What is Investment Banking?

Those who don't know much about investment banking (IB) aside from the term itself likely assume it involves investing which it largely doesn't. It's much more of an advisory role. IB is a type of financial service that helps companies, organizations, and governments manage their financial needs and strategies. Investment banks help clients with:

Raising Money

• Underwriting and issuing new stocks and bonds (example: helping a large tech company issue and sell corporate bonds to raise money for operations)
• Managing Initial Public Offerings (IPOs) (example: guiding a popular food delivery app through an IPO process to become a publicly traded company)
• Arranging private placements and debt financing (example: helping a later-stage AI startup secure private equity funding to train newer, bigger models)

Advising on Strategic Transactions

• Mergers and Acquisitions (M&A) (example: advising a large steel manufacturing company on its acquisition of a smaller competitor)
• Corporate restructuring (example: helping a large global conglomerate streamline its business by selling off non-core assets to reinvest into core assets)
• Valuation services (example: determining the fair market value of a private space exploration company looking to raise a potential investment round)

Market Activities

• Market-making to ensure liquidity (example: acting as a middleman by always being ready to buy or sell shares of a popular stock which is important in ensuring other investors can trade it easily at any time)
• Trading financial instruments such as stocks, bonds, currencies, commodities, derivatives, etc., for financial gain (example: executing an order for a pension fund client who wants to buy government bonds in a quantity that is too large to find on a traditional exchange)
• Securities research (example: producing in-depth analysis reports on the future prospects of the renewable energy industry or key companies in the space)

Other Advisory Services

• Investment strategies and portfolio management (example: designing a diversified investment portfolio for a high-net-worth individual)
• Risk management and hedging strategies (example: developing a currency hedging strategy for a multinational corporation with exposure to lots of volatile currencies)
• Corporate finance advisory (example: advising a mid-size company on the optimal capital structure to fund its expansion plans in the most efficient way possible)

As you can see, investment banks don't typically invest money. They're expert advisors in the financial world. Given banks help clients sell stocks (through an IPO), bonds, or their entire company (M&A), it's common to refer to investment banking as the "sell-side" of finance, which is a term you'll frequently encounter during your IB journey. Financial services that involve the purchasing of securities and assets, such as private equity, venture capital, hedge funds, and other actual investors, are typically referred to as the "buy-side." Investment banks are like the matchmakers of the business world, connecting companies who need money with the investors who have it. They help businesses raise funds, guide companies through mergers and acquisitions, and offer helpful financial advice. Investment banks help to break down complex financial stuff, making it easier for companies to make big decisions. By doing this, they play a huge role in helping businesses grow and moving economies forward. They're like the behind-the-scenes architects of major business deals, using their know-how to shape the financial landscape.

Investment Banking Functions

Investment banks are typically structured into three main divisions: front office, middle office, and back office. When most people mention "investment banking" they are mostly referring to front office functionality. This is where you'll find the highest-paying, most prestigious jobs with the best opportunities for career growth. The front office is responsible for actually generating revenue and includes job opportunities for which networking is absolutely crucial. The front office consists of three main areas: investment banking, sales and trading, and equity research.

The Investment Banking Division

This division, also referred to as the IBD, is the heart of investment banking. This is where deals happen. Investment bankers help companies raise capital, advise on mergers and acquisitions, and assist with restructuring. These divisions make huge amounts of money by charging clients a fee which is typically a % of the total financial value of the executed deal. It's split into two types of groups: product groups and industry (or coverage) groups.

Product Groups focus on specific deal types or investment banking "products" such as:

• Mergers & Acquisitions (M&A): advising companies on how to buy other companies or merge with them (example: if a tech company wants to acquire a smaller startup to expand its product offerings, the M&A group would help negotiate the price, structure the deal, and handle all the paperwork and regulatory requirements to make sure everything goes smoothly)
• Debt Capital Markets (DCM): helping companies raise money by issuing debt, which can include bonds or loans (example: if a company needs to raise $100M to build a few new factories, the DCM group would advise the company to decide the best way to structure the debt, select the right investors, and manage the process of getting the money)
• Equity Capital Markets (ECM): assisting companies in raising capital through the sale of equity, such as through an initial public offering (IPO) or a secondary offering (example: if a growing biotech firm decides to go public to raise funds for research and development, the ECM group would help them determine the valuation and execute the IPO based on the initial share price determined by the valuation work)
• Leveraged Finance (LevFin): helping companies raise capital through high-yield debt to fund acquisitions, buyouts, or other significant investments (example: if a private equity firm wants to purchase a large retail chain, they might hire a LevFin team at an investment bank to help them secure the necessary loans to finance the deal, often by borrowing against the assets of the company being acquired)

Industry or Coverage Groups, on the other hand, specialize in specific sectors. Usually, they may focus on all the deal types listed above within a particular industry. Some examples are:

