What do investment bankers do?

Many individuals are drawn to a career in Wall Street due to the high visibility and substantial compensation associated with investment banking.

However, the job title of "investment banker" often leaves people wondering about the nature of their work. So, what exactly are the responsibilities of investment bankers?

Investment bankers are renowned for their crucial role in guiding young companies through the process of launching initial public offerings (IPOs) when they decide to go public. Nevertheless, this is just one aspect of their multifaceted role.

In essence, what do investment bankers do? investment bankers serve as financial advisors to both corporations and, on occasion, governments. Their primary objective is to assist their clients in raising capital.

This can involve activities such as issuing stocks, issuing bonds, facilitating the acquisition of a competitor, or even overseeing the sale of the entire company.

When the financial markets are thriving, investment bankers typically thrive as well. Increased capital and heightened financial activity lead to more lucrative projects for both investment bankers and their clients. What do bankers do? Investment bankers are involved in various financial activities undertaken by corporations and governments, and here's a closer look at the primary types of transactions they engage in.

What does an Investment Banker Do?

Investment bankers are involved in various financial activities undertaken by corporations and governments, and here's a closer look at the primary types of transactions they engage in.

Facilitating Financing

When a large corporation intends to undertake a significant project, like constructing a factory, it typically lacks the necessary funds upfront. To raise the required capital, they might opt to issue bonds.

The revenue generated from the new facility will be used to cover the bond's cost. Similarly, governments may need to finance large-scale public projects, such as airports or highways.

They can issue bonds to secure the necessary funding, with the assurance of repaying them from future tax revenues. Investment bankers often step in to facilitate this financing process.

They would plan the bond issuance, determine the appropriate pricing, handle the regulatory requirements from entities like the U.S. Securities and Exchange Commission (SEC), and assist in marketing the bonds to potential investors.

Equity Financing

For companies seeking cost-effective means of financing growth and expansion, selling bonds or issuing stock are common options. Investment bankers also have a significant role in organizing the sale of stocks, known as equity financing.

Let's say a young company aims to raise capital for expansion through an initial public offering (IPO). They would engage an investment banker to create a prospectus outlining the offering's terms and associated risks for potential investors.

Subsequently, this offering must be managed through the intricate processes of investor marketing, communication with the media, and securing approval from regulatory bodies like the Securities and Exchange Commission (SEC).

Determining the right offering price is of utmost importance. If shares are priced too high, there's a risk of public disinterest, leading to an unsuccessful IPO. Conversely, if shares are priced too low, the investment bank may miss out on potential proceeds for the client.

Throughout this critical process, investment bankers play a central role.

Underwriting Transactions

When securing financing through capital markets, investment bankers often engage in underwriting deals on behalf of their clients.

This involves assuming a significant portion of the inherent risk in the process by purchasing shares directly from the issuers and subsequently selling them to the public or institutional investors.

Investment bankers sell these shares at a markup, thereby generating profit for their organizations. The difference between the purchase price and the markup price is referred to as the underwriting spread.

Typically, a lead investment banker collaborates with a team of investment bankers, forming a syndicate, to underwrite an offering. This approach spreads the risk across multiple participants.

In some instances, the investment banker may primarily serve as an intermediary and promote the deal but doesn't shoulder the underwriting risk. In such cases, investment bankers might sell a portion of the securities and earn commissions based on the quantity they sell.

Facilitating Private Placements

Not all companies opt for a public offering. What does an investment banker do? Investment bankers also assist clients who prefer to raise capital through private placements rather than going through the stock or bond markets. In such instances, the investment banker is expected to have the necessary connections and credibility to successfully carry out the sale.

For example, a company might choose to sell an entire bond offering to a single institutional investor, such as an insurance company or a retirement fund.

This method can be a quicker and more straightforward way to secure funds since there's no need to register the placement with regulatory bodies like the SEC. Private placements involve fewer regulatory requirements, as institutional investors are considered more sophisticated compared to individual investors.

Negotiating Mergers and Acquisitions

The process of acquiring or merging with another company often involves extensive planning and negotiations. What do investment bankers do? Investment bankers frequently provide advisory services throughout this process, particularly when it comes to determining a fair price for the deal.

Mergers and acquisitions can entail protracted negotiations, with investment bankers on both sides of the table assessing a series of proposals and counteroffers.

Also read: Venture Capital Vs Angel Investment

Addressing Conflict of Interest Concerns

Investment bankers undeniably play a significant role in lubricating the wheels of capital markets, but their actions have faced substantial criticism. Much of this criticism revolves around the potential for conflicts of interest.

Major financial institutions on Wall Street typically house investment banking divisions, securities research divisions, and trading divisions. These divisions are meant to be separated by a so-called "Chinese wall" to limit interactions between them.

To address conflicts of interest between a firm's investment banking and securities research activities, the SEC has implemented rules.

What do bankers do? Investment bankers have been accused of pressuring analysts to provide favorable ratings for securities to please their clients and generate more investment banking business.

Are you looking to learn more about investment banking head towards our free workshop!

Another conflict of interest may arise when investment bankers, who have access to confidential client information regarding their business and prospects, share this information with their firm's traders. This insider information can be exploited by traders for an unfair advantage. For more insights enroll in our course.