Investment Banking Explained

Hallmarks of Investment Banking Success

Successful investment banking relies heavily on the ability to respond instantly to a changing environment, and to influence those changes as best as possible by adapting proven techniques or inventing and experimenting with new ones.

In essence, ideas and innovations drive the investment banker.

The investment banker must not only move fast or be creative, he/ she must possess the skills and knowledge to introduce and manage new products or unfamiliar business lines at high risk. (See Instruments of Intrepid Investment Banking)

Here, market intelligence, careful planning of customer needs, tailored product structuring, and product timing with flexible implementation are necessary ingredients to success.

This is why investment bankers are also referred to as financial engineers.

The professional staff in a successful investment-banking house possesses a wide range of expertise, and exercise creative and entrepreneurial freedom. The successful investment banker knows that he/she cannot be all things to all people. Instead the staying power lies in being all things to some people -building on the right products, aiming at the right markets, choosing the right strategy, banking on the right clientele.

Instruments of Intrepid Investment Banking

Resourceful investment bankers have an arsenal of financial products and instruments designed to access new sources of funds, cultivate old ones and link both suppliers and consumers of capital through complex financing and advisory services.

Because most product life-cycles tend to be short and easily imitated, good investment bankers are quick to invent new products.

Some of the more significant product areas:

• Linking corporate finance with securities trading, including financial techniques that incorporate futures and options.
• Linking or acting as conduits (brokers) between entrepreneurs and investors, such as providing financing, and venture capital, or back-up letters of credit.
• Originating, underwriting and merchandising newly-issued and secondary securities, including financial and advisory services to corporations and institutional investors (e.g. governments). In Malaysia, merchant banks come closest to conducting such activities.
• Designing and financing acquisitions and mergers. Appraising companies and deciding on fair basis for share exchange, including the legal and tax aspects of mergers. Other acquisition activities include arbitrage deals and simultaneously acting as both agent and investor (principal) in the acquisition.
• Private (direct) placement of debt and equity securities by financing placed directly with large institutional investors rather than via underwriting.
• Making private placements, sold without underwriters, without listing, and without circulars or other documentation, but which are offered to prospective purchasers and dealers.
• Developing cross-border businesses. For instance, identifying Asian acquisition candidates for US companies and vice-versa. Or tailoring and marketing foreign sales of Asian securities or vice-versa.
• Raising or investing money across national boundaries. One example: Asian Bond underwriting for US consumers. Another is the issuing bond payable in a number of currencies with their value maintained in relation to gold, like the European unit account.
• Financing and managing venture capital.
• Swapping currency and interest-rate agreements with global corporations having long-term forex and interest rate exposure.
• Linking together parties for parallel or triangular financing. For example, a US firm with excel dollar funds is short of pound sterling funds to finance its UK subsidiary.
• Similarly, another UK-based firm faces dollar fund shortages with its US branch. As investment banker brings these firms together, so they may lend funds to each other's subsidiaries and finance the respective currency shortages.

(Corporate World October 1995)