Introduction to Investment Banking

Course Plan

• Modules in the course

• Details of the Modules

• Evaluation Scheme

• Practitioner for the Course

 Course Modules

Module Content

1 Investment Banking

2 Hedge Funds

3 Venture Capital
 Investment Banking..

• Business Segments in Investment Banking Business

• Regulation for Investment Banks

• Mergers & Acquisition and Financing

• Concepts of Merger & Acquisition

• Consideration in M&A
• Regulation
• Accounting
• Financing Instruments
• Valuation Approaches, Synergy
• LBO Model
• Practitioner Sessions
 ..Investment Banking

• Asset and Wealth Management

• Structured Products
• Active Portfolio Strategies
• Product Innovations
 Hedge Funds

• Structure and Overview of a Hedge Fund

• Hedge Fund Strategies

• Impact of Hedge fund ownership on Corporations

 Venture Capital

• Analyzing Term sheet

• Concept of Pre and Post Financing Valuation, ownership dilution

 Evaluation Scheme

• Class Participation (10,10) :

• Mid Term Exam (20)

• Project (20): Pitch Book preparation

• End Term (40)

 Session Outline
• Evolution of IB

• Commercial Banks Vs Investment Banks

• Mckinsey Vs Goldman Sachs

• Functions of an Investment Bank

• Inherent Conflicts between various functions

• Status in India

• Roles in IB
 History…

• Emerged in the late 18th and 19th century.

• Organized as private partnerships that pooled large amount of
capital.
• Largely Jewish Players
• Evolution from underwriting function to trading.
 ..History

• Funds were raised in capital surplus nations to fund projects

usually for governments.
• Involved complex task of raising, transferring and applying
across international borders.
• This was called the “High finance”
• Family owned business like Rothschild, Barings, Lehman, etc
 Commercial Banking Vs Investment Banking

Investment Banking Commercial Banking

• Underwrite new stock and
bond issues • Take deposits and make
• Sell newly issued securities loans
to public in the primary
market
• Investors trade previously
issued securities among
themselves in the
secondary markets
 Consulting Vs Investment Banking

Consulting Investment Banking

• Organization Structure
• Power-point presentations
• Career progression into
executive roles at company
• Company Valuation
• Capital Structure
• Financial Modeling
• Career progression into
private equity, hedge fund
Business of Investment Banking
 Front Office

Sales & Trading Group,

comprising of : Clients:
1. Sales of equity, debt ,
By geography By Industry M&A Group, involves: currency, commodity Financial
Institutions,
1. Buy Side C to Institutional players
Mutual
2. Sell Side 2. Trading activity:
h Brokerage
Funds,
3. Joint Ventures Hedge
4. Defenses i 3. Principal Investing Funds, HNIs
n 4. Market Making
e 5. Providing research
Client Joint Work in Case of
reports
Coverage M&A s
Client:
Group Capital Market Group, e
(Relationship comprising of:
Mangers) 1. Equity Capital Market
• IPO, FPO, w Asset Management,
Convertible, Private a involves managing: Client
placement l 1. Mutual Funds
2. Debt Capital Market 2. Hedge Funds
• Bonds
l 3. AIF

Maximize shareholder value of client by: Wealth Management

1. Capital Structure Advisory to retail , HNIs and
2. M&A/restructuring family offices
3. Improve market communication
4. Takeover defenses
 Functions performed by Investment Bank

1. Investment Banking Business: Capital raising and M&A.

2. Sales and Trading business: Provide investing, intermediating and

risk management services to institutional investor clients,
research and non-client related investing activity.

3. Asset Management: Responsible for managing money for

individual and institutional investing clients
 Investment Banking Business: Capital raising and M&A

• Assigned to work either in a product group i.e. Mergers &

Acquisitions and Capital Markets

or

• Client coverage group, organized into industry groups like

healthcare, consumer, industrials, retail, energy, chemicals, etc
 Product Group and Client Coverage Group

Source: Stowell
 Product Group

• Within M&A group bankers specialize by Industry

and

• Within capital market group by either working in Debt capital

market or equity capital market
 Client Coverage Group (Relationship Management)

• Bankers assigned to industry are required to become global experts

in the industry

• Understand the strategic and financing objectives of their assigned

companies.

• Help CEO focus on enhancing shareholder value either through

M&A or through optimal capital structure, which might lead to
raising or paying back debt or equity by the company.

• Are key relationship managers and provide a centralized point of

contact for corporate clients of Investment Bank.
 …Client Coverage group

• Financing or M&A assignment results in a partnership between

the product and client coverage groups.

• Client Coverage groups also introduces other investment banking

services like risk management, hedging advice, credit rating advice
or corporate restructuring advice.

• There are smaller product groups responsible for these additional

activities.

• Some client coverage bankers may be assigned to cover clients

based on geography rather than industry.
 Capital Markets Group

• Bankers who focus on equity or debt capital market.

• Usually operates as a joint venture between the Investment

Banking division and the Trading division.

• In order to raise capital for a client a team comprises of client

coverage banker and a capital markets banker.

