Investment Banking

History

Investment banking, as an industry, has been around since the beginning of commercial business. During the boom years of the 1920s, large banks such as JP Morgan generated strong profits by providing both commercial and investment banking services to clients. However, the Great Depression, caused by the stock market crash in 1929, triggered the collapse of the banking system and ultimately led to the introduction of legislation, including the Glass Steagall Act in 1933, that would separate commercial banks from investment banks. For example, JP Morgan became a commercial bank and spun out its investment banking division into an investment bank called Morgan Stanley. “Chinese walls” were also introduced in investment banks in order to separate the investment banking business and brokerage services (sales and trading).

In the 1970s, sales commissions on trading equities, which were fixed, became competitive; margins were reduced. This led many firms that specialized in brokerage services to either go out of business or become part of the larger investment banks. In the 1980s, investment banks also began to develop more sophisticated trading instruments, including junk bonds, collateralized debt and mortgage-backed securities, which provided high yields for investors and more revenue for the banks. Investment banking’s growth and dynamism in the 1980s led to a corresponding increase in MBA students seeking careers in investment banking.

Investment banking was a very profitable business through to the 1990s, with plenty of mergers and acquisitions activity and IPOs, as well as significant revenue streams from sales and trading activities. It also became a more popular choice for top-tier MBA graduates. After rebounding from the 2001-02 recession, investment banks boomed again in the mid-2000s by creating complex financial products to help finance the growth in securitization around the real estate sector.

The 2008 global financial crisis, which originally began with the “credit crunch” in the summer of 2007 and spiraled into a dramatic series of bank failures in the fall of 2008, has altered the face of the industry.

Soon after Bank of America took over Merrill Lynch in spring 2008, Bear Stearns collapsed. In September 2008, Lehman Brothers filed for bankruptcy after suffering heavy losses in mortgage-backed securities and collateral debt obligations due to the slowdown in the U.S. real estate market. The remaining two bulge bracket investment banks at the time, Goldman Sachs and Morgan Stanley, became bank holding companies as a defensive measure in order to gain greater access to capital and government bailouts.

Many experts believe the economic crisis was related in part to the deregulation of the banking industry over the previous two decades. The Glass-Steagall Act, a response to bank failures during the Great Depression, was implemented to segregate the activities of investment banks and commercial banks: Investment banks were permitted to engage in dynamic capital market activities but could not expect a government bailout if they were to fail. In contrast, the government, via the FDIC, agreed to insure the commercial banks as long as they kept their activities confined to staid activities like accepting deposits and making commercial loans.

The 1999 repeal of Glass-Steagall led to a wave of consolidation in the banking industry and the formation of large “one-stop shop” banks like Citigroup. The assumption was that these banks would be better able to serve global corporations while diversifying their financial risk. However, the 2008 financial crisis suggests that these banks had not fully hedged their risk yet were now “too big to fail” and thus needed government bailouts. Since some banks are now indeed too big to fail, governments have proposed re-regulating aspects of the financial services industry to reduce the chances of further taxpayer bailouts.

Though Lehman Brothers, Merrill Lynch and Bear Stearns—formerly leading recruiters of MBA graduates,—have all disappeared, firms such as Goldman Sachs, J.P. Morgan Chase, Bank of America Merrill Lynch, Barclays, Citigroup and Credit Suisse are still hiring MBA students for full-time and internship positions in finance. While the on-campus presence of these firms had diminished in 2009, it has since bounced back to reach some of the highest levels since the 2008 financial crisis.

Firms & Roles

Investment banking is a global industry with major hubs in the financial centers of New York City, London, Amsterdam, Frankfurt and Tokyo.

Within a bank, an investment banker may work in either an industry group or product group. Industry groups focus on a specific industry, such as financial services, healthcare or consumer products, while product groups include mergers and acquisitions, debt and structured finance. Investment bankers’ clients vary depending on their industry or product group within the bank.

Investment banks vary in size and function. The largest firms—those that place the most securities in various transactions—have traditionally been known as the “bulge bracket.” This is because in financial industry advertisements that notify the public of recent deals or financial transactions, these top firms’ names are printed first and in the largest font, making them appear to “bulge” out. Bulge bracket firms engage in a full range of banking activities. The current bulge bracket banks are Goldman Sachs, JP Morgan Chase, Morgan Stanley, Bank of America Merrill Lynch, Barclays, UBS, Credit Suisse and Deutsche Bank. Smaller firms, called boutique firms, usually focus on a particular industry or function and include firms like Evercore, Lazard and Moelis.

