I recently did a survey among high school commerce students. I asked them to tick the careers they have heard of or know about. The most popular answers were CA, Investment Banking, and Corporate Banking. But when I asked them for an explanation about what people actually do in those roles, they said "idk."
Today let us understand what an Investment Banker (IB) actually does.
The most common misconceptions that students have is that they think that investment banks are banks that make investments. IBs are neither banks nor they invest. They can invest but then that will be called their investment wing, not the core work.
They are called banks, not because they take deposits and lend money, they are called banks because they connect people. Think of a blood bank, it connects the donor and the patient and keep reserves for emergency. IBs connect those who want money and those who have money.
And the word investment comes because they help in analysing investments and making decisions.
Remember one thing that once an associate from Goldman Sachs (one of the biggest IBs in the world) once told me in the backstage of a seminar- “The biggest asset of an Investment Bank or any bank as a matter of fact is their reputation. And IBs take it VERY VERY seriously. They go extremes to maintain that flawless reputation.”
And he was very true. Whenever an investment bank gets a hit in their reputation, the market reacts to it sharply. We are not going into details, but if you wish to have a feeling of the market and IB, you should watch- The Big Short (2015)- a movie made on 2008 financial crisis.
First rule of IB — you make lots and lots of money.
Second rule of IB — don't forget the first rule, and hence it's extremely hard to get into.
Third rule of IB — you age 5 years with every year you work at an IB firm, and your partner is probably cheating on you. Not confirmed, but statistically plausible.
Now, what the heck do they actually do?
To answer that, let me ask YOU a question-
Do you know that Reliance bought Campa Cola? Or that Facebook once bought WhatsApp and Instagram? Or that Google once bought YouTube?
How did they know they were paying the right price? If they paid more, the buying company would have lost millions or billions. If they paid less, the founders who built those businesses from scratch would have lost millions or billions.
So how do they ensure they are paying the right price?
The act of buying and selling businesses is called Mergers and Acquisitions (M&A), and IBs do the job of determining the price for that. They get a cut — typically 1-2% — of the entire transaction amount. On a ₹10,000 crore deal, that's ₹100-200 crore. For the firm. Not for you. You're still on Excel at 2 AM.
Apart from M&A, they help companies go public through something called an IPO (Initial Public Offering) — interesting stuff, you should read more about it.
In short, they work to execute DEALS. The core work is to value a company, assess its future potential, and determine a fair price for it.
That's the core idea, but the work feels very different at each level. The hierarchy from bottom to top:
Intern — You are the cup bearer. Chai, formatting, and quiet suffering.
Analyst — You have freshly graduated from a premier B-school or cleared CA Finals with a rank and now you stare at Excel and PowerPoint for 100 hours a week. A single font error in the presentation and your seniors will ruin your entire Tuesday. But you earn insane money compared to your peers, so you cry in a good car.
Associate — You now manage analysts under you, with higher salary and higher responsibility. If your junior makes a mistake, it's somehow still your problem. Welcome to management.
VP — Before this level, you could only see one piece of a deal. Now you can see the whole thing and execute it end to end. Higher salary, higher responsibility, and finally a title that sounds impressive at weddings.
Managing Director / Partner — You no longer do the detail work. You shake hands. Your biggest responsibility is bringing in clients and maintaining relationships. You have the most expensive club memberships in the country, you close deals on golf courses, and your Excel days are a distant, traumatic memory. Highest responsibility, highest pay — and not just salary. You get a cut of the deal itself.
The investment banking firms are also broadly of three types- Bulge bracket firms (big international firms), domestic firms (big Indian firms) and boutique firms (small firms). When I am writing the post, I am just keeping bulge bracket and tip tier domestic firms in my mind.
There is a lot more to know about IB, but for where you are right now, this is enough to make you dangerous at a dinner table.
Go impress someone. Or just go study. Both are valid.
Send me "POLAR" if you read the full thing.
This week’s YouTube recommendation is related to this week’s post.
This is the Issue #2 at ABS. Visit abs.gourab.net for the previous issues. I am Gourab. Signing off till next weekend.