Investment banking plays a crucial role in the global economy by linking organizations that require funds with the investors who can fulfill these funding requirements. Financial advisory supports such companies in raising funds, managing financial problems, and making strategic decisions in mergers and acquisitions, and other financial services. Additionally, they also offer support in large transactions and advice that drives growth. With the support of such investment banking firms, businesses expand and gain economic stability, and hence, it is a keystone of financial markets.

What is Investment Banking?

It is a type of bank or financial institution that offers various management services and advice to governments, corporations, and institutions in large and complex financial transactions. The major activities involved by them are underwriting debt financing, i.e., raising capital, and issuing equity securities like Initial Public Offerings (IPOs) and advising and assisting Mergers and Acquisitions (M&As) for businesses, in addition to Leveraged Buyouts (LBOs). They also help in security selling, placing stocks, and managing investment and trade brokerage for corporate clients, governments, and high-net-worth individuals. These financial institutions are the primary advisors, planners, and managers in corporate restructuring or reorganizations, including divestments.

Types of Investment Banking –

Investment banks are classified into three categories based on their scope and focus areas as follows:

1. Boutique Banks

Boutique banks are special banks that focus only on specific sectors and clients. They are often more attentive to the requirements of their clients and provide customer-tailored services to meet each customer’s needs. These banks require less power and resources in comparison to large bulge bracket banks. They are further divided into two types: regional boutique banks and elite boutique banks.

1.1 Regional Boutique Banks

• Regional boutique banks are the smallest investment banks in terms of firm size and typical deal size. They do not provide all the services offered by the bulge investment banks because of their small size, but they do hold specialization in single areas like handling small mergers and acquisitions ranging between $50 million and $100 million or less in specific market sectors.
• These banks have offices or operations that are either restricted to or focused on specific regions of the country or may even be restricted to a single city. Therefore, regional boutique banks usually have a very small team or a handful of employees in their offices.
• For example, an investment bank situated in Texas with a single office and approximately 20 employees only manages mergers and acquisitions deals for specific companies, like those in the oil and gas industry. It is the best example for regional boutique banks.
• Their clients are mainly corporate-based, especially those who are located in the area where the bank is operating. But they typically serve small firms and local organizations and not national governments, though they deal with local or state governments.

1.2 Elite Boutique Banks

• Elite boutique investment banks are typically different from regional boutique investment banks and similar to bulge bracket banks with respect to the deal size they handle, which can extend to a value of $1 billion. However, they also consider the smaller deals based on the client or conditions.
• They are present at the national and international level, but especially in the prominent regions, only having offices in multiple countries. But they are not as widespread as the major investment banks like JPMorgan (JPM).
• Elite boutique investment banks typically do not provide a wide range of investment banking services; rather, they focus mainly on merger- and acquisition-related problems. They are more likely than regional boutique banks to provide restructuring or asset management services. In a similar way, it has more in common with bulge bracket banks in comparison with regional boutiques.

Key Insights:

• Most elite boutique banks start their journey as regional boutiques and gradually expand their services into elite status by handling big deals with the more reputable clients.
• Some of them, like Qatalyst Partners, attain quick recognition as their founder has a strong reputation in the financial advisory sector.
• Famous examples of elite boutique investment banks are Lazard (LAZ), Evercore Group (EVR), and Moelis & Co.

2. Middle Market Banks

Middle market investment banks fall in between the smaller regional investment banking firms and the large bulge bracket investment banks. They typically manage the deals that start at the regional level and advance to nearly the size of a bulge bracket level. The value ranges from roughly $50 million to $500 million or even more.

They are typically in the middle ground when it comes to geographic reach. They have a significantly larger presence in comparison to the regional boutique banks but are not as widespread globally as bulge bracket banks.

Unlike boutique banks, middle-market firms typically provide the same financial advisory services as bulge bracket banks. This includes equity capital market and debt capital market services, a full addition of financing and asset management services, mergers and acquisitions, and corporate restructuring deals.

Some middle-market banks are similar to regional boutiques, as they both have specialization in providing services to a specific industry or sector. For example, one of the most focused middle-market investment banking firms is KBW, which specializes in serving companies operating in the financial services sector. Piper Sandler, TD Cowen, and Houlihan Likey are other well-recognized middle-market firms.

3. Bulge Bracket Banks

Bulge bracket banks are the major international investment banking firms. They have the largest number of employees and offices, and they manage most of the big deals and often collaborate with corporate clients around the world.

