Investment Banking 101
The bare bone basics
I didn’t even know what investment banking was until I was 28 years old. My undergraduate school WAS NOT an Ivy league feeder school to Wall Street. It so happened I got lucky, started a company with some MIT friends, we raised $60M and I was around the venture capital conversations but not in them. It dawned on me as an engineer then that there’s an entire universe of financial engineering that I was completely ignorant of. That’s when I figured out what investment banking is.
Hopefully I’m catching you a little earlier or maybe this is a fresher but here’s my take on investment banking 101.
How bankers make money. Investment banks get paid by generating fees from M&A (buying and selling companies), providing financing (taking companies public or raising debt), or investment (merchant banking). This is a gross simplification but just enough for you to know the right questions to ask and dig deeper. In M&A a banker earns a percentage of the overall sales just like when someone sells a house. Bulge bracket banks at the top of the league tables may have $3-5M minimum deal fees and anything smaller they can’t get through their internal M&A committee that approves deals. Of course, to earn that money the bank typically has to successfully execute the sale of the company. Retainers, fairness opinions, and breakup fees may be icing on the cake but they are not the cake. Bankers also take deal fees on capital raising but typically as a lower percentage of the capital raised relative to M&A fee percentages. Figure out how the money flows and that will help you understand why bankers behave the way they do. Disclosure: I am a recovering investment banker.
Coverage vs Product. Investment bankers are roughly broken into generalists and specialists. Coverage groups typical cover an industry vertical, e.g., TMT, Retail, Oil & Gas, Healthcare, Industrials and so on. I think of coverage bankers as generalists on products who bring in product specialists. Product groups in investment banking typically will focus on: M&A, equity capital markets, debt capital markets. This is because a) acquisitions can become incredibly complex (purchase price, indemnification, covenants, closing conditions, antitrust, etc), b) IPOs can become incredibly complex (global road show, book building, oversubscription, green shoe, public company comps, valuation, etc), c) debt raising can be incredibly complex (leverage level, interest coverage, debt covenants, tenure, yield to maturity, amortization, etc). Generally M&A is most complex, then debt raising, then equity capital markets.
Perfect product. It doesn’t matter what group or area of the bank you’re in you better have a mindset toward perfect product. That means no math errors. No typos. Ever. To be the junior banker in a board meeting with 5 other Managing Directors and to find a glaring typo in a pitch deck to a senior board who’s interviewing various investment bankers can be career limiting. Attention to detail is mission critical as an analyst and associate investment banker. Yes you may be working 100+ hours per week but you are absolutely getting paid for it and there are 100 people who’d probably kill to sit in your seat. So you have to be on your game. Now as for math errors, this comes down to being an Excel expert (more on that in a future post), being able to pencil test your own work, asking for help from whomever is higher in your chain of command to help you review your work. The more fool proofing you build into your analysis the less likely you are to make simple, silly mistakes. This becomes more important if you’re operating on only 4-6 hours of sleep per night because your probably going to be a little dumber then than you would ordinarily be getting 8 hours a sleep per night.
Compensation. Banker pay is ridiculously high for the work done. Cash comp is king = Base Comp + Bonus. Bonus will almost always be 100% or more. The more senior you go the higher above 100% that number can go. To be absolutely clear though, if you break down your potential earnings after tax and divide those by the hours work you may find that it’s barely worth it economically to be a junior banker. Where the money starts to really make a difference is after 3-6 years in banking. If you can get to Managing Director level, then $1M minimum annual cash comp is in hand at most all banks. At bulge bracket investment banks that number might become $10M+ and there is zero shortage of bankers who would nearly American Psycho their way into that seat. And don’t take my word for it, research salaries and compensation on your own, network, and talk to people.
How to get in. If you’re still reading you might still be interested in investment banking. If you’re a rising sophomore that means go find an internship at an investment bank. If you investment banks don’t go to your school you have to go to the bank. Build a list of 20 investment banks, leverage your school alumni network, target Analyst, Associate, and VP bankers on LinkedIn, go to networking events where bankers hang out. If you’re going back to business school and re-branding yourself from non-banker to banker then you need an internship to. Same networking tips above apply. Undergrads come in as Analysts. MBAs come in as Associates. Find a path or create one.
Welp that’s enough for tonight and hope you found something in here that will help you on your journey.
Best of luck!