Understanding Investment Banking: More Than Just a Name#

Here’s a look into the world of Investment Banking. It’s one of those industries that folks seem to either hate or misunderstand, and honestly, it’s not hard to see why.

Video URL: https://www.youtube.com/watch?v=nd5OA02kbq0

See, Investment Banks aren’t really “banks” in the traditional sense – they don’t typically take deposits like your local bank, and they don’t necessarily “invest” in things like a venture capital firm or hedge fund. So, what do these Wall Street types actually get up to?

Unlike other places in the financial services world, these big banks, like Goldman Sachs, are always under scrutiny, especially regarding how much their younger employees work. There’s been a real “talent war” for folks, but despite big bonuses, the topic of work-life balance keeps coming up, often driven by the first-year analysts.

The Appeal and the Reality: Money vs. Workload#

So, why do so many people aim for a job here, even if they don’t fully grasp what it involves? The money is a big draw.

• The average salary for a first-year Investment Banking Analyst at Goldman Sachs is around $123,000 a year.
• On top of that, the median bonus is a hefty $80,000 a year.

Climbing the ladder is quick if you’re good:

• An analyst performing well can potentially move up to Associate, then VP (Vice President), and finally Managing Director (MD) in about 10 years.
• MDs who are doing their job well can make a couple million dollars a year from their base salary plus bonus.

The chance of hitting a seven-figure salary before 30 is why so many people dream of becoming investment bankers. But, and this is a big but, not knowing what the job actually entails can be a huge mistake.

What Do Investment Banks Actually Do? (The Middleman Concept)#

If they aren’t banks and they don’t invest their own money in the traditional sense, what fills those 95 hours?

Think of an investment bank’s core role as being a middleman.

• They link up investors with companies that are looking for investment (or looking to be bought).

When you think of “bank” as a middleman, the name Investment Bank starts to make a lot more sense.

• The word “Bank” comes from the old Italian word “Banco,” meaning “bench” – like the benches merchants used in market squares.
• A blood bank is a middleman: takes blood from donors, gives to the sick/injured.
• A food bank is a middleman: takes food from donors, gives to the hungry.
• A money bank is a middleman: takes money from depositors, gives to borrowers.
• An Investment Bank is a middleman: connects investors with investment opportunities (like companies needing money or wanting to sell).

Adding to the Confusion: Big Banks Do More#

To make things even more confusing, some of the biggest investment banks, like Goldman Sachs, have branched out way beyond just core investment banking services. The narrator jokes, “I’m sorry I don’t understand.”

Goldman Sachs, for example, has four main divisions today:

1. Property Asset Management: This is where the bank uses its own money to invest in markets, kind of like a hedge fund.
2. Regular Investing and Lending: This is like any other traditional bank, which just adds to the confusion between a “bank” and an “investment bank.”
3. Institutional Financial Services: These teams provide services to big investment funds, offering things like margin loans and handling trade executions. Think of it like a super high-end Robinhood account for the world’s largest investors. If you’ve seen the show Industry, most of the plot focuses on this area, not traditional investment banking. To someone outside the industry, these three divisions might look like investment banking roles, but they are different.
4. Investment Banking: This fourth division is the one focused purely on the core middleman function. It’s kept totally separate from the bank’s other operations.

There are also smaller firms, often called bespoke or boutique firms, that only do the core investment banking work. They run much leaner operations, meaning they usually don’t have consumer banking arms, robust wealth management, or significant lending operations.

What Investment Banking People Actually Do Day-to-Day#

Okay, so what does the actual job involve within that dedicated Investment Banking division?

It’s a lot less glamorous than Hollywood portrays it. It’s not primarily about watching stock prices on six screens or making high-octane sales calls (though those happen at senior levels). It’s much more about Excel and PowerPoint. (The narrator adds, “It’s my own fault for using PowerPoint. PowerPoint is boring.”)

An investment banker is essentially a dealmaker. Think of them like a real estate agent, but for entire companies instead of houses or condos.

Learning the Ropes: Getting Your First Deal#

So, imagine you’re an analyst and your team just won a deal. What happens next?

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The Investment Banking Deal Process: Step-by-Step#

When a client is looking for an investment bank, they usually talk to multiple firms to see who they think will get them the best price.

1. The Pitch: Once an MD (or VP) connects with a potential client (often through their network), they try to get the client’s management team to share their financial information. This is so the bank can create a pitch deck.

   • This is when the Associates and Analysts get to work.
   • A pitch deck is typically a 20 to 30-page PowerPoint presentation.
   • It shows how much the investment banking team knows about the client company and its industry.
   • It includes details about the specific banking team that would handle the deal, how long they think it will take, who potential buyers might be, and (most importantly for the client) how much they think they can sell the company for based on market analysis and the financials the company provided.
   • A lot of time is spent creating pitch decks that are ultimately rejected because the client chooses another bank or decides not to proceed at all (“I’m so tired”).

2. Winning the Mandate & Building Marketing Materials: If your team wins the pitch, the real work begins: building the marketing materials for the company to show potential buyers or investors. This main document is often called a CIP or Confidential Investment Presentation (sometimes SIP for “Strategic Investment Presentation”).

   • At this stage, the client company opens up almost all of their information to the banking team.
   • The final CIP document is usually between 50 and 130 pages long.
   • It tells a “story” about the company and what they are trying to achieve.
   • It includes hard data: organizational structure, products, patents, locations, market research, and detailed financials.
   • All this information goes into a data room. In the old days, this was literally a secure room full of physical boxes of documents at the bank. Now, it’s virtual, using programs like DataSite and Intralinks (which are like extremely secure and expensive versions of Google Drive or Dropbox). This data room is constantly updated throughout the process.

