Understanding the 8 dimensions of Investment Banking
Investment banking is one of the niche areas in corporate world where the jobs are highly demanding and also highly paid and a rewarding. The investment banking industry comprises of many services that are seldom known to people who are willing to enter the industry or aspire to become an investment banker in their career. An investment banker provides and caters to the top executives of the company providing them which valuable business expertise and making their businesses more efficient.
The investment banking services can be broadly classified into 8 major dimensions which an investment bank generally provides. These are as follows:
#1. Equity Underwriting
It is also known as merchant banking or underwriting of shares of a company which is making it’s debut in the capital market of a country. An investment bank assists a company with its IPO and makes sure that the company’s public offering fully gets subscribed. In case, if the shares of a company are not fully subscribed, the bank undertakes the unsubscribed shares in order to comply with the agreement. However, the bank is not allowed to do trading of those shares for a certain period of time after the IPO.
#2. Private Placement
An investment bank also helps a company to raise funds privately. There are many instances where a company might not want to go for an IPO. Rather, it might decide to offer its equity via private placement. In this case, the investment bank searches for high net-worth individuals or private investors who are looking to deploy their funds in a particular sector or industry. This is what private placement is!
#3. Mergers & Acquisitions
One of the most sought after services that an investment bank provides is M&A, which accounts for major source of revenue for any investment bank. These days M&A services are on a rise globally as firms are looking to reconstruct their businesses to employ their resources efficiently and to earn profits.
#4. Valuation & Fairness Opinion
Sometimes, in a deal which a company is looking to undertake for example- a major cement firm looking to acquire a cement plant from a rival company. In such a case, a firm may want to have third party opinion on the value of an asset or a business which the company is looking to acquire. Many investment banks provide this service which gives a fair opinion on value of a deal or an asset.
#5. Corporate Restructuring
Amidst global turmoil, many companies today are looking to restructure their houses in order to have minimum impact on their operations. For reconstruction, a company seeks an investment bank to do a valuation to its loss making or least profitable business and seek the expert opinion of Investment bank to decide whether to continue with the project or not which can make their business and their balance sheet more attractive.
#6. Management Buyouts
Management buyout is a part of leverage buyout (LBO). It is different from an LBO because in an LBO the company takes leverage to buy out and an outsider buys a business. In management buyout, the company is bought by its own management rather than some outside player. Banks also assist in these kind of services and buyouts.
#7. Cross-Border Transactions
It means services which involve two or more countries or companies transacting or doing business with each other. It can be cross border financing like raising loan, bank guarantees, depository receipts etc. Banks help companies in these transactions and charge fees as a part of their efforts.
#8. Structured Finance
These are highly complex instruments that are generally complex in nature and are given and issued to transfer risk from one party to other likes CDO’s which were prevalent during the 2008 financial crisis. Generally big banks indulge in these kind of structured financial products.
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About the Author:
The author ‘Nishant Sonkar’ is a commerce graduate from Shri Ram College of Commerce, University of Delhi with a keen interest in the field of finance and banking. He can be reached at [email protected]