A Guide to Investment Banking for Beginners: Process, Career Scope, Important Skills

Introduction

What comes to mind when you think of “Investment Banking” besides expensive clothes, huge salaries, and long hours? You will come across more terminology like bonds, FDD, equity, debt, and mergers and acquisitions the more you search. But with all these terms, what do the investment bankers do? We recognize that, as a new CA, you are curious to try something new.

It takes more than just math and financial language to break into this field. It’s about understanding how these ideas affect business choices and drive economic growth. This blog breaks down Investment Banking for Beginners in simple terms and how you as a CA Fresher can enter this field.

What is Investment Banking?

Investment Banking is a special segment of banking operations that helps individuals or organisations raise capital and provide financial consultancy services. It acts as an intermediary between security issuers and investors and helps new firms to go public.

Process of Investment Banking

If you plan to establish a career in this field, you must understand this process. Let’s take a look:

Imagine you own a company, and to keep it running or expand it, you need a hefty amount of money—say INR 100 crore. You can’t just ask random people in your network and expect them to hand it over.

So what do you do? You will go to an investment bank to arrange the money for you. In return, you must sell your equity or provide your debt. However, the question is, how would the investment bank identify potential sellers where buyers can grow? Here, we will discuss that process in detail.

Steps in getting an Investment

Step 1: When it comes to investment banking, the first step is BD. BD refers to business development. So, when the company on the sell side is growing well, BD executives from the investment banking company identify them, reach out to them, and set the initial meeting.

Step 2: The next step is to convince the seller that the bank fits their needs.

Step 3: This step is very crucial. In this stage, the investment bank will ask for detailed information about the seller’s company. This information includes a company overview (business overview and evolution, product matrix, shareholding history & strategic partnerships and so on), industry overview (key growth drivers, industry overview, and manufacturing process), business strategy (capex plan, revenue visibility & order book, SWOT analysis), financial highlights (historical financials and financial projections).

Step 4: The seller company will strategise for an information memorandum and financial model.

Step 5: After receiving the information from the seller side, the bank will contact the buyer to convince them to invest money.

Step 6: In the next stage, management addresses buyers’ and sellers’ queries that are not covered in the information memorandum and financial modelling.

Step 7: This stage involves signing a non-binding term sheet or letter of intent.

Why is a Non-Binding Term Sheet Required?

Framework for Negotiation: Sets the groundwork for detailed discussions.

Efficiency and Clarity: Provides direction and focus to the negotiation process.

Flexibility: Allows adjustment of terms as more information is gathered.

Testing the Waters: Gauges the commitment and seriousness of the parties involved.

Cost and Time Effective: Saves on the expanses and time of drafting full legal agreements initially.

Risk Reduction: Minimises misunderstanding and disputes by clarifying key terms early

Building Trust and Relationship: Fosters a working relationship and trust between the parties.

Guidance for Legal Documentation: Serves as a blueprint for drafting

Step 8: Due Diligence, Financial Due Diligence, Tax DD, and Legal DD are required in this stage to assess the seller company’s financial health. Buyers company bear the cost of due diligence.

Step 9: After due diligence is done, the seller company need to sign a binding term sheet.

Things Discussed Before Signing the Binding Term Sheet

Transaction Overview: Key details and structure of the deal.

Strategic Reasons: Why the transaction is beneficial.

Financial Impact: Effect on financial statements and performance.

Integration Plans: How the entities will merge operations, if relevant.

Future Projections: Impact on growth and future operations.

Regulatory and Legal Aspects: Necessary approvals and legal considerations.

Timeline and Next Steps: Expected timeline and immediate actions.

Risks and Mitigation: Potential risks and strategies to address the risk.

Q & A Session: Opportunity for questions and clarifications.

Closing Remarks: Final statement from management

Step 10: The next stage is documentation. A share purchase or business transfer agreement will be done at this stage.

Step 11: After documentation, both parties (seller side and buyer side) have to sign the document in an agreed form

Step 12: This is the last step and it is known as closing. In this stage money gets transferred.

