The term “investment banking” can be an ambiguous and misunderstood phrase, as most students do not fully understand what is entailed within the financial institution, what functions it serves, and what each division can offer a professional seeking a career within the financial sector. This comprehensive guide will briefly distinguish the various services generally provided by investment banks, what skills are needed to break into them, and the functions of key front office roles like IBD and Sales & Trading.
To start off with the basics, a simple definition of an investment bank is an institution that aims to serve large, publicly traded entities and generate income through underwriting, consulting fees, commissions, and market-making transactions; hence, it has a more specialised role than commercial banks. Examples of prominent investment banks include Goldman Sachs, JP Morgan, Morgan Stanley, and Lazard, among a plethora of others.
Typically, such an institution is split into three segments: the front, middle, and back offices. The front office refers to those divisions that generate revenue for the bank. Competition for these opportunities is fierce, and careful preparation is required to show you have what it takes both mentally and physically. Divisions that are included in this are IBD and Sales & Trading. Middle-office entails overseeing and facilitating the operations of the front office and ensuring that transactions are booked and fulfilled appropriately. Key components of this are risk management as well as investment management divisions. Finally, the back office is referred to as the portion of the bank that is made up of administrative and support tasks that are often not client-facing; they include roles such as legal, compliance, finance, and operations. The article will outline the key front-office divisions encompassed within an investment bank, as they are the most sought-after and desired.
IBD (Investment Banking Division)
This division is the most applied for and desired within an investment bank due to its prestige, compensation, exit opportunities, and the exposure it can provide by being directly involved in world-changing multi-billion pound deals. Goldman Sachs revealed that it received a whopping 236,000 applications for just 3,000 open roles in 2022, highlighting the difficulty of breaking into the top IBD positions. M&A encompasses facilitating companies in merging or acquiring other companies to benefit themselves financially, and the process of an M&A deal involves a roadshow, due diligence, and financial modelling or pitching to justify the proposed transaction. Capital markets are another component within IBD and can be split into equity and debt capital markets. The function of this is to raise capital for companies by underwriting IPOs and bond offerings, depending on whether the company intends to grow using equity or debt-related instruments. Other functions within IBD include restructuring and leveraged finance, which are advisory services used by IBs and are aimed at firms that are targeted towards lower investment-grade debt issuances, whereas DCM revolves around above-average investment-grade issuances.
Skills needed for these roles include a strong understanding of client relationship skills, the ability to synthesise large groups of data, strong accounting knowledge, and MS Excel or PowerPoint skills. Additionally, key practices that can benefit an applicant include knowledge of financial modelling, including building valuation models such as DCFs (discounted cash flow) and CCAs (comparable company analysis). Typical starting salaries for IBD roles within London can range from £55k to £75k depending on whether the bank is a bulk bracket or a boutique but generally can reach up to six figures once combined with bonuses.
Sales and Trading
This division, contrary to IBD, encompasses more fast-paced and high-intensity workloads and entails many different roles within, depending on skillset and preference. The division can be devised by salespeople, traders, and structures, each with its own specialist skillset. Salespeople often maintain and build rapport with clients such as pension fund managers, asset managers, etc.; therefore, they must ascertain key interpersonal and communication skills and be persistent and critical thinkers. Traders often acquire strong numerical and quantitative methods, having a strong knowledge of financial markets and instruments. Additionally, they must work well and effectively under pressure, maintaining integrity and precision when making trades. Structures must be able to structure complex instruments and financial products creatively, as well as knowledge of pricing models. Furthermore, advanced qualifications and skills can work in their favour when deriving and constructing specialised financial products for clients.
The sales and trading team deals with a wide range of asset classes, such as equity, fixed income, commodities, and currencies; therefore, each desk is specialised and focused on a specific asset class. Typical exit opportunities are roles within hedge funds such as quantitative traders, investor relations managers, portfolio managers, etc., each with its own set of qualifications and skillsets needed. While the salaries aren’t as lucrative as those at IBD, the work-life balance is notoriously more comfortable, which acts as a huge incentive for prospective students when applying for front-office roles within an investment bank.
While this guide is simplistic and not at all exhaustive of all characteristics or details encompassed within an investment bank, it certainly sets the foundations for what students can reflect upon and ponder upon, depending on their education and employment. Whether you are a mathematics undergrad hoping to immerse yourself in a quantitative trading position or someone with a strong communication, sales, and charismatic profile intending to become a salesperson, this article will hopefully stimulate thought into which investment banking division is right for you.