Data Warehousing and Data Science

23 September 2015

Investment Banking

Filed under: Business Knowledge — Vincent Rainardi @ 7:45 am

Traditionally, the core business of an investment bank (IB) was to help companies raise funds in the capital market  and doing merger & acquisition. In addition to these 2 core services, IBs also offer these services to clients: research, fund management, trading, market making and wealth management. IBs also do trading for themselves (using their own money, called prop desk).

Let’s take a look at these services one by one. But before that, let’s quickly describe sell side and buy sides, and private and public sides.

In the investment banking world there are 2 sides: the sell side and the buy side. The sell side (link) are companies that sell investment services, for example: an IB which does broking/dealing, raise funds in capital market, M&A/advisory, and research. Buy side (link) are companies that buy investment services, for example: private equity funds, mutual funds, life insurance company, hedge funds, and pension funds.

Within an investment bank, we have 2 sides: private side and public side. Private side is the part of the bank which have access to inside company information (i.e. their clients) which are not available to the public. For example: M&A division and capital market division (Debt Capital Market/DCM and Equity Capital Market/ECM). Public side is the part of the bank which only have access to public information. For example: trading and research. Between these 2 side we have a “chinese wall”, which separate the 2 parts of an investement bank. The 2 parts must not (by law) exchange information. Chinese wall is a fundamental principle that has to be considered very seriously when designing IT systems for an investment bank.

Now let’s take a look at the services of investment banking:

  1. Raising capital is basically issuing bonds or equity (IPO or secondary offering). The bank acts as underwriter, meaning that the bank (usually a syndicate) buys all the bonds or shares from the company, then sells it to the market with spread (for stock) or fee (for bond). This require a lot of corporate finance work.
  2. M&A is the original meaning of “investment banking”, i.e. to find the client a buyer, or to find the client a company to buy (takeover, acquisition). Or, to have an idea that if company A & B are merged there would be advantage for both companies, such as synergy, vertical integration, increased market share or economy of scale, then try to sell the merger idea to both companies.
    There is also spin off or de-merger, where some part of a company is detached (created as a new company), and then sold off to another company. M&A also involves a lot of corporate finance work. M&A is also called “advisory”.
  3. Research covers equity research, fixed income research, macro economic research, technical analysis, quantitative analysis. In addition to individual companies, equity research provides industry trends, market trends, sector weightings and geographical preferences. Technical analysis (link) studies the historical price to predict the future direction in a particular market or a single-name issue. Research also provides tools which enables clients to access forecasts and evaluate capital structure, and to search for a specific company/sector/year/asset class.
  4. Fund management manages clients’ money in mutual funds (open ended) or investment trusts (close ended). Covering many sectors, i.e. by asset class (equity, bond, cash, commodity), by geography (UK, US, European, Global), by type (growth, income, recovery, absolute return).
  5. Trading buys and sells securities in the capital markets, on behalf of the clients. Covers various asset classes including equity, credit, FX, commodity, securitized, prime, multi asset and tailored. Tailored brokerage offers tailored off-market transaction such as distressed situations, sale-and-leaseback and company expansions (link). Prime brokerage (link) offers services for clients to borrow securities and trade/invest on netted basis and leveraged basis (link).
  6. Market making: provide liquidity in the market by quoting both buy and sell price (simultaneously) in a share or a bond or a commodity, usually narrower than the market spread (link), hoping to make money from the bid-offer spread (link).
  7. Wealth Management: provide advisory on financials and investments to high net-worth individuals/families, as well as the work/execution. This includes retail banking, estate planning, will, tax and investment management (link). Aka private banking, which is misleading because wealth management is not only banking but also legal, tax, and investing services.

Some of the top investment banks are (link): Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America Merrill Lynch, Deutsche Bank, Citigroup, Credit Suisse, Barclay, UBS, HSBC, Nomura, RBC, BNP Paribas, RBS.

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