Investment Banking 101: Coverage, Products & Advisory – Part I: Coverage

Investment BankingIf you are trying to find out how to get an investment banking job, your best bet is to first understand the basics.

What is investment banking? What do Ibankers do? Why is Ibanking such a hot post-MBA destination? Which fairness cream do investment bankers use?

Our resident MCB Investment Banker or MIB as we call him started a series to explain just that. His first post (‘What is Ibanking‘) set the ball rolling. If you missed it, read that first before you continue with this next article in our Investment Banking 101 Series.
 


Investment Banking 101: Coverage, Products & Advisory – Part I: Coverage

In this article, I shall explore the offerings of a developed investment bank and then draw parallels with Indian investment banks. This should help you understand what bankers do and how to position yourself better for recruiting at an investment bank.

As a recap: Investment Banks work to allow firms access to the capital markets. They do this by helping firms raise equity or debt (or variants of equity or debt) or by advising them on strategic financial decisions (such as mergers, acquisitions, et al).

Investment banks aim to provide the best possible advice to their clientele. This ensures that the client is able to gain maximum value from the transaction as well as turn into a recurring business relationship for the bank. Since clients stem from a vast variety of industries, it is practically impossible to be an expert in each and every one of these industries. Being the ‘jack-of-all-trades’ will do a bank no good because they deal with very savvy C-suite executives who will not tolerate the banker running a ‘trial & error’ operation at the client’s expense. Therefore, banks have developed ‘Coverage’ groups. The coverage group focuses on a sector or a group of allied sectors and develops and expertise in them. It is the coverage group’s responsibility to know, understand and be the authority on that sector in a bank. Typical coverage groups are:

Industrials: Cover manufacturing, may also cover aeronauticals, chemicals, etc

Power / Energy / Utilities / Natural Resources: Called different names, these groups typically look at power generation, distribution and energy sources (may include renewables also)

Real Estate: Cover broad real estate trends and events

Tech, Media & Telecom (TMT): May operate as one group (in the case of Goldman Sachs), or several; TMT covers, well, Tech, Media & Telecom

… And a whole lot of other groups, depending on the bank.

Coverage bankers, therefore, can be looked at as sectoral experts. They bring their sector-specific expertise to the bank and its clients in various transactions.

Apart from this coverage bankers are also involved in ‘pitching’. Pitching is the process of carefully analyzing a firm and understanding how an investment banking transaction could bring value to the firm’s activities. A typical example of such an investment banking process would be an M&A process, where clients may not be sophisticated enough to be able to calculate the financial impact of a prospective acquisition. Another investment banking transaction that bankers may pitch is an IPO to a firm that seems like it would be able to access good value given the condition of the capital markets.

Apart from being sectoral experts, bankers in the coverage section of the investment bank typically are one of the most qualified people to build financial models for firms in the industry due to their deep understanding of industry benchmarks, production ratios as well as growth cycles and expectations. All of this knowledge translates to a better understanding of their client – which in turn helps them pitch a better transaction (product) to the client and therefore better help the client.

Of course, the investment banker is not doing this for free (or because they enjoy pitching!). Successful pitches turn into business in terms of an investment banking transaction, which generate substantial fees. Typical fees on an IPO, for example, could range from 3% – 7% of the amount raised.

Amongst coverage groups there is a pecking order. The smartest and most talented Analysts and Associates tend to gravitate toward whichever coverage group is the ‘hottest’ at that bank. The degree of ‘hotness’ stems from various sources, such as how much business the MD brings in, how big the mandates are as well as how often deals get done in that industry.


Read the other articles in the series: Introduction to Investment Banking


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