I was asked about the skills needed to begin a career in Investment Banking.
Based on my personal experience, a few thoughts.
What is Investment Banking?
Investment Banking (IB), known as Corporate Finance by some, is actually quite a diverse business. Skills differ depending on the specific field within IB and the level of work being performed.
Traditional IB involves assisting clients in raising private and public capital, advising clients on mergers and acquisitions (M&A), buying and selling investment products, and investment research. IB may include merchant, commercial and global banking activities. It may also include investment management.
Core activities that involve client interaction are known as the front office.
Supporting the front office are the middle and back offices. The middle office includes Risk Management, Compliance, and internal Finance. The back office involves Operations (the people who process the work), Human Resources, and Information Technology.
Obviously, the skill sets required to work in Human Resources are different from those necessary for Risk Management or M&A. So you need to be a little more specific in your choice of discipline when determining the skills to develop.
In this post, we will look at the skills needed to work in the front office. There are differences between units, but there are also many commonalities.
Regardless of the activity, IB requires strong mathematical and statistical skills.
Much of the work requires calculations of past financial data and extrapolation of those numbers into the future. Scenario analysis, forecasting, preparation of pro-forma financial statements, tax considerations, performing complex calculations on sophisticated investment returns are possible daily tasks.
This holds true for most front office positions, with the possible exception of actual trading activities.
People with strong backgrounds in mathematics, such as statistics, accounting, tax and finance, are valued.
As important as number crunching is, without the ability to properly analyze the data, the calculations are useless. You must understand what the economy and relevant industry may do moving forward to determine its impact on the company being analyzed.
Lawyers, professional accountants, engineers, financial experts, even chess players, develop strong analytical skills in their training. If you want to be hired in the IB industry, develop strong analytical skills.
Economists are also valued for their understanding of economic patterns and impact on companies.
Legal and Tax
In any IB activity, legal and tax considerations are usually pivotal.
Tax issues can make or break a deal. How does one structure an acquisition to take advantage of tax statutes? How best can one raise capital to provide tax incentives for investors?
Legal implications on any deal are also critical. Are there potential lawsuits that may exist? Can a new product be patented?
The examples are infinite.
For this reason, backgrounds in law or tax are beneficial for a career in IB.
IB teams need individuals who understand the companies they work with.
Staff must be able to assess business specific issues in order to value a company for new share issues, for investment research or in a merger or acquisition. Unless someone knows the industry, it is difficult to forecast future performance, differentiate between strong and weak product lines, or value intellectual property such as a patent.
As a result, technical specialists can find a profitable niche in IB. If a bank specializes in the oil and gas industry, they will have oil and gas experts in their employ.
Biotech and hi-tech industries will continue to be popular for IB activities. Industry experts in these fields, especially if they add an MBA to their credentials, will be in strong demand.
There are even M&A related IB positions available for people in traditional back office roles.
A Human Resources specialist may be necessary to consider integration of two companies in a merger or acquisition. What costs are associated with retaining staff to ensure the merged company can continue to operate? Or what costs are associated with terminating 25% of the employees from the acquired company?
Information Technologists might be involved to assess the operational issues and costs involved when merging two companies with different computer systems.
Just because you are not a specialist in finance, law, or accounting, does not mean you cannot find work in IB. The opportunities are less plentiful, but they do exist.
Advancement in IB
Like most professions, as one advances to middle and senior positions in IB, the skills required change.
At middle management, there is less number crunching and detailed analysis. You will need to develop more big-picture analytical skills, drawing a variety of areas together. You will also need leadership skills as you spend more time leading and managing staff and less time doing the actual work.
The greater the seniority, the more emphasis in attracting new business and keeping existing clients satisfied. This involves developing business networks, negotiating, and being more of a salesman. Often, this is a challenge for technical specialists, more used to crunching and analyzing numbers than dealing with client development.
IB can be a rewarding and profitable career.
However, it can also be an extremely stressful career with a substantial workload. The burnout rate is quite high for professionals in the industry. From personal experience, living out of a hotel while working 100 hour plus weeks can get exhausting after a while.
IB is very competitive and filled with Type-A personalities. You need to be willing to throw your elbows if you want to prosper in this environment.
Further, when the economy is expanding, business is good. But during economic downturns, companies do not seek to raise capital or undertake mergers or acquisitions. During these times, maintaining a position with a bank is difficult and the renumeration poor.
Please bear this in mind when considering a career in IB.