Investment banking firms serve as an interface between businesses and investors. The phrase refers to the functions of a financial services firm or a corporate division that includes providing advice on financial transactions to individuals, corporations, and governments. Let's take a closer look at what these firms do.
These functions can be broadly classified into three categories
Trading desks at these firms are often segregated by market. Foreign exchange, or forex, fixed income, equities, and commodities constitute the key segments. Each of these areas can be further subdivided. For instance, fixed income is a broad category that includes everything from treasury bonds to risky, low-grade company bonds, also known as junk bonds.
Amongst the key functions of an investment bank are mergers and acquisitions. Typically, a larger corporation seeks to strengthen a specific aspect of its operations. Some large firms may decide that acquiring another business is a better approach to quickly joining a new market. Strategic buyers are big corporations that buy for this reason. During regular M&A agreements, investment banks are frequently invited in to advise on whether the deal makes sense or to assist in raising the necessary funds.
It is not always the case that the company being considered for buying wants to be acquired. These banks play a crucial role in hostile M&A negotiations as buying a company that doesn't want to be acquired sometimes needs more posturing and cash.
Analysts or strategists working for investment banks’ research divisions prepare these research reports. These reports often, though not always, have actionable recommendations for their clients. The reports generally cover a specific geographical region, industry sector, or asset classes, such as currency, commodity and fixed income.
These firms also perform a variety of related tasks such as underwriting deals: they act as underwriters for their clients' transactions and for arranging capital market financing. These firms profit from selling the shares at a markup for their clients. The underwriting spread is the difference between the purchase price and the markup price.
Raising funds from debt and equity markets is one of the main functions of investment banking firm. These firms perform a central role in launching IPOs for companies preparing to go public.
Private placements, another key function of these firms, involve selling shares or bonds to investors and institutions instead of selling them on the open market. It could be a faster and easier way to raise funds because placements do not need to be registered with the SEBI.
These firms also collaborate with PE/VC firms and assist businesses with alternate funding methods. Moreover, the process of fund-raising also entails determining the appropriate pricing for the business. To determine the pricing, they consider the market conditions, investor experience, and comparable offerings, among other criteria.
Relatively mature companies often have the opportunity to grow rapidly. This is when growth capital comes into play. Businesses use it to enhance profitability and revenues by expanding operations, entering new markets, and, in some cases, acquiring new businesses. The combination of high growth and low risk of investment makes growth capital an appealing choice for these relatively mature businesses. Every day, PE/VC companies receive a large number of fundraising proposals and very often seek recourse to investment banking businesses to sort and analyse them.
Investment banking firms are typically consulted when corporations consider selling their business. Selling a business may be a lengthy and arduous process. Hiring an investment bank to help with the deal might alleviate a part of the burden for you and your management team while also increasing the chances of a successful outcome.
Having access to investment bankers' wide network of cash-rich investors is a big advantage when raising funds to invest in innovative technology, make smart acquisitions, or expand a company's operations. Furthermore, structuring and implementing deals require extensive experience, skill and resources, which these firms supply.