BREAKING INTO INVESTMENT BANKING: What is IB?
BREAKING INTO INVESTMENT BANKING: What is IB?
Part One of a Four Part Guide to Investment Banking
Hello Friends!
This week, I’ve written up an abbreviated guide to Investment Banking. Click this link to access my Investment Banking Google Drive, where you can find over +500 technical and behavioral questions you can prepare for (aka literally every question that you can expect to be thrown your way in an IB interview).
Sadly, I will not be writing a titanic 8-Part ‘How To” Guide, unlike last time with consulting unfortunately, because I’m starting full-time work in full swing. That being said, I still want to write content whenever I can, and that means continuing with my ‘Breaking Into XYZ’ series. Because I’ve worked in both consulting and investment banking, I feel relatively qualified to add my insights and resources for you.
If you are interested in learning about other fields, however, I encourage you to check out my podcast! And if you want even more content, just let me know in the comment section below and I’ll work with the relevant experts and guests to make it happen.
* funny enough this isn’t even investment banking related, this is actually more S&T and hedge funds than banking, but I just couldn’t resist showing this meme to you
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Agenda
In today’s guide to Investment Banking, we’ll be splitting it up into four parts:
PART 1 — What Is Investment Banking
PART 2 — Networking, Resumes & Cover Letters, and Applying
PART 3 — Preparing for the behavioral interview
PART 4 — Preparing for the technical interview
Combined this should help you obtain the resources you need to put it all together and land an offer in investment banking. That being said, the space is notoriously difficult to break into — while there are a lot of investment banking shops, a lot of them (scratch that, all of them) have hyper-traditional recruiting practices. For instance…
Target schools. Investment banks 100% are prestige h0es, so if you’re a non-target student especially pay attention to the networking portion of this guide.
Legacy admits. Thought legacy was a thing in college only? Wrong. Investment banks have a tremendous history of hiring candidates from wealthy families (re: former and/or even active clients). Funny enough, this problem is worse for smaller banks (re: boutiques) than for bulge brackets (re: think the largest and baddest players, like J.P. Morgan, Goldman Sachs, Morgan Stanley, etc.).
GPA Cut-Offs. If your GPA is <3.5, I’m sorry, but you likely won’t make it. Investment banks usually have strict cut-offs (unless you’re a particularly attractive legacy candidate or you have something extraordinary on your resume and CV that would justify a “below average” GPA.
Diversity Hires. Or rather, a complete lack thereof. While investment banking firms love to host D&I events (which are a great first step!), the actual population of actually diverse interns, analysts, associates, vice presidents, and managing directors are… well… pretty sad to say the least.
Does this scare you? I haven’t even gotten into the long, brutal work hours (think 80-120 hours a week), the mind-numbing work of going back and forth between Excel and PowerPoint, the lack of a life outside of work, a culture of overly-stressed analysts, associates, VP’s, and MD’s all taking their stress out on each other (well, at least the higher-ups do this, the bottom feed just drowns their sorrows in alcohol or alternative coping methods of choice), and the existential dread that you’ve wasted the best years of your life on a job you were likely going to quit in 2 years (re: most IB analysts leave after 2 years, though usually to pursue more ‘lucrative’ opportunities in private equity).
Anyway, if you’re still convinced to read more of this guide (whether you’re interested in IB or not), let’s just jump straight to it…
What Is Investment Banking
WHAT AN INVESTMENT BANK DOES
Investment banking is a specific division in the larger space of banking that is related to the creation of capital for companies, governments, and other large entities.
Okay, but in English now…
Investment Banking - regardless of who you are or where you are in the world - has impacted your life in pretty large ways. For instance, when Disney acquired Marvel, this was accomplished by investment bankers. When Uber IPO’d in the public stock exchange, again investment bankers were there. Big Tech - Google, Facebook, etc. - got to where they are today because they went public, acquired insane amounts of capital, and again… the investment bankers were there every step of the way. Their influence and impact is omnipresent but not commonly understood by most Americans. So let’s break down what an investment bank actually does…
Investment banking is composed of two broad activities. First, they help other entities finance massive operations by underwriting debt and equity securities. One popular example you may know of is the IPO, or initial public offering. When a company goes, public, shares of said company goes on the public exchange (re: NASDAQ, Dow Jones, Hang Seng, Nikkei, etc.). Some popularly known IPOs of the last couple of quarters include Zoom, Uber, and Lyft. AirBnb is planning its IPO later this year, and former startups like Robinhood and Wish are planning to IPO very soon. Behind these companies’ public offerings are investment banks, who help clients strategize and ultimately execute their IPOs. Another way of raising capital is through debt — when companies issue ‘bonds’, investment banks help them borrow funds from investors. Investment banks again facilitate the transfer of supply (investors who are interested in buying the bonds) and demand (client who needs the funds to finance a project), and the client will borrow said funds and then pay interest on them (as opposed to equity, where the client sells a percentage ownership in itself and pays no interest, think of ownership in terms of things like stocks).
