Investment Banker

Investment bankers have long been an important piece of the global financial system. An investment banker is a licensed financial professional that assists individuals, partnerships, corporations, governments and the like to raise capital and/or sell or buy assets (including companies) through, in part, the issuance of securities. An investment banker is typically a member of an investment bank, which may also provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities. An investment banker who provides investment banking services in the United States is licensed and is subject to Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation. Investment bankers use a broker-dealer, which is an entity licensed by the SEC and registered with FINRA, to address, among other things, compliance oversight and to hold their license.

When a group of investment bankers work together, they create an investment bank. Like other entities, investment banks come in different sizes and capabilities. While a larger investment bank may have multiple industry and product coverage groups, boutique (typically smaller) investment banks tend to specialize in one or a few industries, product types and geographies. Typical product coverage groups include mergers and acquisitions, leveraged finance, public finance, private finance (venture, lower middle market, middle market), asset finance and leasing, structured finance, restructuring and bankruptcy, equity and high-grade debt.

What You Need To Know

The selection of an investment bank with the appropriate specialization is critical to achieving your objectives. For small and medium sized companies, the below factors should be evaluated when selecting an investment banker and/or investment bank:

Type of Transaction

Ready for Transaction?
Companies must be well prepared and have attained a degree of institutionalization to complete a transaction. Company departments including accounting, HR, legal, sales, marketing and operations must have documented policies and processes, as well as historical information. Further, the quality of company earnings and, in many cases, growth prospects must be solid. If these foundational elements are not present or the current value of the company is not acceptable then it may be premature to work with an investment banker. In such case, the company should consider working with an exit planner or business growth consultant.

Securities Transactions
Investment bankers are licensed with the SEC and FINRA to assist clients in completing securities transactions. If the desired transaction does not involve securities then you may use other professionals such as business brokers, commercial bankers, etc. You should consult a securities attorney to determine whether the desired transaction involves securities.

Right Specialization

Product Type
Your company and the desired transaction need to align with the proven capabilities of the investment bank. There are two primary questions in this section:

  • In what segment of the market is your company? There are two general segments – public and private. Within each segment there are many subsegments including pre-revenue, pre-profitable, lower middle market, middle market, micro cap, small cap, and mid cap. Each of these segments require deep experience and highly specialized capabilities.
  • What is the desired type of transaction? Does the company need to raise debt and/or equity capital, make an acquisition, sell itself or a part of itself, reorganize or declare bankruptcy, refinance a senior line, refinance junior term note, complete an IPO, Secondary, Shelf Offering, PIPE, etc.

Industry Coverage
Investment bankers will often specialize in a few industries. The benefit of specialization are numerous including understanding industry specific drivers and dynamics, senior level relationships with industry participants and knowledge of financial investor interest and appetite.

Senior Executive Attention and Resources

If your choice is largely based on the qualifications of a particular investment banker, make sure to confirm your will receive adequate involvement by that investment banker versus an associate or other investment banker.

Process, Responsibilities, Deliverables

Undertaking an important transaction involving an investment bank is an arduous process. While each investment bank develops its own processes, a investment banking engagement typically includes the following steps and process:

Traditional investment banking process begins with comprehensive analysis and planning around a securities offering. Typically, the process includes several steps. The first step is to formulate a defensible growth and operating assumptions. This is accomplished by preparing a comprehensive multi-year financial projections including sales and marketing, human resources, research and development and capital expenditures plans. The next step involves developing multiple valuations based on a variety of theories such as an income approach, a comparable approach and an asset approach. The third step is typically to examine internal rates of returns on the many different types of securities that can be used to appropriately capitalize the company. That is followed by determining the quantity, type and price of the securities to be sold to investors, and finally creating an ultimate “Marketable Deal Structure” (“Deal”) that can be used to develop a successful securities offering.

Preparation of Confidential Investor Presentation and List of Prospective Investors
Once the Investment banker has created a Deal for a given securities offering, the banker will prepare, with significant client involvement and ultimately approval, a confidential investor presentation (“CIP”) for prospective investors. A CIP is sometimes referred to as the “book” in the industry. The CIP typically contains: 1. Detailed analysis of the marketplace including competitive overview, positioning and pricing; 2. Overview of the client’s sustainable competitive advantages and strategic growth initiatives; 3. Overview of the client’s challenges and areas for strengthening 4. Overview of key management and experience; 5. Presentation and analysis of historical and projected client financials; 6. Discussion of client’s capital structure, and; 6. Discussion of proposed financing.

Develop List of Prospective Investors
The investment banker will prepare a list of potential investors / buyers / sellers (“Prospects”). The investment banker will collect target Prospects from a variety of sources including 1. Internal databases; 2. External information service providers such as CapIQ, Pitchbook, BigDough; 3. Market research, and; 4. Other investment bankers and industry participants. For many segments of the investment banking market, the universe of Prospects is highly fragmented and constantly evolving. There are approximately 10,000 institutional investment capital groups (Venture, Private Equity and Hedge Funds), over 300,000 medium and large-sized, private and public companies and tens of thousands of high net individuals, investment clubs, family offices and equity sponsors in the United States. The investment banker’s challenge is to identify from this large universe Prospects that are most appropriate for the investment opportunity and the client’s objectives. Target Prospects typically possess a unique combination of financial capability, synergistic value with the client’s business, time-table alignment and willingness to largely meet or exceed the client’s market-based valuation expectations in respect to both price and terms.

Marketing of Investment Opportunity
In this stage of the transaction, the investment banker will develop and send to Prospects an executive summary (referred to in the industry as the “Teaser”) of the investment opportunity. The executive summary typically contains no confidential information about the company. A purpose of the executive summary is to elicit preliminary interest from the Prospects and, when properly qualified, to lead to the sending of the CIP after the execution of the confidentiality agreement. Following the delivery of the CIP, the investment bankers will further qualify Prospects to cull the list to a limited number of client management presentations.

Management Presentations
In this stage of the transaction, the investment banker will schedule a limited number of management presentations to highly qualified Prospects. The investment banker will draft the management presentation, will coach management through practice meetings and will anticipate questions and issues. Following the management presentations, the investment bankers will confirm interest and a broad range of pricing from the remaining Prospects.