Investment Banking - How to Become an Investment Banker - Investment Banking University
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Transcript of Investment Banking
Investment BankingInvestment Banking
A Report byA Report by
Raymund SanchezRaymund Sanchez
AgendaAgenda
DefinitionsDefinitions Functions of an Investment BankerFunctions of an Investment Banker Distribution MethodsDistribution Methods Events in a Negotiated SaleEvents in a Negotiated Sale Private PlacementsPrivate Placements ReferencesReferences
DefinitionsDefinitions
Investment Banker:Investment Banker: A financial specialist involved as an intermediary A financial specialist involved as an intermediary
in the merchandising of securities. in the merchandising of securities. Acts as a middleman by facilitating the flow of Acts as a middleman by facilitating the flow of
savings from those economic units that want to savings from those economic units that want to invest to those units that want to raise funds.invest to those units that want to raise funds.
Functions of an Functions of an Investment BankerInvestment Banker
Functions of an Investment BankerFunctions of an Investment Banker
Core BusinessCore Business UnderwritingUnderwriting DistributingDistributing AdvisingAdvising OthersOthers
Back OfficeBack Office OperationsOperations TechnologyTechnology
Middle OfficeMiddle Office Risk ManagementRisk Management Corporate TreasuryCorporate Treasury Financial ControlFinancial Control Corporate StrategyCorporate Strategy ComplianceCompliance
Functions of an Investment BankerFunctions of an Investment Banker
Core Business > UnderwritingCore Business > Underwriting assuming the risk of selling a security issue at a assuming the risk of selling a security issue at a
satisfactory price satisfactory price term borrowed from insurance term borrowed from insurance
Functions of an Investment BankerFunctions of an Investment Banker
Core Business > DistributingCore Business > Distributing selling function of investment banking selling function of investment banking the primary function of an investment bank is the primary function of an investment bank is
buying and selling products. buying and selling products.
Functions of an Investment BankerFunctions of an Investment Banker
Core Business > AdvisingCore Business > Advising providing advise in the issuance & marketing of providing advise in the issuance & marketing of
securities securities research is the division which reviews companies research is the division which reviews companies
and writes reports about their prospects, often with and writes reports about their prospects, often with "buy" or "sell" ratings."buy" or "sell" ratings.
Functions of an Investment BankerFunctions of an Investment Banker
Core Business > OthersCore Business > Others Global transaction banking Global transaction banking Investment management Investment management Merchant banking Merchant banking
Functions of an Investment BankerFunctions of an Investment Banker
Middle Office > Risk Management Middle Office > Risk Management involves analyzing the market and credit risk that involves analyzing the market and credit risk that
traders are taking onto the balance sheet in traders are taking onto the balance sheet in conducting their daily tradesconducting their daily trades
setting limits on the amount of capital that they are setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall a detrimental effect to a desk overall
Functions of an Investment BankerFunctions of an Investment Banker
Middle Office > Corporate TreasuryMiddle Office > Corporate Treasury responsible for an investment bank's funding, responsible for an investment bank's funding,
capital structure management, and liquidity risk capital structure management, and liquidity risk monitoring. monitoring.
Functions of an Investment BankerFunctions of an Investment Banker
Middle Office > Financial ControlMiddle Office > Financial Control tracks and analyzes the capital flows of the firm tracks and analyzes the capital flows of the firm adviser on essential areas such as controlling the adviser on essential areas such as controlling the
firm's global risk exposure and the profitability firm's global risk exposure and the profitability and structure of the firm's various businesses and structure of the firm's various businesses
Functions of an Investment BankerFunctions of an Investment Banker
Middle Office > ComplianceMiddle Office > Compliance responsible for an investment bank's daily responsible for an investment bank's daily
operations' compliance with government operations' compliance with government regulations and internal regulations regulations and internal regulations
Functions of an Investment BankerFunctions of an Investment Banker
Back Office > Operations & TechnologyBack Office > Operations & Technology data-checking trades that have been conducted, data-checking trades that have been conducted,
ensuring that they are not erroneous, and ensuring that they are not erroneous, and transacting the required transfers transacting the required transfers
Distribution ModelsDistribution Models
Distribution ModelsDistribution Models
Negotiated PurchaseNegotiated Purchase Competitive Bid PriceCompetitive Bid Price Commission / Best Efforts BasisCommission / Best Efforts Basis Privileged SubscriptionPrivileged Subscription Direct SaleDirect Sale
Distribution ModelsDistribution Models
Negotiated PurchaseNegotiated Purchase the underwriting firm that needs funds makes the underwriting firm that needs funds makes
contact with an investment banker & contact with an investment banker & deliberations concerning the new issue begin. deliberations concerning the new issue begin.
most prevalent method of distributing securities most prevalent method of distributing securities in the private sectorin the private sector
most profitable technique as far as investment most profitable technique as far as investment bankers are concernedbankers are concerned
Distribution ModelsDistribution Models
Competitive Bid PriceCompetitive Bid Price several underwriting groups bid for the right to several underwriting groups bid for the right to
purchase the new issue from the corporation that is purchase the new issue from the corporation that is raising funds. raising funds.