• Technology, Media & Telecom (TMT): covers companies that operate in the technology industry, including software and hardware companies, media companies that focus on broadcasting, publishing, and entertainment, and telecom companies that provide communication services like internet and phone
• Healthcare: focuses on companies involved in providing medical services, manufacturing medical equipment or drugs, providing medical insurance, or otherwise facilitating the operation of the healthcare system
• Financial Institutions Group (FIG): includes other investment banks, commercial & consumer banks, insurance companies, investment companies, and other entities that manage money, such as credit card companies and mortgage banks
• Real Estate: deals with companies & firms that develop, buy, sell, or invest in real estate properties, including both residential and commercial projects
• Consumer: covers a wide range of consumer-focused companies, including those that sell products directly to consumers, such as clothing stores, supermarkets, restaurant chains, luxury goods providers, etc.
• Metals & Mining: includes companies involved in the extraction and processing of minerals and metals from the earth, such as gold, copper, and iron ore mining companies
• Energy: focuses on companies involved in the production and distribution of energy but not limited to oil and gas, including renewable energy sources like solar and wind
• Oil & Gas (O&G): deals with companies that explore, produce, refine, and distribute oil and gas products
• Industrials: covers companies involved in the production and distribution of goods used in construction and manufacturing, such as heavy machinery, aerospace, and defense.
• Utilities: includes companies that provide essential services like water, electricity, and natural gas
• Transportation: focuses on companies that provide transportation services or manufacture transportation equipment, such as airlines, railroads, and automotive manufacturers.

Some banks further break out industry groups, and have a TMT subgroup dedicated specifically to technology or even software or semiconductors. Other banks might combine industry groups, and have an Energy team that also includes O&G. Additionally, it's not uncommon for investment banks to have product-industry groups, such as Technology ECM, Real Estate M&A, etc. Some banks recruit candidates directly to these smaller teams within the IBD, while other banks might recruit and offer candidates for roles in a larger product or industry group, and then place them into subgroups after they receive and accept the offers.

It is best to at least have some idea of what product or industry group you want to join before you begin the recruitment process. That way, you can target your networking efforts to enter recruiting pipelines on teams you actually care about. As of this writing, RecruiterBase is the only resource out there that allows candidates to find bankers in specific product or industry groups, which is a big reason why thousands of students across the nation use our platform.

Sales & Trading

The Sales & Trading (S&T) division, while generally less prestigious than IBD, helps big institutional investors buy and sell securities. This isn't as simple as it sounds. These clients often place massive orders that could disrupt market prices if executed all at once. S&T professionals need to be smart and strategic about how they handle these orders. S&T teams might invest money for their clients, or their own money. In the latter situation, investment banks are actually invested, but, again, S&T is not the IBD that typically is referred to when the term "investment banking" is used. It is a tier below the IBD in terms of prestige, pay, and exit opportunities but it's still a great entry level landing spot for a career in finance. S&T is usually split into two main areas:

• Equity Trading (where professionals trade stocks and their derivatives)
• Fixed Income Trading (where professionals trade bonds, currencies, commodities, and more)

Equity Research

The research division in investment banks produces analytical reports on companies, complete with recommendations for clients, subscribers, and public investors such as "Buy," "Sell," or "Hold." While interconnected with other parts of the bank, the research division is distinct from the IBD to prevent conflicts of interest. This separation is crucial because investment bankers, who manage client relationships and transactions, might have incentives to sway research recommendations for favorable outcomes in deals. For instance, there could be undue pressure on researchers to issue a "Buy" rating to improve a company's market image ahead of a merger or bond issuance handled by the IBD whose fee is correlated to the size and outcome of the deal. Meanwhile, sales and trading teams use research outputs to inform trading strategies and advise clients. Strict regulations ensure that research remains unbiased to maintain the integrity of advice provided to investors and uphold market trust.

Middle and Back Office

These areas handle other important, supportive tasks like risk management, compliance, and IT. However, as a student aiming for traditional IB roles, your main focus will likely be on front office positions, especially the IBD.

Types of Investment Bank

In the world of IB, elite boutiques and bulge bracket banks are often seen as the most prestigious and highest-paying firms. Elite boutiques tend to offer the highest compensation, yet also the most technically rigorous interview processes where advanced topics are more likely to arise. Bulge bracket and elite boutique institutions often come with another trade-off: the longest work hours. On the other side of the market, middle market and regional banks, boasting less prestige and lower compensation, may provide better work culture and more manageable work-life balance. Understanding these distinctions is important as you think about which firms to target. There is not necessarily one type of bank that is best to target, aside from the one that is most in line with your goals and work-life balance desire. For all types of banks, networking is basically required to have a shot at landing an offer.