Career Scope in Investment Banking for Beginners

Bulge Bracket Investment Bank: J.P. Morgan, Barclays, and Citi are examples of some bulge bracket banks. From asset management to sales and advisory services, they provide every type of investment banking service. As an investment banker, you will have exposure to dealing with national and international clients.

Underwriting Services: In investment banking, underwriting is the process where a bank raises capital for a client (corporation, institution, or government) from investors in the form of equity or debt securities.

Mergers and Acquisitions: Mergers and Acquisitions involve financial transactions and asset management. An investment banker assists the process in several ways, such as advisory service, valuation, deal structuring, and so on.

Asset Management Service: Investment banks provide asset management services to insurance companies, other financial private departments, and government departments. As an investment banker, you will have to perform the duties of an asset manager. As an asset manager, you will create a portfolio for clients that maintains a majority of the return for an accurate risk so those clients can bear the loss in any situation.

Equity Research Service: Equity research professionals assess the business data and create reports to help clients make informed investment decisions. With the help of the equity research service, investors can get absolute knowledge of making decisions before buying a stock. The primary role of equity research is to give insights into the performance of a business and give investors an idea of potential business risks before investing in the business.

Top Investment Banking Companies in India

International Investment Banking Companies in India

Investment Bank Name	Services
J.P. Morgan	M&A, Capital Markets, Risk Management
Bank of America Merrill Lynch	M&A, Capital Markets, Wealth Management
Morgan Stanley	M&A, Capital Markets, Wealth Management
Barclays	Financial Advisory, Equity and Debt Capital Markets, Risk Management
BNP Paribas	Corporate Finance, Structured Financing, Equity Capital Markets
Deutsche Bank	M&A, Capital Markets, Risk Management
UBS	M&A, Capital Market Operations, Wealth Management
Société Générale	Corporate Finance, Capital Markets, Structured Finance

National Investment Banking Companies in India

Investment Bank Name	Key Services
ICICI Securities	Equity Capital Markets, M&A, Structured Finance
HDFC Bank	M&A, Private Equity, Structured Finance
YES Securities	Equity Capital Markets, Structured Finance, M&A
Kotak Investment Banking	M&A, Private Equity, Capital Markets
JM Financial	Financial Advisory, Debt and Equity Syndication, Structured Financing
Axis Capital	M&A, Private Equity, Capital Market Operations
Motilal Oswal Investment Advisors	M&A, Private Equity, Capital Market Operations
Edelweiss Financial Services	M&A, Private Equity, Capital Market Operations
IIFL Investment Banking	M&A, Private Equity, Capital Market Services
Centrum Capital	Corporate Finance, Project Advisory, Capital Markets

What Are Front Office, Middle Office and Back Office Roles in Investment Banking?

Front office Roles

The front office in investment banking is significantly responsible for generating new deals. These deals are mostly centred around investment banking, sales, or trading.

Key Responsibilities Include:

Client interactions aimed at generating new deals for the bank or the client.
Buying and selling products in various financial markets.
Raising funds in capital markets.
Advising companies on mergers and acquisitions.

Some Common Job Roles in Front Office

Merger and acquisition analyst
Traders
Sales professionals
Private wealth advisors

Key Factors of Front Office Job

You will have great exposure to learning new skills.
Proving your value to the investment bank you will get faster promotion.
A front office role’s salary range is much higher than a back office job. Depending upon your experience it can range from INR 10 LPA to 30 LPA.

Middle Office Role

Middle office work in investment banking works as a bridge between the front office and the back office. In middle office roles, you will have to work on deals but need special expertise in understanding certain areas, such as legal, risk, verification and so on.

Some Common Job Roles in Back Office

Legal
Market Risk
Product control

Key Factors of Middle Office Roles

The salary is lower than the front office job.
The recruitment process is less competitive than the front office job.

Back Office Role

Data Handling

In a back office role, your primary responsibility is to handle the final stages of a deal.
You will have to add finishing touches, such as trade confirmation or working on tech systems, to ensure everything is processed as efficiently as possible.