Assessing Fit

In assessing whether a particular investment bank is a good fit for a candidate, it is important for candidates to understand the types of transactions that the company works on and to gain a feel for the company’s culture. It is also important to understand how a bank organizes its industry and product groups and what type of training program it offers. The size and structure of industry groups varies from bank to bank, so a candidate interested in a particular industry should research the opportunities available within each target firm.

Working for a large bank has advantages, such as greater name recognition, strong training programs, a greater breadth of career options and the opportunity to work on transactions that might span multiple industries. Working for a smaller bank, however, carries its own benefits. In a smaller firm, an investment banker often has the opportunity to take on leadership roles early in his or her career and may also participate in client interactions earlier on. For example, an associate working at a boutique bank that focuses on real estate financing will probably work solely on real estate transactions but is likely to gain greater responsibilities early in his or her tenure.

The training programs at investment banks also vary widely. Small firms may offer one- to two-week training programs focused primarily on modeling, while larger firms may offer extended training programs that last a month or more. These longer training programs often include presentations by industry experts and senior professionals and have a firm-wide orientation component as well as divisional training. Because larger firms have the internal resources to offer such programs and follow-up continuing education courses, they are more likely than smaller firms to hire students with relatively little banking experience. There are also online training courses available to those who feel the need to get up to speed sooner than internal training allows.

Role

MBA graduates from leading business schools are generally hired as associates, while recent college graduate from leading colleges are hired as analysts. The associate position demands the same long hours as the analyst position, but it allows for greater contact with clients.

Associates focus on financial analysis and valuation while also working to develop new business opportunities through cold-calling and pitching to prospective clients.

After serving as an associate for three to four years, an investment banker may receive a promotion to the position of vice president. Vice presidents cultivate client relationships, manage associates and analysts, and execute transactions.

After three to four years as a vice president, investment bankers then transition into the role of associate director, a position typically held for two to five years. The final step in an investment banker’s career progression is usually to become a managing director or partner. Directors oversee all transactions in a particular division or sector, nurturing relationships with client companies and generating business for the bank.

Though many MBA students enter the investment banking industry upon graduation from business school, relatively few continue past the associate role to make a career out of investment banking. This is in part due to the “up-and-out” model that these investment banking firms deploy for their recruiting, the demanding nature of the work and the often competitive work environment.

Up-and-Out Policy: Both investment banks and management consulting firms require their hires to move up in the organization after a pre-determined period of time (two years is standard) or get managed out. Thus there is no opportunity to remain at the entry level beyond the pre-determined period of time. If you are perceived as good enough to one day make partner, you will be asked to progress to the next level. If you are not perceived as good enough, they will ask you to leave. This creates a competitive environment among peers that is not as prevalent in firms that do not adopt such a policy. It also ensures a new incoming cohort each year and keeps the entry positions for those at the beginning of their post-MBA careers.

The rationale for such a policy is to ensure that there is a path moving forward for star performers to make partner and that average performers do not clog the promotion channels for those beneath them who will be the next generation of outstanding performers.

The exit options for those leaving investment banking are very attractive. Many bankers will move to the buy-side by joining private equity firms that focus on venture capital or leveraged buyouts or by joining hedge funds. This pathway is more defined for top analysts, but it is also available to associates who seek out these opportunities. Other associates might move to a business development or corporate finance role within a traditional corporate client. Some will join a tech company in a financial role or start their own firm.

The Work

Associates in investment banking work long hours, including weekend work. A 75-hour work week is not unusual. They are rewarded with relatively high compensation versus their peers in other industries, including management consulting. Their pay is based on a salary, as well as a year-end bonus, which can be significant. An investment banker’s career is subject to volatility, both in terms of the marketplace and as a function of personal performance.

For those working in sales and trading, the day is quite structured: It often begins a few hours before markets open so that they can research the market and place their opening trades. The day ends soon after the trading market ends. For investment bankers, work hours are more dependent the stage of the deals a banker is working on.

In investment banking firms, analysts and associates build financial models for analyzing deals as well as prepare presentations for pitching new clients. The working culture can be competitive. Banks pitch deals to clients, some of which materialize into business revenue, some of which do not. Revenue from deals goes to the bank and to those working on the deal, in the form of a bonus. Investment banking analysts and associates are ranked based on the quality of their work product, with top performers getting staffed on more deals, receiving higher bonuses, and gaining more career opportunities to join a buy-side firm. There is therefore competition, among analysts and associates, to get on the best deals and outperform their peers.

Because investment bankers work on important financial transactions, bankers work very closely with senior management at client firms. Thus there is plenty of opportunity to interface with CEOs and CFOs of client companies.

Bankers tend to work from their office location, rather than travel to clients. Bankers also face ethical challenges that are unique to their industry; the same firm can represent a client on an investment banking deal while also trading its stocks, although regulations have tried to limit opportunities for this behavior.

