“Investment banking.” If you’re in business, you’ve likely heard these two words uttered countless times. But what does an investment banker actually do?
Whether you read the Wall Street Journal, turn on CNBC, listen to political talk shows, or follow the latest Bitcoin news, investment bankers seem to be everywhere. This raises the question, what does an investment banker actually “do”?
Well, the answer is like the equivocal phrase that college professors often use: “It depends.” Investment banking is a broad term that encompasses a range of transactions:
- It can include capital raising, both debt and equity, into both public and private enterprises.
- It can also include advisory services for transactions, such as mergers, acquisitions, and divestitures.
Within the M&A category, it can cover both buy-side and sell-side advice.
- There’s also the cousin industry of providing private business valuations.
- And you see firms getting into ESOP formational advice.
Did I lose you yet?
- What don’t we do?
Well, what isn’t an investment banker!? That’s a bit easier to explain. The term “bank” is a bit of a misnomer, as investment banks don’t act as depositories and don’t directly lend or invest capital in clients. But you do see traditional banks such as JPMorgan Chase that have direct lending services, investment banking divisions, and even investment arms that blur the lines between these verticals. So commercial banks can in fact own investment banks; it’s just that they don’t offer the same set of services.
- Our niche:
We at Hilliard Lyons touch pretty much all of the traditional investment banking services in some capacity. But, like most firms, we tend to spend much of our time in a specialty. For us, that segment is M&A advisory work. Now, you may ask, isn’t this a valuation newsletter? That is indeed true. We have in-house, credentialed colleagues like Jim and Jackson that can handle valuations for traditional ESOPs, estate planning, gift tax, etc. But there is quite a bit of overlap in valuing a private business and providing M&A advisory services.
Knowing what a private business is worth is a key element of any successful M&A practice. Ultimately, a business is worth what someone will pay you for it. That being said, there’s quite a bit of underlying art and science that can give a business owner a good sense of what the market might bear. Fortunately for us, we can use our experience buying and selling companies as a litmus test for our valuation practice.
- No ‘typical’ day:
Getting back to the actual “doing” of Investment Banking, it is hard to depict a “day in the life,” because each day can be quite different. Given the project-oriented nature of our business, it will depend on where a project is in its lifecycle of a deal. A typical M&A assignment may take six to nine months to complete, so one could be in the middle of marketing, in purchase agreement negotiations, in the initial due diligence phase, in confidential memorandum drafting, and the list goes on. In terms of action items, one could be calling prospective buyers, fielding follow-up questions on a company’s operations, drafting pitch materials for a prospective client, delivering a presentation/fee proposal, having conference calls with management teams, managing an online data room for due diligence, etc. The “doing” requires significant time management skills and the ability to prioritize tasks effectively. Good communication with clients, with co-workers, and with other firm employees is a must.
When it comes to process and getting the deals done, a good investment banker can serve as the quarterback of the team. There’s always going to be a need for quality legal and accounting advice on top of the investment bank, so all of the team members need to be aligned and in sync with the latest information. We at Hilliard Lyons maintain close relationships with a variety of professional firms and recognize the critical role that lawyers and accountants play in getting transactions done.
- Not exactly glamorous: Many people in and outside the business community associate investment banking with big-city glamour, flashy suits, Wolf of Wall Street-esque parties, and excess. This couldn’t be further from the truth in many respects.
- Optimizing capital, time, and ownership on Main Street: The reality is that investment banking provides an essential function in the transfer of business assets to the next generation or ownership group for the company to hopefully thrive and grow. Raising capital provides options for businesses to invest into new product lines, new hires, and new opportunities. Business valuations provide owners with insight into the true value of their fairly illiquid asset. Sure, there were some bad actors during the recession in big cities, but generally, the investment banking industry is focused on serving those “small businesses” with under $100 million in sales that employ people across the country on Main Street. I’ve had the privilege of working on several of these transactions, and nothing is more rewarding than coming back to the business a year or two later to see new customer relationship formed, an expansion to the manufacturing facility occur, or the previous owner able to scale back hours and focus on other interests.
Long story short, investment banking can mean different things to different people. For me, it has been a rewarding journey into the psyche of negotiations, the inner workings of finance, and the long-standing relationships/friendships that can be formed with clients and referral sources. So if you or someone you know ever needs business-owner advice, just reach out and give your friendly neighborhood investment banker a call!
P.S. We don’t charge by the hour!
© 2018 J.J.B. Hilliard, W.L. Lyons, LLC, Member NYSE, FINRA and SIPC. You may not reproduce or distribute any part of this newsletter without Hilliard Lyons’ prior written consent. We believe that the information in this newsletter is reliable, but we do not guarantee its accuracy, and it may be condensed or incomplete. This newsletter is for information purposes only, and is not intended as financial, investment, legal, or consulting advice.