An investment banking career involves raising equity and debt capital for companies, and is an attractive option for recent university graduates or professionals with a few years of experience. While competition for these positions can be downright ferocious and the hours daunting, the profession remains a highly-lucrative option for young professionals looking to earn high levels of income in addition to executive-level experience. According to GlassDoor.com's October 2012 salary estimates, the average JPMorgan Chase IB associate earns an average salary of $102,063, while Goldman Sachs associates earn $111,952.
Are you the right type of person for this career path? Read on to find out what it takes to get into and succeed in this often stressful world of investment banking.
What Is Investment Banking?
Investment banks provide a myriad of finance-related services, including underwriting, raising capital for companies by issuing equity or debt securities and facilitating mergers. When raising capital for a firm, an investment bank is acting as an intermediary between investors and the issuer. Capital raised can come from private investors (each of whom often has a high net worth), or from pools of capital obtained within the public markets. Capital obtained from public markets is normally through an initial public offering (IPO); however, special purpose acquisition companies (SPACs) are another alternative.
Investment banks also provide merger and acquisition (M&A) services, both on the buy and sell side of a deal. The buy side involves identifying and facilitating the acquisition of a target company, while the sell side involves taking a client company to market at auction and identifying and facilitating the sale to a high bidder or acquirer with a strong strategic fit. Alternatively, investment bankers may also help a company restructure its equity or debt, often to ease financial distress.
Do You Have What It Takes?
There are several core skills required to excel in an investment banking career. These include:
- The ability to provide valuation estimations (and logically back up those calculations)
- Work stamina
- Mental and emotional horsepower
- Personal interaction skills
The field opens its doors to graduates of many degrees, and a mastery of finance and accounting (whether learned through academia or by self study) continues to be a dominant differentiator due to the numerous valuation calculations that must be performed. Analysts working for investment banks perform valuation calculations on the various debt or equity securities being offered. These calculations are important because investors will pay what they perceive to be a fair price for an equity or debt investment, based on expected cash yield sometime in the future. If a security is over- or undervalued, the investment bank (and issuing company) will garner less capital than required. Critical thinking skills are supremely important, as an investment bank's services extend to appraising entire entities for a pending merger, acquisition or corporate restructuring.
Determining Future Cash Flows
Various external and internal factors drive expectations of short and long-term future cash flows going in and out of an organization. In order to do this, a team of analysts working for an investment bank will:
- Study the entire industry
- Conduct competitive analysis
- Assess alternative future business scenarios
- Analyze business models, organizational structure, financial statements, go-forward plans and risk
Analysts will also use a number of metrics to determine qualitative data. These include:
- Computations of cost of equity and cost of debt in order to determine the cost of capital
- A comparison of estimates with actual rates of return
- An evaluation of stock versus asset purchases
- Tax ramifications for acquirers, targets and lenders
Due diligence of an organization necessitates an understanding of an entity's relationships with customers, suppliers and numerous stakeholders in addition to an understanding of business systems such as information technology, procurement, human resources, legal, finance, logistics and operations.
Communication Is Key
Investment bankers need to be effective team players with excellent communication skills in order to avoid disconnects and wasted effort. Investment banks communicate with external parties such as clients, accountants, consultants and lawyers. Furthermore, many client representatives tend to be extremely scrutinizing, well-respected and often short-tempered, and you'll need to know how to deal with them.
Investment bankers with a few years of experience interface at the executive level (e.g., CEOs and CFOs). In this interaction with a client executive - who often has decades of experience in an industry - the investment banker must show and add value to the executive (and the shareholders he represents). Professional skepticism, conveyed by blank (if not hostile) stares, runs rampant. After all, about half of all mergers and acquisitions fail to cushion up a stock price, and clients are aware that investment bankers make money from fees due from services and transactions, not necessarily on post-merger performances.
Not Your Average Nine to Five
Due to the long hours involved, work stamina is required. When deadlines approach for deals, consecutive all nighters are a frequent occurrence.
The late-night hours, client demands and finite number-crunching lead to relatively high attrition and burn-out rates. In many circumstances, analysts will stockpile several bonuses and move on to another career after a few years. The intellectual stimulation and challenging rigors of high-level corporate finance and executive level analyses, however, do provide a context where those who seek to exert themselves can find comfort and satisfaction in a prestigious and lucrative career. The classes of top business schools are dotted with former investment bankers wanting to go back to school to earn master's degrees. The low- to mid-six-figure compensation packages piled up over the years provide ample cash supplies for graduate school. Alternatively, there is an opposing and convincing view that experience counts for more when compared to a graduate degree.
Rising To The Top
It is common for a rising star to specialize in a particular industry, whether it is in real estate, health care, energy, retail, transportation or infrastructure. As an investment banker progresses throughout his or her career and becomes involved in a multitude of projects, he or she becomes able to quickly apply industry norms, ratios, trends, forecasts and typical performance benchmarks.
During the first few years, the analyst/associate conducts financial and operational grunt work. An associate's progression to a principal or director role, however, requires a higher level of responsibility in business development, and the ability to generate revenue for the department or firm. Assuming a supervisory role for a project, and becoming the primary contact for clients, along with training and recruiting, are appropriate adjuncts to business development and revenue generation.
Differentiating Yourself From The Crowd
Investment banks seek high academic achievement, involvement in campus leadership positions, stellar communication skills and internships at well-regarded companies and nonprofit organizations. The applicant needs to be able to convey raw mental and emotional horsepower, a solid sense of direction in terms of goals and objectives and credible step-by-step supporting actions that have been taken to arrive at those objectives.
Students and young professionals who possess broader or non-business academic curricula, or who worked at nonprofits, traveled overseas, volunteered and who display a burning curiosity and desire to explore this field, should resolve to apply and reapply for investment banking roles. There is a minimum requirement for a basic understanding of finance for your chances to be enhanced. But as long as the applicant conveys authenticity in his or her endeavors and possesses the passion and determination to explore investment banking as a career, an opportunity will often open up. Do not underestimate people's respect and admiration for someone who follows his or her conscience and dreams. Remind yourself that many of the world's most successful business leaders did not study finance or accounting - if they even received a college diploma at all.
The Bottom Line
Applicants with a true passion for finance, market and organizational analysis should apply and reapply for investment banking roles, conduct self-study on finance, business, management and leadership. They should also secure impressive standardized test scores, differentiate themselves by volunteering or leading groups, and network with current or former investment bankers. If you're an energetic professional with strong valuation skills and the ability to interact with others, this challenging and rewarding job may be just what you're looking for.