Client Interactions

Many believe that back office personnel don’t face clients, but it’s not entirely true. They do face clients, but the discussions are mainly around:

Further confirmations are needed from the client.
As opposed to conversations about creating a new deal.

Importance in Deal Completion

Without back-office support, no deals are fully completed.
Most importantly, a deal happens with the collective effort of back office and front office personnel.

Support for Front Office

As a support system, the back office:

Informs the front office how well the systems are functioning.
Identifies blockages in completing the deal.
Works on improving the process flow, data accuracy, and completion.

Roles in the Back Office

The roles in the back office are generally known as:

Trade support
Operations
Technology teams

Key Factors of Back Office Job

You will have significant exposure to learning new skills.
You will get a faster promotion by proving your value to the investment bank.
A front office role’s salary range is much higher than a back office job. Depending on your experience, it can range from 10 LPA to 30 LPA.

5 Key Skills Investment Bankers Need to Master

Financial Modelling and Valuation: Financial modelling and valuation are essential tools in finance and investment. They involve analysing and projecting a company’s financial performance or an investment opportunity to determine its value. You need to master these tools to get into investment banking.
Teamwork Skill: Investment banking is all about teamwork. Working well in a team, communicating your ideas with teammates, and contributing to the group’s objective are essential to becoming an investment banker. Your teamwork ability will be tested if you are applying for an analyst or associate role in investment banking banking.
Communication Skill: Clear and concise communication is the key to delivering a pitch, Negotiating a deal or presenting financial data to the client.
Quantitative Skills: Investment bankers deal with complex financial data. Strong quantitative skills are crucial for analysing trends, preparing financial models, and conducting valuations.
Presentation Skill: Presentation skills are another key skill for investment bankers. Dealing with clients and presenting your findings to senior management is essential. The ability to deliver persuasive and compelling presentations is necessary, especially if you are applying for a front-office role.

Why Financial Modelling and Valuation is Essential for Investment Banking?

Data Structuring & Analysis

Financial Modelling: Investment bankers use financial models to analyze and structure deals. This involves creating complex spreadsheets that project future financial performance based on various assumptions. These models help in assessing the viability of a transaction and its potential impact on the involved parties.
Valuation: Valuation techniques are applied to determine the fair value of a company or its assets. This is crucial for understanding the potential returns and risks associated with a deal. Common valuation methods include discounted cash flow (DCF) analysis, comparable company analysis (CCA), and precedent transactions analysis.

Mergers and Acquisitions (M&A):

Financial Modelling: Investment bankers build financial models to evaluate the financial implications of mergers, acquisitions, or divestitures. These models help in estimating the pro forma financials of the combined entity, synergies, and potential cost savings.
Valuation: Valuation is a key factor in M&A transactions. Investment bankers use valuation techniques to determine the appropriate price to pay for an acquisition or the value of a company in a sale.

Capital Raising

Financial Modelling: When a company is raising capital through debt or equity, financial models are created to forecast the impact of the capital infusion on the company’s financial statements. This includes projections of revenue, expenses, and cash flows.

Valuation: Valuation is critical in determining the pricing of securities being issued. For equity offerings, this may involve determining the IPO price or the offer price in a secondary offering. In debt offerings, valuation helps in pricing bonds or other debt instruments.

IPOs (Initial Public Offerings)

Financial Modelling: Investment bankers create extensive financial models when working on IPOs. These models project the company’s future performance and help set the IPO price.

Valuation: Valuation is a crucial aspect of determining the market capitalisation and share price for the IPO. Investment bankers use various methods to arrive at a fair, attractive valuation to potential investors.

Advisory Services

Financial Modelling: Investment bankers provide advisory services to clients, and financial models are used to analyse various strategic options, potential investments, or restructuring scenarios.

Valuation: Valuation plays a key role in advising clients on the value of their businesses or assets, helping them make informed strategic decisions.

Conclusion

The financial process of Investment Banking for Beginners is intricate. It’s not easy to enter this world as a CA fresher. However, after seeing a little bit of how this sector functions and how investment bankers handle the process, are you ready to step into this world?

With the right mindset and preparation, you can leave a lasting impression and take a significant step toward achieving your professional goals.

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