undue influence of the investment banker over the undue influence of the investment banker over the firm is mitigated & the price received by the firm firm is mitigated & the price received by the firm for each security should be higher for each security should be higher
as far as fund raising is concerned, the benefits as far as fund raising is concerned, the benefits gained from the advisory function of the gained from the advisory function of the investment banker is lost investment banker is lost
Distribution ModelsDistribution Models
Commission / Best Efforts BasisCommission / Best Efforts Basis investment banker acts as an agent rather than as a investment banker acts as an agent rather than as a
principal in the distribution process. principal in the distribution process. typically used for more speculative issues typically used for more speculative issues
Distribution ModelsDistribution Models
Privileged SubscriptionPrivileged Subscription new issue is marketed to a definite & select new issue is marketed to a definite & select
group of investorsgroup of investors 3 target markets involved (1) current stock 3 target markets involved (1) current stock
holders (2) employees (3) customersholders (2) employees (3) customers
Distribution ModelsDistribution Models
Direct SaleDirect Sale the issuing firm sells directly to the public without the issuing firm sells directly to the public without
going through an investment banker in the process going through an investment banker in the process relatively rare relatively rare
Events in a Negotiated Events in a Negotiated SaleSale
Events in a Negotiated SaleEvents in a Negotiated Sale
Selection of an investment bankerSelection of an investment banker Pre-underwriting conferencesPre-underwriting conferences Formation of the underwriting syndicateFormation of the underwriting syndicate Registering of the securitiesRegistering of the securities Formation of the selling groupFormation of the selling group Due diligence meetingDue diligence meeting Price peggingPrice pegging Syndicate terminationSyndicate termination
Events in a Negotiated SaleEvents in a Negotiated Sale
Selection of an investment bankerSelection of an investment banker Pre-underwriting conferencesPre-underwriting conferences
Key Items to be discussed:Key Items to be discussed: Amount of capital to be raisedAmount of capital to be raised Whether capital markets seem to be receptive at the time & Whether capital markets seem to be receptive at the time &
the type of financing instrumentthe type of financing instrument Whether the proposed use of funds appears reasonableWhether the proposed use of funds appears reasonable
Tentative underwriting agreementTentative underwriting agreement Approximate price the investment banker will pay for the Approximate price the investment banker will pay for the
securitiessecurities Upset price (escape mechanism for the benefit of the issuing Upset price (escape mechanism for the benefit of the issuing
firm)firm)
Events in a Negotiated SaleEvents in a Negotiated Sale
Formation of the underwriting syndicateFormation of the underwriting syndicate
syndicate: temporary association of investment bankers formed syndicate: temporary association of investment bankers formed to purchase a security issue from a corporation for subsequent resale, for to purchase a security issue from a corporation for subsequent resale, for a profit to the underwriters.a profit to the underwriters.
purpose of syndicates:purpose of syndicates: The original investment banker could not finance the entire underwriting himselfThe original investment banker could not finance the entire underwriting himself Lowers the risk of loss for a single underwriterLowers the risk of loss for a single underwriter Widens the eventual distribution effortWidens the eventual distribution effort
Events in a Negotiated SaleEvents in a Negotiated Sale
Registering of the securitiesRegistering of the securitiesRegistration statementRegistration statement
Historical facts about the firmHistorical facts about the firm Financial facts about the firmFinancial facts about the firm Administrative facts about the firmAdministrative facts about the firm
Events in a Negotiated SaleEvents in a Negotiated Sale
Formation of the selling groupFormation of the selling group Due diligence meeting: Due diligence meeting: a last chance gathering to get a last chance gathering to get
everything in order before taking the offering publiceverything in order before taking the offering public
Price pegging: Price pegging: placing orders to buy at the agreed upon public placing orders to buy at the agreed upon public
offering price to mitigate downward price movements in the secondary markets offering price to mitigate downward price movements in the secondary markets
Syndicate termination: Syndicate termination: dissolution of the syndicate at the end dissolution of the syndicate at the end
of the contractual agreement of the contractual agreement
Private PlacementsPrivate Placements
Private PlacementsPrivate Placements
Public offeringsPublic offerings :security issuer does not :security issuer does not meet the ultimate investors in the financial meet the ultimate investors in the financial instruments instruments
Private placementsPrivate placements :securities are sold :securities are sold directly to a limited number of institutional directly to a limited number of institutional investorsinvestors
Private PlacementsPrivate Placements
AdvantagesAdvantages SpeedSpeed Reduced floatation costsReduced floatation costs Financing capabilityFinancing capability
DisadvantagesDisadvantages Interest costsInterest costs Restrictive covenantsRestrictive covenants Possibility of future SEC registrationPossibility of future SEC registration
ReferencesReferences
Stanley Block & Geoffrey Hirt, “Foundations Stanley Block & Geoffrey Hirt, “Foundations of Financial Management”, 1994, P430 of Financial Management”, 1994, P430
John Martin, William Petty, Arthur Keown, John Martin, William Petty, Arthur Keown, David Scott, “Basic Financial Management”, David Scott, “Basic Financial Management”, 1979, p512 1979, p512
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