As a side note, if you’re in the ‘ECM’ team (Equity Capital Markets), you’ll be mostly working on initial public offerings, secondary public offerings, and other vehicles for raising equity. If you’re in the ‘DCM’ team (Debt Capital Markets), you’ll be working on issuing corporate bonds. Another similar team to DCM is Leveraged Finance. The key difference is that DCM focuses on investment-grade debt issuances, whereas LevFin focuses on below-investment-grade issuances (re: “high-yield bonds” or “leveraged loans”) that are often used to fund control acquisitions, leveraged buyouts, and other transactions. “Below-investment-grade” essentially means anything with a Ba1/BB+ credit rating or lower, so firms in this category tend to be much riskier. They tend to have less consistent operating results, higher leverage, and therefore a higher chance of default (re: bankruptcy). Leveraged Finance clients thus tend to be smaller companies or private equity firms rather than sovereigns, agencies, or supra-nations.
Confusing? I get it. Finance is very much simple topics but worded in an excessively complex manner. Ah, intellectualism. Anyway…
Second, investment banks help facilitate and and execute mergers and acquisitions and reorganizations for both institutions, corporations, and private investors. M&A is when a company acquires another. This could occur for a number of reasons, but if we go down that rabbit hole we’ll never finish this guide. If you are interested in more, click here to find out more about M&A and what it exactly is.
Something to note however — we’ve focused on what investment banking is, but within an investment bank there is actually another team: Sales & Trading. S&T is what most people think of when they think ‘finance’ and ‘finance bro’s. These are the people who execute and facilitate the transaction of making markets in stocks, bonds, and derivatives. Salespeople work with asset managers, hedge funds, insurance companies, and other buy-side investors to pitch ideas and to buy or sell securities or derivatives. Traders execute these transactions. If you’ve watched Wolf of Wall Street, The Big Short, and other Wall Street-esque movies… that’s S&T, not IB! For the purpose of this guide, we will NOT be touching S&T. IB and S&T are very different and emphasize different skills. S&T is also intensely shrinking due to new regulations, so opportunities in S&T and Markets is much more constrained than IB. If you want to learn more about S&T though, let me know! I’m trying to make guides for every job type and industry, and am working with the experts to make it all happen. I’m starting with consulting and investment banking because that’s what I’m most familiar with, but in the near future these guides will be all-encompassing :)
The Investment Banking Industry
Many large investment banks are affiliated with or subsidiaries of larger banking institutions. Goldman Sachs, for instance, is an investment bank, but it’s not just an investment bank. It’s also a retail bank (albeit a very small one), asset management firm, and blood sucking leech personified in corporate form. Other banks, like J.P. Morgan, Morgan Stanley, Bank of America Merrill Lynch, and Deutsche Bank are also investment banks but encompass far more business lines than just investment banks.
Investment banks essentially assist in large, complicated financial transactions (ECM, DCM, M&A, etc.). They act as intermediaries between investors (who have money to invest, re: supply) and corporations (who require capital to grow and run their businesses. re: demand).
Within the larger hemisphere of investment banking, there are three types of firms: bulge brackets (the biggest of the bad’s), middle markets (firms that work with mid-sized businesses $10M-$500M in revenues instead of F500-like corporations), and boutiques (regional/local players that are also highly specialized, and typically focus on one specific industry or investment banking service).
This list by Vault ranks IB’s across all three types of firms. Meanwhile, this ranking by Mergers & Inquisitions does it via type of firm. The latter is more accurate, as it’s hard to compare bulge brackets to boutiques to middle markets, but in general the Vault rankings are considered the gold industry standard.
Again, I’ve said it before and I’ll say it again, rankings are busted. If you landed a role in investment banking, chances are you could have it made it to another firm. The firms’ work all blurs with one another, and really the only defining difference is just how other future employers weigh the brand of one name over the other. That being said, so long as you are a top performer (~top 10% of your internship and/or full-time start class), you are golden. You will get gleaming reviews from your MDs (Managing Directors, not the medicine kind, as most people tend to initially think LOL) and VPs, and you’ll end being promoted, making the same amount of money, and/or pivoting to Private Equity, Hedge Funds, and executive/leadership roles all the same.