The majority of clients of the bulge bracket banks are Fortune 500, and even many of them are Fortune 100. These investment banks regularly manage mergers and acquisitions worth multibillions of dollars. However, depending on the entire economic situation or particular clients, a bulge bracket may also consider the deals valued in the low hundreds of millions.

Every bulge bracket bank functions internationally and has a strong presence globally and within domestic areas. The major investment banks offer the entire range of financial advisory services, including trading, all types of financing, asset management services, equity research and issuance, and prime services of investment banking, i.e., merger and acquisitions services.

Most of the bulge bracket banks have commercial and retail banking divisions and generate additional income by cross-selling financial products.

Key insights:

• The most significant transition in the investment banking world after the financial crisis is that many high-net-worth individuals and Fortune 500 companies have opted to keep the elite boutique services instead of bulge-bracket firms.
• Boutique investment banks are bifurcated into regional boutiques, which are smaller in size and mainly focus on specific regions, and elite boutiques, which often manage large deals.
• Bulge bracket banks are the largest investment banks in terms of deal size and functions, whereas middle market banks lie between boutiques and bulge bracket banks.

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What are the Services Offered by Investment Banking Firms?

We have common confusion between investment banking firms and investment banks, but in reality, the two are distinct from each other. Investment banks offer a broad range of financial services such as securities underwriting, mergers and acquisitions, deals and distribution of securities, stock analysis, investment management, commercial banking, and retail banking.

It provides only securities underwriting services with the objective of raising capital by selling securities, such as IPOs, to its investors in the capital market and advisory services in mergers and acquisitions by properly assisting in the negotiation and structuring of M&A.

The main clients are corporations, institutional investors, and government bodies, such as private equity funds, mutual funds, hedge funds, pension funds, and sovereign wealth funds (SWF).

1. Investment Banking Underwriting Services

Underwriting is the procedure of raising capital through selling stocks or bonds to investors (IPO) on behalf of corporations or other institutions. Companies require capital to operate and expand their businesses, and bankers help them in getting that money by marketing the company to investors.

The following are the three types of underwriting:

• Firm’s Commitment: The underwriters agree to buy the entire issue and take full financial responsibility for the unsold shares.
• Best Efforts: the underwriter agrees to sell as many shares as possible at the sanction set price; however, they can return any unsold shares to the company without any financial responsibility.
• All or None: if all the shares or issues are not able to be sold at the set price, the deal is called off, i.e., cancelled, and the issuing company does not receive any funds.

2. Investment Banking Merger and Acquisition (M&A) Services

Merger and acquisition advisory services refer to the process of helping corporations and institutions in finding, evaluating, and completing the acquisition process of a business. This is the prime function of i-banking, in which they use their extensive networks and connections to find prospects and help in negotiating on behalf of their clients.

Investment bankers offer advice to both sides of M&A transactions, and they are on the buy side or the sell side of the deal.

Buy-Side M&A: On the buy-side, it acts as advisors to the acquirer, i.e., the buyer, and determines whether the transaction proposed to the client is reasonable or not. The prime focus is to ensure the offered price is fair to avoid the risk of overpaying for the underlying asset, such as a whole company or individual business segment.

Sell-Side M&A: On the sell side, it works on the sell side and is hired by the seller to advise them on the deal and ensure that the company is sold at a fair price with the motive to maximize the value without leaving any money on the table.

Investment Banking Firms in India – Overview

Investment banking firms in India have experienced significant development over the past few decades. We all know that the Indian economy is rapidly growing, and international companies are entering the Indian market, so the investment banks provide support in project financing, handling mergers and acquisitions, and supporting the functioning of the capital market.

1. Top International Investment Banking Firms in India:

International investment banks have a substantial presence in India. Below are some of them:

• J.P. Morgan: J.P. Morgan is a prominent American finance and investment bank that has its headquarters in New York, U.S.A., and a strong presence in India with numerous offices across the country, and it holds expertise in M&A, capital markets, risk management, and wealth management services.
• Goldman Sachs: It was established in 1869, with its headquarters based in New York, U.S.A. It is an international powerhouse that offers a full set of financial advisory services, including capital markets, M&A, securities trading, and asset management, and holds a rank in the Fortune 500 list of the largest U.S. corporations.
• Morgan Stanley: Morgan Stanley has its headquarters in New York, U.S.A., and has a strong focus on mergers and acquisitions, capital raising, wealth management, and financial restructuring. It has marked its presence with its emerging mega-fundraising programs, such as Reliance Industries.
• Bank of America Merrill Lynch: Bank of America Merrill Lynch has its headquarters in North Carolina, U.S.A., and has a potential presence in India. It serves primarily in M&A, capital markets, wealth management, and corporate banking.
• Barclays: Its head office is located in London, U.K., and it is famously known as a British international bank. It offers a wide range of financial advisory services, such as equity and debt capital raising, M&A, risk management, and wealth management.
• Credit Suisse: Its headquarters is in Zurich, Switzerland, and it has a strong presence in India and holds specializations in financial advisory, capital markets, wealth management, asset management, investment banking, and private banking services.
• Deutsche Bank: Its headquarters is in Frankfurt, Germany, and it is an international investment bank with a substantial presence in India. It provides services like M&A, risk management, and capital markets.
• BNP Paribas: It is a prominent French international bank with its headquarters in Paris, France. It has marked its presence by offering services such as corporate finance, structured financing, and the equity capital market.
• UBS: UBS is a Swiss multinational bank with its headquarters located in Zurich, Switzerland. It offers a full set of investment banking services in India, like mergers and acquisitions and capital market services.
• Société Générale: Société Générale is a French multinational bank with its main branch located in Paris, France. It has a strong presence in India and offers various investment banking services such as complex financing solutions, corporate finance, and capital markets.

Conclusion –

In conclusion, an investment banking firm is a keystone in the financial world by linking companies that need capital and the investors that seek the opportunity to invest their capital. Since these financial advisory firms hold experience in raising funds, handling large transactions, and offering suggestions on critical financial moves, it results in fostering innovations and international business expansion. Overall, it helps in driving the economic growth and stability of organizations. Studying how investment banks operate allows businesses and investors to make strategic decisions in such a complicated and competitive financial landscape.

Frequently Asked Question (FAQs) –

1. What is banking? 

Banking is a financial activity in which banks, licensed financial institutions, manage deposits and offer loans, where it plays the role of both securing your deposit and also sourcing to fulfill your financial requirements. These financial institutions offer various financial services ranging from individual retirement accounts to currency exchange and digital storage. Consumers get experience with various types of banks, such as retail, investment, and commercial. Each of these provides specific financial services. In the United States, banks operate under the national and state regulatory bodies to ensure that they are operating under the financial regulatory framework.

2. What is the meaning of an Initial Public Offering (IPO)?

An initial public offering is a process in which shares of a private corporation are offered to the public for the first time. By offering shares to the public, a company gets an opportunity to raise capital from public investors.

To conduct an IPO, companies must fulfill the requirements set by stock exchanges and the Securities and Exchange Commission (SEC). Companies hire investment banking firms to underwrite their IPOs, and they are involved in each aspect of underwriting, such as due diligence, document preparation, marketing to potential investors, and issuance of shares.

3. Who are the clients of the investment banks?

Investment banks offer their services to a wide range of clients to boost up their capital and fulfill their merger and acquisition needs. They serve their clients from all over the world.

The following are their clients:

• Governments: Investment banks collaborate and advise the governments for various purposes, such as raising funds, securities trading, and managing the buying and selling of state-owned companies.
• Corporations: Investment banks support both private and public companies in underwriting IPOs, boosting the capital growth, expanding their business, making acquisitions, and selling business units.
• Institutions: Investment banks collaborate with the institutional investors who are responsible for handling their clients’ money in various ways, such as trading securities and conducting research for them. They also work for the private equity firms by helping them in acquiring portfolio firms and later exiting those investments either by selling or through IPO.

4. What is the role of investment banking firms in underwriting IPOs?

It serves as a mediator between companies and investors during the time of issuing stocks or bonds. They provide advice on fixing the price of their securities and ensure that all the regulations are followed.

Usually, when a company goes for a public offering, investment banks purchase all or most of the shares directly from the company. Then the investment bank sells those shares on the market on behalf of the company, which makes it easier for the company to manage the IPO. The investment bank’s motive is to make a profit by selling shares at a higher price, but it involves a substantial amount of risk. Here, if the experts’ analysis fails, the bank can face major losses.

5. What are the functions of investment banking?

Investment banks provide advice on crucial financial transactions such as the valuation of a company and the best possible ways to structure the deals, like acquisitions, mergers, or sales. Such banks play a major role in underwriting IPOs for corporations and support in the sale of securities, boost mergers and acquisitions and reorganizations, and offer triaging opportunities for both institutions and private investors.

Investment banking firms also issue securities with the approach of raising funds for their clients and prepare the required U.S. Securities and Exchange Commission (SEC) documents for a company to go public.