01 May 2022
In the last century, banking services have been broadly diversified. A Traditional Bank works in a familiar way: attract deposits at a lower rate and sell loans on those deposits at a higher rate. Today there are different types of banks that serve and meet the needs of various customer segments.
- Retail: Offer personal banking services to individuals, such as checking, savings and retirement accounts, consumer loans, mortgages, etc.
- Commercial banks: Attend the needs of corporate, nonprofit and government clients and as a result they have the ability to offer special financing products for businesses.
- Online and neobanks: These are tech-oriented banks that don’t have physical locations, instead they partner with traditional banks to offer their users a better digital experience.
- Credit unions: Financial institutions that are owned and run by its members. These are not-for-profit organisations that accept deposits and offer loans.
- Investment banks: Generate revenue by investing the client/own money (asset & wealth management), as well as advising clients on raising funds (e.g. IPO, sell-side M&A), amongst many other services.
The buy-side vs the sell-side in Investment Banking
Investment banks usually branch into two areas: the buy-side and the sell-side. The buy side are firms that purchase securities (stocks, bonds) with the purpose of maximising returns and managing the funds of its clients, this includes pension funds, hedge funds and mutual funds. Buy-side careers include: portfolio management, wealth management, private equity, venture capital, hedge funds2.
The sell-side are firms that issue, sell and trade securities, these are involved in selling newly issued-shares in an IPO, dealing with new bond issues and facilitating market transactions. The sell-side is responsible for making the financial instruments available for purchase for the buy-side. Sell-side careers include: Investment banking, equity research, sales & trading, commercial and corporate banking2.
The most prestigious investment banks
“Bulge Bracket” is a term commonly used to describe the group consisting of the largest, best established Investment Banks. This is a group of nine financial powerhouses often regarded as the pinnacle of the Industry and as such, are the most sought after companies for graduates hoping to secure a job in IB.
The difference between traditional Investment Banks and PE/M&A boutiques
Bulge-Bracket Investment Banks
At the top, we have bulge bracket investment banks which are international organisations that provide clients a full-range of investment banking services, including sales & trading, all types of financing, asset management services, equity research, M&A, etc. These include names such as JP Morgan, Goldman Sachs and Morgan Stanley. It is well known that the working hours at an investment bank are gruesome and the pressure one must take is intense, however it is rewarding in terms of taking on responsibility, financial benefits and exit opportunities. After completing a graduate programme at an investment bank, you open up many avenues in the financial industry with a strong brand name on your CV, diverse network of professional contacts and strong commercial awareness.
Boutique Banks
Then, we have boutique banks where the main differential is that they do not offer the full spectrum of investment banking services, but specifically focus on one type of financial service. Due to this, analysts at boutique banks often find themselves having a more hands-on experience, interacting with clients and taking more direct responsibility early on. Compensation is still very attractive, although sometimes not as high as what the bulge-bracket investment banks can offer. Needless to say, working for a boutique bank presents unique career development opportunities.
Middle-Market Investment banks
Below this we have middle-market banks which generally work on smaller deals whilst offering a more tailored service. Examples include William Blair & Co., Piper Jaffray, and Robert W. Baird. The deals they work on are generally valued between $10 million and $500 million with main services including merger and acquisition advisory services, debt and equity capital fundraising, and corporate restructuring. They often focus on a particular region where they have a competitive advantage over some of the larger, global investment banks. Other differentials include providing a more personalised service and often specialising in a particular industry or niche advisory service.
Private Equity
Whilst many investment banking analysts stay within the industry after their graduate programmes are complete, 70% list Private Equity as their desired exit choice after 2-3 years in IB.
Private Equity is a form of financing that is away from the public markets and uses strategies such as leveraged buyouts, venture capital, growth capital and mezzanine capital to purchase a controlling interest in companies. PE firms look for undervalued firms where they can synergize their expertise or existing operations to add value to the company that has been invested in and sell the business within 5-10 years. Private equity funds tend to have fewer staff than a traditional investment bank meaning less office politics, greater visibility and increased communal feeling.
Private equity funds rarely hire candidates as graduates, but often target analysts at top investment banks. After working as an analyst at an investment bank, you will be a trained, polished and proven candidate meaning that you will be able to hit the floor running once you enter private equity.