That being said, there may be a type of IB that attracts you.
Bulge Brackets are the blue chip standard of the finance industry. They are the biggest names, and you can’t go wrong.
Boutiques are small but intimate, and typically have more cohesive and tight-knit cultures. If you are interested in a SPECIFIC type of banking or industry, then boutiques will give you unparalleled access (whereas bulge brackets are more broad, and better if you don’t have a particular passion or professional focus).
Middle Markets are, well, in the middle of terms of size, but they tend to be the most chill. Your clients are smaller in size, and the stress and pressure - while absolutely still there - is not nearly as bad as in boutiques (where teams are small, meaning you’re doing the work of 10 people instead of 2) and bulge brackets (where each bank is constantly trying to steal clients from one another and seize lucrative deals). The pay is typically lower, but the role may compensate by providing more relaxed work hours and greater time spent with friends and family and actual hobbies + interests.
Investment Banking has greatly changed over the years. While it’s easy to be cynical of finance and big banks, the industry is actually a LOT more restricted than what it used to be able to do back in the ‘good ol’ days’ (re: the 80s, which was the heyday of the Wild West of Finance). CB Insights wrote a fantastic article on how the industry exactly has changed, as a result of regulation but also technology and innovation.
THE ACTUAL WORK
I speak from personal experience when I say that a monkey can literally do what an investment banker does. I’m not joking. The topics above may seem complex, but when you really break it down it’s actually quite simple.
Investor has da money. Companies need da money. Investment Banks connect investor to da company, and/or vice versa. Yay. Fat cats get even fatter. Rinse repeat cycle.
Now, when we actually dig into what this EXACTLY means, it gets a bit more complex. But trust me — it’s a lot simpler than it actually sounds.
In a nutshell, IB requires a lot of financial modeling and valuation. Whether it is underwriting securities or facilitating M&A, analysts and associates at banks spend an ungodly amount of time in Excel, building financial models and using various valuation methods to advise their clients and complete deals. They also then proceed to spend an ungodly amount of time on PowerPoint visualizing their models (and making them prettier) and designing pitch decks that more aesthetically capture the appeal of the bank’s services, collapse their work into neat, digestible chunks that can be read in a second in a slide, and communicate their findings to firm leaders and clients. Investment banking therefore requires the following skills:
Financial modeling – Performing a wide range of financial modeling activities such as building 3-statement models, discounted cash flow (DCF) models, LBO models, and other types of financial models
Business valuation – Utilizing valuation methods such as comparable company analysis, precedent transactions, and DCF analysis to value the financial worth of a client, competitor, comparable, or target company to be acquired
Pitchbooks and presentations – Developing pitchbooks and PPT presentations from scratch to pitch ideas to prospective clients and acquire new deals
Transaction documents – Preparing documents such as a confidential information memorandum (CIM), investment teaser, term sheet, confidentiality agreement, building a data room, and more
Relationship management – Working with existing clients to successfully close a deal and make sure clients are happy with the service being provided
Sales and business development – Constantly meeting with prospective clients to pitch them ideas, offer them support in their work, and provide value-added advice that will ultimately win new business
Negotiation – Being a major factor in the negotiation tactics between buyers and sellers in a transaction and helping clients maximize value creation
This all kind of sounds cool, doesn’t it?
Oh, it doesn’t? Eh, figures.
I actually thought this was fascinating back when I was recruiting, and if you’re sitting on your butt thinking to yourself “same,” kudos to you! IB teaches you a LOT, and while the work itself isn’t too difficult, it teaches you amazing technical and soft skills.
Technically speaking, financial modeling and valuation are critical skills that are in high-demand. With these skills, you can lateral to consulting, venture capital, private equity, hedge funds, asset management, etc. very easily. If you’re at a well-known shop, you can also find your way to a top MBA much more easily than in other job roles and industries (re: many IB shops have pipelines into Harvard, Stanford, etc., meaning a percentage of their analyst classes are guaranteed spots in these programs).
In terms of soft skills, you will learn exceptional time management skills (you need to do 120 hours worth of work into 80-100 hours a week, it adds up REAL quick), negotiation skills, how to work with uppity managers and overly-stressed team-mates, how to navigate an intense workplace environment and win people’s hearts and minds (when everybody, again, is overly uppity and overly-stressed), and you’ll meet smart, amazing people who may share your same sense of self-awareness (of which you can bond over your shared misery, and become life-long friends in the process).