• The capital markets bankers raises capital by determining the

pricing, timing, size and other aspects of the issue with the sales
professionals in the trading division.
 Equity/Debt Capital Market Group (ECM/DCM)

• Work in close coordination with client coverage bankers to

determine suitable corporate targets for equity/debt products.

• Involves coordination with sales and trading group to determine

the market demand for the client securities.

• Require to balance competing interest of different group i.e. the

client as well as the investors in the issue.

• Focus on capital structure impact of the issue, credit rating impact

and the mechanism of raising finance.
 Merger & Acquisitions Group

• Sell Side transactions: involve the sale or merger of an entire

company or disposition of a division (or assets) of a company.

• Buy Side transactions: involve the purchase of an entire

company or a division (or assets)

• Restructuring: involve either carving out business from a

company or change a company’s capital structure or a sell side
transaction.

• Hostile acquisition defense advisory services

 Trading
Responsible for:

• Investment related transactions with institutional investors

• Proprietary positions in various instruments

• Market making and clearing on exchanges

• Principal Investments made directly or through managed funds

 Asset Management

• Offers different asset classes as investments to individuals as well

as institutions.

• Offered in the form of mutual funds, private investment funds or

separately managed accounts

• Revenues are earned based on fees that are paid by investors as a

percentage of assets under management (AUM).

• Wealth management involves investment advisory to investors.

Investment Banking: A global perspective using
numbers
 Disruption of Investment Banking
IPO:

• Firms like Spotify, Slack chose to go for direct listing rather than use the services of Investment Bankers. Airbnb was
expected to use the same route however it opted for the traditional IPO route due to disruption on account of covid
pandemic.

• Electing not to go public at all since funds are available from Venture Capitalists

• Going for Initial Coin Offerings: Companies issue their own tokens which may be exchanged for future products or services
of the company. These are fungible as well as tradable. No equity is given but just a cryptographic token whose value could
rise in future.

M&A

• Large firms choosing to go ahead on their own: Apple’s acquisition of Beats, Comcast’s acquisition of DreamWorks,
Facebook’s acquisition of WhatsApp, and Oracle’s acquisition of Micros Systems were all done without an investment
bank’s involvement.

• Threats from Boutique Banks

• Axial Network Inc: Online tool where buyer/lenders meet sellers/borrowers. (https://www.axial.net/)
Asset Management:

• Money management firms like Blackrock, Vanguard, Fidelity and State Street saw AUM from from 7Tn to 16Tn between
2007 to 2017 while AUM of top 10 Investment Banks declined by 6%.

• Money management firms not burdened by IB regulations (IB need to carry more capital based on the risk taken) and also
charge less fees.

• Personal Finance Apps and Robo Advisors (Betterment, Wealthfront, etc)

Sales & Trading:

• Unbundling of research cost from trading cost (as per MIFID II) is leading to cut on jobs on the sell side research. This was
a tool to attract order flow (trades from customer).

• Volcker Rule
 Investment Banking In India
• Merchant Banking services started by foreign banks, namely National Grindlays in 1967
followed by Citi Bank in 1970.

• Merchant Banking services was offered along with other traditional banking services.

• SBI was first Indian bank to set up merchant banking division in 1972.

• Later, the ICICI set up its merchant banking division in 1973.

• It was followed by other commercial banks like Canara Bank, Bank of Baroda, Bank Of
India, Syndicate Bank, Central Bank Of India, PNB, UCO Bank etc.
Investment Banking Career
 Business areas in Investment Banks

• Investment Banking: M&A/Financing

• Trading and sales:

• Wealth management, Asset Management and Research

• Principal Investments

• Operations and Finance

 Investment Banking Positions

• Analyst

• Associate

• Vice-President

• Managing Director
 Analyst

• Usually a undergraduate. However in India MBAs are hired for this

position as well.

• Required to be good with excel, accounting, economics and

finance

• Run analytical models, gather and analyze information so that it

can be incorporated in a presentation.

• Develop presentation for associates, VPs and MDs.

• Work related to Financing or M&A

• 80 to 100hours per week. Need to work many times during

weekends as well
 Associates

• Usually MBAs and many times Analyst with more than three years
of work experience are recruited as Associates.

• Skilled in valuation, security analysis, derivatives, Merger &

Acquisitions, tax planning and restructuring.

• Create presentation, develop financial models and supervise the

work of analyst.

• May be responsible for communicating with client as well as

executing the transaction.

• Long work hours

 Vice-President

• Associates with more than 4 years of work experience.

• Manage a team of Associates and Analysts.

• Managing most of the deal and communicating with the client

• New Business development

• Communication with different banking teams and other divisions

within the firm.

• Mobilize resources within the firm

• Manage 5 to 10 projects at a time

 Managing Director

• VPs with more than 4 to 10 years of work experience .

• Manage VPs, Associates and Analysts.

• New business development

• Managing client relationships

• Access the firm’s senior management to build client relationships

• Access internal and external resources related to tax, legal and

accounting.

• Resource allocation

• Determine compensation levels, recruitment and training.