IB1 - Chapter 1 Summary for Intro to Investment Banking PDF

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Chapter 1 Summary for Intro to Investment Banking...

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Investment Banking Financial Systems Overview The goal of a financial system is to connect people that have money with people that Financial Markets Investors

Businesses/Government Financial Intermediaries

Primary Market: share of stock sold for the first time to an investor Secondary Market: any trades between investors 

Investment banks “underwrite” primary market issuances and are considered the “trusted advisor”

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Public bonds are rated to help investors determine potential safety and return(AAA-A-BBB-B-CCC)

Chapter 1: Overview of Investment Banking Investment banking has changed from a low-risk advising and intermediating role to a position of taking a high-risk on their own account and for their client. Glass-Steagall Banking Act of 1933: prohibited depository institutions from operating investment banking busines Gramm-Leach-Bliley Act of 1999: overturned the Glass-Steagull Act 1. To provide for a more stable and countercyclical business model for the banks 2. To allow U.S. banks to better compete with international counterparts Postcrisis Global IB Firms: J.P. Morgan, Bank of America, Citigroup, Credit Suisse, UBS, Deutsche Bank, Barclays, Goldman Sachs, and Morgan Stanley Basic Business within an Investment Banking Firm: 1. An Investment Banking Division that focuses on capital raising and mergers and acquisitions for corporate clients; capital raising for government clients. 2. A Sales and Trading Division that provides investing, intermediating, and riskmanagement services to institutional investor clients, research and participate in non-client related investing activities. 3. An Asset Management Division that is responsible for managing money for individual and institutional investing clients. I. The Investment Banking Division

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A. Responsible for working with corporations that seek to raise capital through public or private capital markets, manage their existing capital through investments, or complete an M&A related transaction. a. Some firms directly invest in corporations through debt or equity securities, or provide loans to clients. B. Aids government entities in raising funds and managing risk C. Employees are called “bankers” a. Product Group (M&A or Capital Markets) i. Focus on specific transaction type 1. Leveraged finance, M&A, restructuring b. Client Coverage Group i. Specific industry 1. Energy, real estate, financials, etc A. Capital Markets Group a. Equity Capital Markets i. Common Stock issuance, convertible security issuance, equity derivatives ii. Bankers must work together with issuers who want to sell at the highest possible price and investors who want to buy at the lowest possible price b. Debt Capital Markets i. Debt financing for corporate and government clients ii. Investment grade (Higher ratings) and noninvestment grade issuers (Lower ratings) iii. Find the balance in price while facilitating communication and providing execution B. M&A Group a. “Sell Side” Transactions i. Sale or merger of an entire company or disposition of a division/asset of a company b. “Buy Side” Transactions i. Purchase of an entire company or division/asset of a company c. Restructuring i. Carve out businesses from a company to enhance shareholder value or dramatically change capital structure to prevent bankruptcy or facilitate a sell side transaction d. Hostile Acquisition Defense Advisory Services Trading Division a. Dodd-Frank Act of 2010 i. Changed areas of proprietary trading and principal investments 1. Regulation of financial markets 2. Consolidation

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3. Consumer Protection b. The division is responsible for: i. Investment related transactions with institutional investors ii. Taking proprietary positions in fixed income and equity products, currencies, commodities, and derivatives iii. Market making and clearing activities on exchanges iv. Principal investments made directly and through managed funds A. Fixed Income, Currencies, and Commodities (FICC) b. Makes markets in and trades government bonds, corporate bonds, mortgage securities, asset-backed securities, currencies, and commodities B. Equities a. Makes markets in and trades equities, equity products, and derivatives b. Executes and clears transactions on global stock, option, and futures exchanges Non-client Related Trading and Investing A. Principal Investing a. Investment banks also invest in securities directly b. Banks can only provide seed investments to funds, their share must decrease to 3% within one year c. Leveraged Buyout (LBO): purchasing a public company using equity provided by investment banks and debt provided through loans or bonds underwritten by them C. Proprietary Trading a. Investment banks also make short term, non-client related investments in securities for their own account Asset Management Division A. Offering equity, fixed income, alternative investments, and money markets investment products and services to individuals and institutions B. Revenues are generated by collecting fees determined as a percentage of assets under management (AUM) C. Investment banks typically invest their own capital alongside the capital of their highest worth individuals and clients...