Click Here - Investment banking products and services

Investment banking products & services

1. Equity & debts capital market (ECM & DCM)
2. Advisory
3. Trading & brokerage
4. Asset management  

1. Capital market - > company utilizes this service to meet their financial obligations so they go public through ECM & DCM.

 

ECM – EQUITY CAPITAL MARKET

 IPO – Company which intends to expand its business operation and looking for additional fund to that, will go for selling its shares to the general public in the form initial public offering.

Firms shares is sold to multiple investors resulting in losing most of the ownership.

Where BOD has the right to elect the CEO of the firms since the majority shares lays in BOD hands. And there is lot of risk factor and legal factors to be considered before going to list the IPO. So here comes the INVESTMENT BANKER who plays a key role in advising the firm.

1. When to go public
2. How to attract the investor
3. Conduct meetings b/w company management & investors
4. Book building that’s pricing the IPO
5. Price stabilization

 Types of IPO

1. Retail investors -> private individuals, who bid in the IPO listing to get the shares with less income with minimum returns.
2. Institutional investors ->specialized investors with more knowledge such as Mutual funds, pension funds and insurance companies. Who invest very high to gain more returns.
3. Hedge funds – who looking to profit from underpriced or overpriced securities to make profit from investment.

 

	RETAIL	INSTITUTIONAL	HEDGEFUNDS
INVESTMENT PERIOD	LONG	LONG	SHORT
RETURN	AVG	AVG	HIGH
RISK	LOW	LOW	HIGH

 

Type of Investor preferred by investment banking firms.

1. Retail investors -> who hold the stock for long so IB prefer retail investors
2. Institutional investors -> who hold the stock for long so IB prefer retail investors.
3. Hedge funds -> likely to sell the shares after IPO, so hedge funds investor are not preferred. 

“Book building is how INVESTMENT BANKERS determine the IPO share price. They collect bids from institutional investors, to establish the optimal price. However, this process carries the risk of setting the price too high or too low, impacting investor interest and market perception”

        IPO allocation

1. Timing of IPO application submitted
2. Qty of shares quoted
3. Previous IPO track record.

IPO fees distribution

1. Underwriting fee – 20%
2. Management fee – 20%
3. Selling fee – 60%

Seasoned Equity offering - Existing company going for additional IPO, less prep work, pricing & admin prep done. One the investors is sorted out; the investment banking firms undergo the under writing of the shares to sell for the investor.

Stock exchanges – 2^nd market where listed shares or bonds traded on market, it has good transparency, liquidity and maintains all the compliance.

 

DCM – DEBTS CAPITAL MARKET

BOND offering is similar to ECM also, borrowing the money and paying the interest against the premium throughout the bond period.

1. To meet short term requirement
2. Easier to price the bond by credit rating agencies
3. Ease of finding investor since the return is guaranteed

Syndicated loans – loan provided by pooling from different banks where investment banking plays the middleman between the investors and borrower with same terms and condition with one agreement.

1. Reasons to issue syndicated loans
2. Diversification
3. Fee generation
4. Globalization

 Types of bonds in investment banking firm

1. Fixed rate bond 
2. Floating rate bond
3. Equity related bonds – debt security, which is convertible into equity
4. Asset backed securities-is collateralized by an underlying pool of assets—usually ones that generate a cash flow from debt, such as loans, leases, credit card balances.

Why issue bonds?

1. Bonds interest rate is lower when compared to bank business loan.
2. Less restrictions
3. Bonds is not for short working capital
4. Easier to price the bond then equity.
5. Since credit rating agencies rate the bond valuation.
6. Bond listing only takes 25-35 days.

Bond process  

Hire advisor -> assemble syndicate banks-> hire credit rating agencies -> contact investors -> book building -> underwrite and sell -> stabilization periodVast investors. 

2. Advisory – M&A and restructuring

M&A deals are the most profitable business which earns massive commission and fees can be charged for the advisory services rendered by the investment bankers.

 

1.     Parties involved
2.     Buyer company
3.     Target company

 Why the company need to acquire or merge the business ?

-         Acquiring the Existing business is much cheaper than est the new business

-         Entering into new market as new company is far better than merging with existing company to mitigate the potential risk.

 “Investment banker act has advisory services for the firm looking for M&A deals, since they have lot of connection when compared to the company owned advisory”

 

Buy-side IB Strategic advice Target valuation (pricing for buying) Synergy estimation (success rate)

Sell-side IB Finds bidder Sales process PREP Business valuation Minimum bidding price Co-ordinates sales process Work with advisors and bidders

 “Crucial factor involving the Investment banker in M&A deals to determine the “PRICING” strategy”

 

Restructuring advisory – Investment banker provide the restructuring advisory or recovery business plan in case of the firm is being distressed to pay of his debts or bankrupt.

Operating difficulties

Financial issues- interest may be high

 “investment banker negotiates with lenders to increase the liquidity position of the firm to regain the business operation”

 

 3.  Trading and brokerage

Trading - Investment bank makes money by purchasing stock of the particular companies and when it appreciates / depreciate, they make money or loss money similar the investor in the stock exchange investment banking firm also do the trading activity.

 

Brokerage -> it’s the fees charged by the broker or middlemen for trading the stock by using their platform.

 brokerage markup - The difference between the market price of a security personally held by a broker-dealer and the price paid by a customer

 “Price paid by investor – price of the security acquires = brokerage markup”

 ***1/3^rd of the revenue is gained by trading and brokerage fees for the investment banking firm”

Proprietary trading - occurs when a financial institution trades financial instruments using its own money rather than client funds.

1.     Research dept provide the accurate stock investment advice.
2.     Market pulse is predicted for investment
3.     Market advantage

Market making – investment banker player a crucial role in boosting the sales of the illiquid securities. They buy the shares and sell it to the investor when its placed for buy orders the difference b/w the buy order and sell order is what the profit it earns also known as bid-ask spread.

4. Asset management companies- investment bankers manages the money on behalf of the institutions to build and increase the wealth over time.

“HNWI (high net worth individual) or organization approach the asset management companies to increase their wealth”

The AMC invest the funds in more diversified funds to overlap or mitigate the risk factor over the period on the investment made.

AMC services

1. Understand the requirement of investment
2. Investment strategy
3. Plan implementation
4. Monitoring

Roles of AMCs in investment banking firms or the job profile

1.  Sales – Est client relationship by understanding the needs Portfolio managers.
2.  To make investment decisions based on the needs of investors
3. Research department - investment insights.