Both consulting firms and investment banks deal with issues at client firms at the highest level, addressing top problems, which means there is plenty of opportunity to interface with C-level executives.

Hiring of MBAs

What Firms Seek

Investment banking firms seek candidates who demonstrate a disciplined work ethic, attention to detail, a positive attitude, strong analytical skills and a deep knowledge of financial services. In addition, firms aim to hire students who demonstrate initiative and strong communication skills, can process a great deal of information quickly, are a good fit with the company’s culture and are willing to put in long hours. MBA graduates seeking positions in investment banking should expect to work long days, though these hours are typically rewarded with high pay. Bankers continue to enjoy sizeable year-end bonuses, but recent economic ills have led to greater scrutiny of banking industry compensation, which in turn has reduced bonuses somewhat.

Investment bankers often work in teams and engage clients directly, so interpersonal skills are very important in this industry. Typically, a team includes between three and 10 investment bankers, each of whom is expected to contribute an opinion to the larger team’s discussion, allowing the team to generate innovative ideas to present to clients. While quantitative work may be at the heart of an investment banker’s job function, the soft skills required to operate as part of a unit are also essential.

All things equal, investment banks value candidates with prior banking experience because it lowers the risk of the hire—the banks know that this candidate can do the job and understands what it means to work 75-hour weeks. Thus, candidates interested in a banking career who don’t have prior banking experience will have to work harder to gain an offer.

For those who are switching careers into finance and investment banking, landing an internship opportunity in the summer between the first and second year of business school is a very important way to enter the industry. In order to prepare for the internship, students should seek out additional finance classes in their first year to the extent that their curriculum allows. GMAT scores are also generally considered by many of the leading firms.

The Recruiting Process

Leading investment banks have sophisticated recruiting programs for MBA students that generally focus on the top schools, as candidates have already overcome a rigorous admissions process to get into a top school. It is important for those seeking a career in investment banking to examine the career management reports of schools that they are interested in, to see what percentage of the class goes into finance.

On-campus recruiting generally occurs in the fall for second-year students and during winter months for first-year students. This is similar to management consulting, but different from tech recruiting, which has much more of a just-in-time hiring focus.

The leading banking recruiting activities at the very top business schools include company presentations and networking events on campus, designed to entice students to apply for a job within the bank. Banks will also scour the resume books at top schools, identifying high-potential candidates and organizing special recruiting dinners to woo these candidates.

For those candidates seriously interested in landing an investment banking job, it is very important to research firms and cultivate ties with bankers at these target firms. This will often involve hours of time participating in networking events, office visits and phone calls.

Student-led investment banking and finance clubs also support their members in the recruiting process in a variety of ways. These include offering additional resume-writing workshops, compiling resume books, providing interview preparation and mock interviews and hosting additional networking events with alumni from the consulting firms. In fact, the resources provided by student clubs can be as important in the recruiting process as those provided by career management centers at most top schools.

Most interview offers are based on a closed interview process, in which the company selects which students it wants to interview. Students are selected to interview based on their contacts with the company—a result of their networking activities—and a submitted application and a resume. Each bank will have a team that works with each of the schools where it recruits. That team will include a member of human resources, as well as a team captain who will be an alumnus of the MBA program. These teams are responsible for managing the recruiting program at each of the schools.

Interviews generally occur in two rounds, and a candidate may undertake two interviews per round. The interviews will explore fit with the company, as well as credentials, based on prior work experiences and classes taken. The interviews are typically conducted by more senior bankers, rather than human resource professionals.

For candidates seeking a position at an investment bank who don’t have prior banking experience, the summer internship is very important. Banks’ full-time recruits generally fall into three buckets: those who were bankers prior to the MBA, those who interned at the bank and others. The latter category is the smallest, and banks will default to candidates they know and those they know have the appropriate experiences.

Some candidates are not able to get an internship at their preferred bank. While a more difficult prospect, it is still possible to recruit for the preferred bank in the second year. Obviously this path is less secure than the path of those who intern at their preferred bank. It is much harder, and unrealistic, to recruit for a full-time role without any prior banking experience.

A significant number of summer associates will receive a full-time offer. This number will be based on marketplace conditions and the performance of the individual associates. Of course, a number of summer associates decide that investment banking is not for them, so they either quit or stop seeking to land a full-time offer.

Some candidates with banking experience prior to the MBA who plan to return to banking may choose to gain a different experience for their internship. For example, someone who has done banking in the tech sector and plans to return might seek a summer internship at a tech firm. For this group, it remains important to network with the banks during the internship recruiting season in order to remain on their recruiting radar.