Saturday, June 23, 2007

Describe what you think the role of an investment bank is.

Describe what you think the role of an investment bank is.
Undergraduate analyst candidates—especially those with little evidence of prior exposure to
financial concepts—are more likely than MBA candidates to address this question. That
said, it’s an important one to get right. Not only should you know what an investment bank
does, but you should know the differences among its various functions. You should make clear,
for example, that you know the difference between investment banking, sales and trading,
equity research, and asset management—at the very least, make sure you know the specific
position for which you are interviewing.
Bad Answer
Candidate: Basically, investment banks are the dealmakers of the financial
world. When you think of the “deal of the year,” or that big IPO or merger on
the front page of the Wall Street Journal, there were investment bankers behind
that. Investment banks are the biggest securities firms in the world; they buy
and sell stocks and bonds, write research on companies for investors, and
provide corporate finance services.
There are two primary problems with this answer. First, the question asks what the role of
the bank is. To say that banks are out “doing deals” doesn’t really explain the advisory
services that they provide. In his enthusiasm to secure a job where he’ll be the analyst on the
deal of the year, the candidate gives a pretty vague, starry-eyed answer about IPOs and the
Wall Street Journal. Second, the candidate gives away that he does not fully understand the
distinction between investment banking, sales and trading, and equity research. These
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functions may reside under the same roof, but they are altogether separate jobs with different
client bases, daily routines, and job descriptions. This question is about the specific role of the
investment banking function within those large, global financial services and securities firms.
On this last point, we should take a moment to emphasize how the various arms of a global
securities firm differ in their job descriptions. Sales and trading professionals, generally speaking,
are in the business of working with institutional investors (their clients) to buy, sell, and
trade public debt and equity securities. They are market makers for the public financial
markets. The sales force explains to clients why they should buy newly issued securities
underwritten by their firm, while traders serve as intermediaries who can help public market
investors trade in and out of investments over time (for a nominal trading commission).
Contrast this role with equity research analysts, who provide independent analysis of publicly
traded companies that includes a forecast for a company’s future stock price and, thus, a
recommendation to investors as to whether the stock looks like a good buy today. Investment
bankers play an altogether different role, and their clients are the companies themselves.
Mediocre Answer
Candidate: Well, investment banks are the CEO’s closest financial advisor.
They advise on topics like M&A or IPO opportunities and are the ones who
execute their clients’ largest, most important deals. A bank is basically a consulting
firm that specializes in finance, and their job is to know everything there is
to know about mergers and financings so that they can step in when a transaction
Nothing about this answer is wrong, per se, but it’s a bit big picture and doesn’t delve into the
actual service provided by the bank. This answer implies that investment banks are financial
think tanks that wait for the phone to ring and then opine with CEOs on weighty matters in
the world of high finance. While CEOs do turn to their bankers for advice on big deals, and
while investment banks are surely hired largely for their expertise on mergers and financings,
this answer is a bit thin on the actual role or service that banks provide in such transactions.
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Good Answer
Candidate: As I understand it, an investment bank works with companies to
structure transactions that will enhance their value. This may include accessing
the capital markets in order to fund growth or expand operations or investing
in another company through a merger or acquisition. I think the value that
investment banks provide their clients is twofold. First, they function as intermediaries
between their clients (who need capital) and the financial markets
(who wish to invest capital). So in a way, investment banks are relationshipbuilders.
Second, and perhaps more important, the investment bankers provide
invaluable advisory services by structuring the transaction in a manner that best
meets the unique needs of its clients. Banks are not only the matchmaker
between the parties involved in a transaction, they are largely the architects of
the deal itself. So if I’m a client who wants to raise money, I would look to my
investment banker not only to introduce me to investors but also to design a
transaction structure that best meets my objectives.
Interviewer: I agree with all that. So what’s your role within the investment
bank? What do you expect to be doing day-to-day?
Obviously, you should tailor your response to the specific position—analyst or associate—for
which you are interviewing. Your answer should convince the interviewer that you have both
realistic expectations for the job, as well as an infectious enthusiasm for the work you’ll be
Candidate: Well, after I completed the analyst training program, I expect I’d be
assigned to one or more transaction teams within my group. On each of those
teams, I would work most closely with the associate on deal generation and
execution. I’d be responsible for collecting and analyzing company- and
industry-specific data relevant to the transactions I was working on and for
building detailed Excel models that forecast the company’s financials in a range
of different financing scenarios. If I were fortunate enough to work on live
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transactions (as opposed to just “pitches” for new deals), I would probably sit
in on organizational meetings and conference calls, where the team would
discuss the strategy and the timeline driving the deal. I’d also hope to participate
in meetings with the company to understand their business model and
strategize on the structure and timing of the transaction with the company’s
management. It’s this part of the job that I’m most looking forward to—really
understanding the company’s strategy and growth objectives, creating financial
models for a transaction that meets their needs, and then “selling” both the
company’s story and the merits of the transaction to potential investors.
Remember, you have two objectives when you’re answering this type of question: You’ve got to
convey realistic job expectations that prove that you’ve done your industry homework, and you
need to communicate a genuine enthusiasm for the role. This candidate weaves the two together
here. He knows what the analyst role entails, and he’s identified the components of the job he
finds most compelling.
Candidate: I’d probably also be expected to pay close attention to all of the
documentation involved with the deal (such as the prospectus and any internal
or external memos). As the junior-most team member, I’d probably be
responsible for a lot of the nuts and bolts of the deal: creating and editing
client presentations (under the supervision of associates), for example, and
coordinating the flow of information internally and externally among a lot of
different people (such as lawyers, accountants, and the other investment banks
involved in the transaction).
This level of detail is just icing on the cake: Without prior banking experience, you probably
wouldn’t be expected to know any of it, but as long as you’re not wildly off base, it doesn’t
hurt to demonstrate that you’re interested enough in the job to have learned a lot about its
specific responsibilities. In particular, this candidate makes it clear he doesn’t have any illfounded
delusions of grandeur regarding his likely role on the deal team. He knows that he
won’t be high on the investment banking food chain, and he’s probably scored points for that.


kinshuk said...

The information is nice, but the text formatting has obviously gone all wrong. Hope it gets sorted out soon.

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reena said...

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