What does an investment bank actually do?Easy

Three things, and only one of them is what most people picture. It sells companies, it sells claims on companies, and it tells people what those are worth.

3 min read · 606 words

An investment bank does not invest your money. That is a different business with a similar name. What it does is stand between two sides of a transaction that would struggle to find each other, and get paid for making the transaction happen.

There are three of those transactions, and almost everything else is a variation on one of them.

One: it sells companies

A company changes owner. Somebody wants to sell, somebody wants to buy, and neither knows what the other will accept. The bank runs the process — who is approached, in what order, on what timetable — and most of the price is made there rather than in any spreadsheet. That is the mergers and acquisitions desk.

The work is not mainly arithmetic. It is deciding which buyers to approach, keeping more than one of them interested for as long as possible, and knowing which conditions in the contract are worth more than a higher headline number.

Two: it raises money for companies

A company needs money it does not have. It can sell part of itself, which means new shares — that is equity capital markets, and an IPO is the first time it does that publicly. Or it can borrow from many lenders at once by issuing a bond, which is debt capital markets.

In both cases the bank's job is to find the price at which enough people will buy. It does that by asking a lot of investors what they would pay, which is a process rather than a calculation.

Three: it lends against the purchase itself

When the buyer is a fund rather than another company, the purchase is mostly funded with borrowed money secured on the company being bought. Arranging that is leveraged finance, and it is where a bid price actually comes from: the largest number the debt will support, minus what the buyer needs to earn.

And when it goes wrong

A company that cannot pay what it owes has to agree something with the people it owes it to. Restructuring is that negotiation, and it is the one part of this list where the outcome decides who owns the company rather than what it costs.

So what is the product?

Advice and distribution. The advice is what to do and how to structure it; the distribution is the list of people who might buy, and the credibility to ring them. A bank with no buyers to call is selling only the first half.

The fee is normally weighted heavily towards completion, which is worth knowing when you read one: an adviser paid mostly on the day it closes has an interest in it closing. That is not a scandal, it is a structure, and the retainer exists to offset a little of it.

What it is not

• It is not a bank you have an account with. That is retail or commercial banking, and in many groups it is a separate legal entity under separate rules.
• It is not asset management. Managing money for investors is a different business, usually separated by rules about what information may pass between them.
• It is not trading, quite. The trading floor buys and sells instruments that already exist and have a price. This half of the site is about transactions that are negotiated once — see the markets side for the other one.

The clearest way to see the difference: on a trading floor a price exists and you decide whether to take it. On a deal there is no price until two sides agree on one, and everything in between is the work.