But of course, the reality is you’re going to be spending 80-120 hour work weeks in the office. You’re probably going to be running on 4-5 hours of sleep every day, and your body will be coffee than water. It seems glamorous at first - the deluxe banquet and five star hotel / yacht treatment during orientation, the hefty salary (which we’ll get to very shortly), and feeling like a king/queen in your business professional choice of wear - but that wears off reaaaaal quick.
For context, when I was interning, I got into the office at 6 AM (this is atypical, I worked in a cross-border team, so we worked with offices around the world meaning this was the only time that everybody could meet) and worked until 10 PM, even 12-1 AM working on some last-minute deals that came in. I would often have to come to the weekends to work (which isn’t a human rights violation yet absolutely should be), and again spend around 6-8 hours on a beautiful Saturday and/or Sunday numbly staring at Excel spreadsheets and endless PowerPoint slides.
That being said, it isn’t all that bad. Firms often have social events for interns, which means free food and free booze (investment bankers LOVE alcohol, it’s a common trend in roles that require you spend more time with your boss than your spouse or children). I loved my mentors, and they clearly loved me too because we’d go on fancy outings and they’d straight up cover my bill. For the people who can handle the grit, they come with a pretty keen sense of self-awareness, even humility, which makes for amazing conversation, friendship, and mentorship. They know the drill, they know the bullshit. And that just makes you wiser for it.
Of course, there are a lot of assholes too. You kind of have to be to survive. I don’t really blame them. But again, when you’re considering a career in IB, you have to know the positives and negatives (just don’t mention the negatives during an interview, especially not from me LOL).
THE PAY (you gotta get that bread doe)
As you can see, despite how terrible the job sounds, there’s a clear reason why so many people still bend over backwards to recruit for it.
Analysts can expect to net $100-$125K easily per year in salary (including end-of-year bonuses), and this is straight out of undergrad.
Wall Street Oasis: WSO’s guide on salaries and bonuses by industry and firm
Mergers & Inquisitions: Deep dive on salaries and bonuses by firm, industry, and also by role (analyst -> associate -> VP -> Directors -> MDs -> Senior MDs)
Wall Street Prep: Goes into more depth on how bonuses are structured (which is important, because bankers can actually make more in bonuses than salary!)
Another thing to note — IB is lucrative because your ability to ‘pivot’ to industries like private equity, hedge funds, etc. means an exponentially higher paycheck in your future. Top analysts get placed in top PE shops, for instance, and your pay gets nearly doubled nearly instantly. Check out WSO’s salary and bonuses guide on Private Equity and other industries to get a sense of what I mean.
As you can see, it’s thus pretty common for IB analysts and associates to leave the job after a couple of years. Some stay, but most leave for ‘better’ opportunities. IB has high churn (re: analysts are constantly coming and going) and that’s why internship programs are such a HUGE thing for investment banks.
CONCLUDING THOUGHTS
If you want to learn more about investment banking, there are some AMAZING free resources you should look into right now:
My Google Drive — Access 10 guides on IB interviewing and recruiting, with more than +200 questions and answers you can use to prep for NOW!
Wall Street Oasis — Constantly updated live forum of people overly-stressing about getting into finance. Occasional gold gems can be found. Also highly self-aware and sarcastic, I love its energy and the people in it mostly do want to help!
Street of Walls — Check out its guide on IB, it’s pretty in-depth and a lot of it’s material is what I used in my own IB recruiting!
Mergers & Inquisitions — A fantastic resource for those interested in IB but also other fields in finance. Generally free high quality articles are at your disposal, they’re surface-level but great for understanding the field!
Corporate Finance Institute — This is great not for understanding recruiting but rather the specific skills and experiences investment banks are looking for.
Interested in IB?
HELL YEAH — Okay fam, I got you! Stay tuned for the next three parts where I cover how to ace IB recruiting, interviewing, and knowing the in’s and out’s (and the little known secrets people don’t tell you)!
HELL NO — Okay fam, I got you! You can ignore the next three parts (issued Wednesday’s), but tune into my Sunday newsletter where I do a deep-dive on general recruiting best practices and my FTF’s! My Instagram will also soon be publishing more generalized recruiting tips, and if you want me to do a deep dive on an industry you want to learn more about — please message me!
In the mean-time, stay healthy + happy folks :)