🏦 Investment Banking Overview
Definition: Investment banks are financial intermediaries that help companies, governments, and institutions raise capital (equity and debt) and advise on mergers, acquisitions, and other strategic transactions.
Key courses: Wharton FNCE 728, Columbia, HBS Finance electives Key resource: “Investment Banking” — Rosenbaum & Pearl (the IB bible)
🏗️ Investment Banking Business Lines
1. 📈 Advisory (M&A)
- Advise companies on mergers, acquisitions, divestitures, restructurings
- No capital at risk — fee-based
- Fees: 1–2% of transaction value (lower % for larger deals)
- Work: Pitch books, valuation models, negotiation support, deal execution
2. 📊 Equity Capital Markets (ECM)
- Help companies raise equity capital
- Products: IPOs, follow-on offerings, convertible notes, rights offerings
- Banks underwrite (guarantee price) or best-efforts (no guarantee)
- Fees: 5–7% of IPO proceeds (“the 7% solution”)
3. 💵 Debt Capital Markets (DCM)
- Help companies raise debt financing
- Products: Investment grade bonds, high yield bonds, leveraged loans, private placements
- Banks underwrite or arrange the debt
- Fees: 0.5–2% of deal size
4. 🔄 Leveraged Finance
- Specialized DCM for leveraged buyouts and high-yield issuers
- Sub-investment grade (junk) bonds and term loans
- Feeds PE firms’ LBO needs
5. 📑 Equity Research
- Analysts cover public companies, issue buy/hold/sell recommendations
- Revenue model: Drives trading commissions (increasingly under pressure)
- MiFID II in Europe separated research from trading fees (unbundling)
🏢 Bank Hierarchy
By Size (Bulge Brackets → Boutiques)
| Tier | Banks | Characteristics |
|---|---|---|
| Bulge Bracket | Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America, Citi, Barclays, Deutsche | Full service, global, all products |
| Elite Boutiques | Lazard, Evercore, Moelis, Centerview, PJT | Advisory-only, top M&A talent, high prestige |
| Middle Market | Jefferies, RBC, Wells Fargo, Houlihan Lokey | Smaller deals, often more responsibility for juniors |
| Regional Boutiques | Local advisory firms | Niche industries or geographies |
👨💼 The IB Career Pyramid
Managing Director (MD) [Client relationships, origination]
↑ 3–5 years
Vice President (VP) [Deal oversight, client contact]
↑ 3 years
Associate [Model ownership, deliverables]
↑ 2–3 years
Analyst [Financial modeling, pitch books, due diligence]
(2-year program, MBA entry at Associate level)
MBA grads typically enter as Associates (~$200–250K+ total comp at top banks).
📊 The M&A Process (Buy-Side vs. Sell-Side)
Sell-Side Process (Company Being Sold)
| Phase | Duration | Activities |
|---|---|---|
| Preparation | 4–8 weeks | Teaser, Info Memo (CIM), data room |
| Marketing | 4–6 weeks | Broad reach to 30–50 buyers; LOIs due |
| Due Diligence | 4–8 weeks | Narrow to 2–3 buyers; deep diligence |
| Negotiation | 2–4 weeks | Final bids, negotiation, select winner |
| Sign → Close | 4–12 weeks | Definitive agreement, regulatory approval, close |
Key Documents
- Teaser: 2-page anonymous overview to gauge interest
- CIM (Confidential Information Memorandum): Full pitch book for the company
- NDA: Before sharing CIM
- Letter of Intent (LOI): Non-binding indication of interest and price
- Definitive Agreement (SPA/MAPA): Binding legal contract
🔢 Pitch Book Structure
Every IB pitch book follows a similar structure:
- Situation overview — current state, challenges, opportunity
- Valuation analysis — DCF, comps, precedent transactions
- Transaction considerations — process, structure, timing
- Market overview — industry dynamics
- Appendix — supporting data, detailed models
💼 Key Valuation Methodologies in IB
| Method | When Used | Output |
|---|---|---|
| DCF Valuation | Intrinsic value; main method | EV / Equity Value per share |
| Comparable Company Analysis | Market benchmarking | EV/EBITDA, P/E multiples |
| Precedent Transactions | M&A deal comps, control premium | Transaction multiples |
| LBO Model | Financial buyer perspective | Maximum buyout price |
The Football Field chart: All four methods shown as ranges on one chart → establishes valuation range.
🔗 Connected Concepts
- DCF Valuation — Core IB valuation method
- LBO Model — PE buyer perspective
- Comparable Company Analysis — Comps analysis
- Capital Structure — Banks advise on optimal structure
- M&A Process — Deal advisory is IB’s core product
← 📊 Finance MOC | Related: DCF Valuation · LBO Model · M&A Process