Goldman Sachs’s Industry Groups often do quite a bit of their own execution, in particular for M&A. As an example, if you work in Goldman’s highly sought-after Technology, Media and Telecom (‘TMT’) Group, you’ll both cover industries and execute M&A deals, even though TMT isn’t a Product Group.
By contrast, at Morgan Stanley, Product Groups are largely separate from Industry Groups. For example, Morgan Stanley’s M&A group leads M&A execution even though Morgan Stanley has many Industry Groups.
In short, can use our original explanation as a starting point for understanding what each group does within a bank, but many banks combine Product Group and Industry Coverage Group functions and there’s little rhyme or reason as to why.
Bulge Bracket Banks vs Middle-Market Banks Groups
Despite having just muddied the waters, there are a few things that remain relatively constant across firms. Most Bulge Bracket and Middle-Market Banks keep a few of their groups completely separated. The groups that typically remain standalone include: Debt Capital Markets, Leveraged Finance, Financial Sponsors, Equity Capital Markets and Private Equity Placements.
Beyond these groups, there’s quite a bit of variation of how much deal execution is done within Industry Groups do within each bank.
Elite Boutiques: Industry Groups vs Generalists
Because Elite Boutique Banks focus on advisory, their breakdowns are typically around the two core Advisory offerings: M&A and Restructuring.
Several Boutique Banks break M&A down by Industry, similar to the Industry Coverage Groups we saw above. In firms with this structure, the bankers within an Industry Group typically focus on M&A solely within that particular industry. In firms with this structure, Restructuring is typically a standalone group.
Conversely, some Elite Boutique banks offer their Junior Bankers a more Generalist role. In firms with this approach, Junior Bankers work on M&A and Restructuring transactions across industries. Despite this approach, as bankers move up in the ranks, they tend to specialize in a particular industry.
Blurry Lines #2: Capital Markets vs Investment Banking
Another point of confusion is the distinction between Capital Markets and Investment Banking. You’ll often hear both mentioned in discussions around Investment Banking, but it’s not clear how their role is different…if at all.
First, Capital Markets is typically under the Investment Banking umbrella. However, the bankers in these groups are solely focused on raising capital from external Investors and Lenders. Capital Markets bankers act as the direct interface between the bank’s clients and the Debt and Equity markets.
Because of their market-facing role, Capital Markets Groups are often described as a separate entity, but they are just another part of Investment Banking.
Given the blurry lines mentioned above, the inner workings of Investment Banks can be very confusing to outsiders.
However, just remember that at a core level, Investment Banks offer Advisory and Capital Raising services for businesses.
And on a macro level, Investment Banks are categorized into three buckets: Bulge-Bracket Banks, Elite Boutiques, and Middle-Market Banks.
Bulge-Bracket and Middle-Market Banks offer the full spectrum of Advisory and Capital Raising services, but Bulge-Bracket Banks focus on Medium/Large-Sized clients whereas Middle-Market Banks serve Small/Medium-sized clients.
In contrast, Elite Boutiques typically focus on Advisory services for Medium/Large-sized clients.
Finally, while the functions of Industry ‘Coverage’ Groups and ‘Product’ Execution Groups may overlap depending on the bank, in the end, each bank is typically offering some combination of Advisory and Capital Raising services.
We hope that by breaking down the basic groups within Investment Banks, their core services, and the types of firms, we have given you a better understanding of how these firms operate.
Let us know in the comments below if you have any questions!