3. Why is the Company Raising Money? A crucial piece of information in the CIP is why the company is seeking capital. There are usually two main reasons:

   • Reason 1: To Invest and Expand Operations: Bankers call this seeking Growth Equity. The company issues new shares and the investment bank sells them to qualified investors. Issuing new shares means existing owners’ stakes are diluted (their percentage of ownership goes down). It’s important to them that the money raised makes the business more valuable than the amount their shares were diluted. For example, if someone’s ownership goes from 10% to 5% because the number of shares doubled, the company’s value needs to at least double for them to be happy.
   • Reason 2: To Pay Out Existing Shareholders: Bankers call this a Buyout or Secondary Offering. This is simpler: founders or early investors want to cash out. They sell their existing shares to new investors (who might want to hold the shares long-term or make a strategic investment, like how Google bought YouTube). Usually, no new shares are created, and the money raised goes to the people selling their shares, not the business itself.

4. Confidentiality is Key: The reason for raising capital and all the detailed information gathered for the CIP is highly sensitive and could be very damaging if leaked. A good investment banking team’s job includes making sure the CIP is only shown to potential buyers who are most likely to make a competitive offer.

5. Team Structure: A typical investment banking team working on a deal usually has:

   • 1 MD
   • 1 VP
   • 1 Associate
   • 1 Analyst
   • Very large or complex deals might have multiple Associates and Analysts, but clients and the bank management prefer fewer points of contact. Deals often run smoother with fewer people doing the same things.

6. Distributing the CIP and Fielding Questions: Once the CIP is finished and the client and banking team are happy with it (checking for inconsistent information), it’s sent out to the agreed-upon list of potential buyers.

   • This list usually has 80+ buyers.
   • The team’s job then involves fielding calls from these buyers to clarify details from the lengthy (up to 130-page) technical documents.
   • These calls are stressful: you’re expected to have perfect, on-the-spot answers to hard questions, often while your MD or VP is listening in.
   • You also have to sell the client’s company without saying anything misleading that could get the bank sued or damage its reputation later.

7. Narrowing Down the List & Letters of Intent (LOIs): This initial marketing phase can last up to three months.

   • During this time, the banking team whittles the list of potential buyers down to 20 or less.
   • From those 20, a good outcome is getting five or more buyers who express serious interest.
   • These interested buyers are given deeper access to the data room and send their own teams to meet the client’s management and tour facilities.
   • From these five, typically three will submit a Letter of Intent (LOI). This is an offer outlining the basic terms of the deal and the price they are willing to pay.

8. Due Diligence: If the client accepts a buyer’s LOI, the deal moves into the due diligence phase.

   • The investment banking team works with the client’s lawyers and the buyer’s lawyers, plus various third-party specialists.
   • They go through a checklist of common issues and standard business requirements.
   • For example, accounting firms will review financial statements to ensure they match what the company presented.
   • Buyers’ teams will scrutinize personnel charts, existing loans and liens, tax documents, and any ongoing legal problems.
   • If problems are found, the investment bankers must quickly provide solutions or risk the deal falling apart.

9. Purchase Agreement: If due diligence goes well, the buyer drafts a Purchase Agreement.

   • This uses the initial LOI as a blueprint.
   • The Purchase Agreement is usually around 60 pages long.
   • It contains a long list of terms, conditions, and other elements like non-compete clauses.
   • Negotiating these terms typically takes about a month.

10. Closing: Once everyone is happy with the Purchase Agreement, a date is set for the deal to close, and the money is wired.

    • The Investment Bank only gets paid its fee by the seller at this point.
    • The banking team also helps the buyer with mundane tasks needed for a smooth transition after an acquisition, like handing over keys and arranging account access. The new owner needs to ensure staff get paid and the business remains operational the next day, so the banking team helps make sure these details are covered.

Life After First Year & Career Path#

Analysts past their first year aren’t usually partying or doing the crazy stuff you might see on TV. They are mostly spending their time working or catching up on sleep. There’s not much time for anything else. It’s a grinding pace that few people can sustain for long.

Most firms have an “up or out” recruitment policy:

• If you aren’t promoted from Analyst to Associate within two to three years, you are usually fired.
• The same applies to Associate to VP within about five years.

The work changes significantly at the senior levels:

• The job of MDs and VPs is much less about the nitty-gritty execution and more about finding new business, networking (sometimes requiring expensive country club memberships just to get access to clients), and engaging potential clients.
• Their workload is generally less intense than an analyst’s, and the pay is much better.

Most Investment Banking Analysts don’t actually stay at investment banks for their entire careers. They typically get two to five years of intense experience working on deals. This experience, along with the connections they make, makes them highly valuable hires for other companies. Common next steps (exit opportunities) include moving into senior management roles at companies or joining Private Equity firms.

From the narrator’s personal experience in Investment Banking, they don’t believe investment banks are the “evil entities” sometimes portrayed in the news.

Taking on New Topics and What I See#

Alright, so sometimes I might talk about things I don’t have personal experience with. When I do that, I’m definitely open to buying into those sensationalized takes you see out there.

My Perspective: A Look at the Economy#

After checking out those kinds of takes, you should then go watch my video.

Enabling Learning#

And hey, big thanks again to Brilliant. They’re the ones making it possible for everybody to keep on learning. Specifically, learning how money works.