Bulge Bracket (BBs)

Bulge bracket investment banks are the largest firms, offering a full suite of services globally and typically handling the largest transactions. The term "bulge bracket" comes from the way these banks' names appear prominently at the top of the prospectus (paperwork filing) for an IPO or debt issuance, listing all the banks underwriting the deal. Key players include JP Morgan (JPM), Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BofA), Citigroup (Citi), Barclays, and UBS. These banks are often the first choice for Fortune 500 companies to hire for their capital needs due to their extensive resources, global reach, and ability to manage large, complex deals. These firms tend to be "full-service" meaning they offer services across M&A, underwriting, sales and trading, asset management, and other IB products.

Elite Boutique Banks (EBs)

Elite boutique banks, while smaller than bulge bracket counterparts, often match them in prestige and offer excellent exit opportunities. Specializing in high-end advisory services such as mergers and acquisitions (M&A) and restructuring, firms like Lazard, Evercore, Qatalyst, and Moelis are prominent examples. These banks offer a more focused approach, often leading to more hands-on deal experience and closer client interaction. Working at an elite boutique can be demanding and rewarding, providing opportunities for significant professional growth and development in niche financial services. Again, they tend to have the hardest interview processes, the longest work hours, and the highest pay.

Middle Market (MMs)

Middle market banks occupy the space between the largest firms and specialized boutiques. They offer a broad range of services and have a smaller geographical presence than BBs and EBs, typically working on deals worth less than $1B. While the exit opportunities might not be as prominent as those from BB or EB banks, they remain strong. Respected middle market banks include Jefferies, Houlihan Lokey, William Blair, and Lincoln International. These institutions tend to provide a balance of deal exposure and a more manageable work-life balance, making them attractive to those seeking robust career opportunities without the extreme pressures of larger firms.

Industry-Specific Boutiques (ISBs) and Regional Banks (RBs)

Industry-specific boutiques (ISBs) and regional banks (RBs) focus on particular industries or geographic areas. These firms typically handle smaller deals, often below $100M. Although they may not have the name recognition of larger banks, ISBs and RBs offer deep expertise in their niche areas and can provide significant responsibility early in your career. Examples include healthcare-focused or tech-focused boutiques and regionally focused firms. Working at these banks allows for specialization and in-depth knowledge of specific markets, offering unique career advantages and insights into targeted sectors. Many candidates will choose to target these firms if they want to break into IB without living in a finance hub such as SF, Chicago, or NYC.

When considering which type of bank to target, think about what type of IB or high finance experience you're after. BBs and EBs can open doors to the most prestigious buy-side roles though they often imply the harshest work-life balance, which might be acceptable for some candidates. From MM and other boutique banks, it might be harder to compete for the best buy-side roles. However, you might have a slightly better work-life balance. This is because the top banks win more, larger deals which require more work and less margin for error, while smaller banks might have live deals active at a slower cadence which will lead to a better work-life balance for entry level bankers. Smaller investment banks can very much so still lead to enticing exit opportunities as well. Deciding on what type of bank to pursue depends on your interests, career aspirations, and personal preferences.

Comparing Investment Bank Performance

When evaluating investment banks, league tables offer a quantitative tool for comparison. These rankings assess bank performance across various deal types and industries, based on the volume and value of transactions over a specific period. Here are some reputable sources for IB league tables:

• Financial Times League Tables
• FactSet League Tables
• Wall Street Journal Investment Banking Scorecard

While valuable, league tables should be interpreted carefully. A high ranking doesn't always equate to prestige or better career opportunities. Consider factors like bank size, specialization, geographic focus, and time period when analyzing these rankings. For example, BB banks typically dominate the league tables, though EB banks such as Qatalyst Partners might close slightly less deal volume but with a far smaller, leaner team. League tables don't account for factors like deal quality or revenue per employee. When using them in your research, consider the specific category, time period, geographic focus, and the bank's size relative to its ranking. Combine league table data with other factors like culture, exit opportunities, and personal fit to make informed decisions during your job search. Again, the best bank isn't always the highest-ranked one, it's the one that aligns best with your career goals and preferences.

Key Takeaways

• Investment banking (IB) is primarily an advisory business, not an investing business as investment banks help clients raise money, execute strategic transactions like M&A, and provide market-making services and research
• Investment banks are structured into three divisions (front, middle, and back office), with the front office (particularly the Investment Banking Division) being the most prestigious and highest-paying area
• Networking is the most critical step in successfully recruiting into a top investment bank
• The IBD is organized into two main types of groups: Product Groups (like M&A, DCM, ECM, and LevFin) that specialize in specific transaction types, and Industry Groups (like TMT, Healthcare, FIG) that focus on specific sectors
• Research divisions are kept strictly separate from investment banking to prevent conflicts of interest, as bankers might have incentives to influence research recommendations to benefit their deals
• Investment banks are categorized into four main types: Bulge Bracket (BBs), Elite Boutiques (EBs), Middle Market (MMs), and Industry-Specific/Regional Boutiques, with BBs and EBs typically offering the highest compensation and prestige but demand the longest hours
• While BBs and EBs generally provide the best exit opportunities to prestigious buy-side roles, middle market and boutique banks can offer better work-life balance and still lead to strong career outcomes