What are the Divisional Breakdowns within Investment Banking?

Investment Banking is a broad term that can cover a range of different financial activities. In this article, we will consider Investment Banking in the more traditional sense of Corporate Finance. However, it can also include similar functions for non-corporate entities such as municipalities and other forms of government.

The clearest distinction within Investment Banking is between the ‘Capital Markets’ groups and the ‘Advisory’ groups. Capital Markets deal with any activities related to capital raising and servicing usually within the primary markets. Advisory groups tend to work with clients to advise and execute a range of transactions including mergers, acquisitions, spin-offs, divestitures, leveraged buyouts, and many more. Furthermore, these product groups can also be broken down by industry or region. M&A, for example, will often have separate coverage for various industrial sectors as well as by geographic coverage.

Key Learning Points

  • Investment banking is a broad term that most often refers to corporate finance activities
  • Capital Markets and Advisory/M&A are the main areas in most investment banks
  • Usually, an IB group would be split into industry and geography sectors to achieve specialist coverage
  • Many other groups such as Financial Sponsors, Private Placements, Leveraged Finance, Real Estate, and Public Sector/Infrastructure groups are either hybrids or sit just outside of the main classifications
  • Most in-house private or merchant banking divisions are kept separate from IB activities

Capital Markets

For clients looking to raise new debt or equity in the primary markets, Capital Markets will be the IB team advising and executing. This division includes the groups such as Equity, Investment Grade Fixed Income, and Credit, as well as Associated Derivatives, and all tend to sit on the markets’ floors of the building. They interact with investment bankers in Advisory, Research, and Sales, and Trading. All of these groups sit on the other side of the ‘wall’ which separates private activities from public-facing groups.

There are other groups that are hybrids of the Capital Markets teams but share enough in common to often sit nearby on the markets’ floors. Leveraged Finance, which includes both Credit and Fixed Income (called High Yield) is considered part of Capital Markets, as is Syndication, which deals primarily with high yield bank loans. Real Estate may have a financing group that sits on the capital markets floors as well since Real Estate financing is incredibly capital intensive.

Advisory Groups

Investment bankers who manage client relationships are the classic advisors. They must be capable of speaking intelligently about all areas of the investment bank to clients. It is also important to have the ability to pull in members from the other product groups (M&A, Capital Markets, etc.) to meet with clients to discuss specialist areas. These advisory groups can be broken down by industry but are typically broken down by geography. Travel can be intense with these groups given the broad generality of topics they cover, so a geographical approach is usually a better way to manage a team.

Mergers & Acquisitions

The M&A focus is typically broken into subgroups by industry in investment banks. Industry knowledge is deemed critical to understanding a client’s specific needs in the first instance. In addition to industry, there may be breakdowns in geographical focus particularly when dealing with international groups. Having a very strong in-depth industry knowledge and a solid familiarity with the (geographic) market in question will give an M&A team a winning edge over competitors. Having a good track record will also speak volumes about the strength of any IB team.

Other Areas of Focus

Financial Sponsors is an Advisory group focused on transactions involving private equity funds, hedge funds, and sovereign wealth groups. These can be traditional LBOs but also recaps, divestitures, and smaller equity investments for both short and long-term gain. Financial Sponsors often work closely with the Leveraged Finance team.

Private Placements handle very specific transactions that do not have to be registered with the SEC. As a result, they are a quasi-capital markets group, while also handling transactions that are quite different in many ways from a public offering.

FIG or Financial Institutions Group is an Advisory group that handles all transactions within the financial institution space. This will mainly be M&A-related but can cover other areas. There is often a separate group of FIG professionals who are solely responsible for examining M&A opportunities for the bank itself (as opposed to client-based work).

Lastly, Public Finance and Infrastructure is a group that handles Advisory and Capital Markets activities for municipalities and other governmental entities.

Merchant Banking

Many IB firms will take a stake in their own deals and transactions as well as deals that originate outside of the firm. When the firm invests its own capital, it is considered Merchant Banking. These groups are often outside the IB umbrella because even though the skill sets are similar, there is no tying this type of business to other transactions. The firm’s capital must be invested entirely apart from any other considerations except whether it will generate the proper return to shareholders.