Lecture 2 - Businesses of IB - Unpacking the Investment Bank

What are the 4 investment bank core lines?

• Advisory

• Equity Capital Markets (ECM)

• Debt Capital Markets (DCM)

• Leveraged Finance (LevFin)

Describe advisory

• Focus: Strategic advice for corporates, boards, governments and private equity sponsors

• Examples:

  • Mergers and Acquisitions (buy-side, sell-side)

  • Spin-offs, carve-outs, joint ventures

  • Restructuring and fairness opinions

  • Defensive advisory (hostile takeovers, activism)

Describe the equity capital market (ECM)

• Focus: Raising equity and equity-linked capital

• Examples:

  • Initial Public Offerings (IPOs)

  • Follow-on offerings / secondary placements

  • Rights issues, block trades, accelerated bookbuilds

  • Equity-linked: Convertibles, exchangeables

Describe the debt capital market (DCM)

• Focus: Raising debt capital and optimising liability structure

• Examples:

  • Investment-grade bonds (corporates, financials,
    sovereigns)

  • High-yield bonds

  • Liability management (tenders, exchanges)

  • Structured debt/hybrids/green bonds

Describe leveraged finance

• Focus: Financing highly leveraged companies, especially private equity LBOs

• Examples:

  • Leveraged Loans (Term Loan B, revolvers)

  • High-yield bonds

  • Bridge financing for M&A

  • Syndication and distribution to banks, CLOs,
    institutional investors

What is the definition of investment banking?

• Definition: Financial intermediaries that help entities
  raise capital, advise on transactions, and facilitate
  securities trading

• Investopedia definition: Investment banking organizes intricate
  financial transactions, including IPOs and mergers.
  Investment bankers guide corporations through high-
  finance challenges by raising capital and advising on
  potential mergers and acquisitions

Why does investment banking matter?

• Helps companies and governments raise funds. Drives M&A, IPOs and debt issuance. IB is a key link to economic growth

• IBs are the bridge turning global savings into productive capital investment

• Macroeconomic data by 2024:

  • Global GDP $111 trillion (World Bank)

  • Global fixed income markets outstanding increased $145.1 trillion

  • Global equity market capitalisation $126.7 trillion

  • IBs are gatekeepers to markets worth more than 2× global GDP

  • Without them, issuers can’t tap these markets efficiently

Show the data which shows where the global investment banking revenue comes from (percentages of each of the 4 core lines)

Show the global investment banking net revenues by region

Show a graph showing the investment banking net revenues from each of the 4 lines and in total

What is the primary function of commercial and investment banks?

Commercial bank: Accepts deposits, makes loans, provides basic financial services

Investment bank: Provides advisory, underwriting, M&A, and capital market services

Who are the clients in commercial annd investment banks?

Commercial banks: Individuals, small businesses, corporations

Investment banks: Corporations, institutional investors, governments

What are the main revenue sources in commercial and investment banks?

Commercial bank:s Net interest income (interest revenue - interest expense), fees on services

Investment banks: Advisory fees, underwriting fees, trading commissions, asset management fees

What products and services do commercial and investment banks provide?

Commercial banks: Checking/savings accounts, mortgages, personal and business loans, credit cards

Investment banks: M&A advisory, IPOs, debt/equity issuance, trading and market-making, research

What is the main risk exposure for commercial and investment banks?

Commercial banks: Credit risk (loan defaults), interest rate risk

Investment banks: Market risk (securities/trading), deal risk

How regulated are commercial and investment banks?

Commercial banks: Highly regulated (consumer protection, stability)

Investment banks: Regulated with focus on securities markets, investor protection

What are the profitability drivers in commercial and investment banks?

Commercial banks: Interest rate speeds, loan growth

Investment banks: Deal flow, market activity, client relationships