Perhaps the most simplistic explanation of what an investment banker, like Anil Chaturvedi, does on a daily basis is that they help entrepreneurs and investors find money. But, while this explanation is simple enough, it’s not nearly comprehensive enough to explain everything that an investment banker does. Some investment bankers may focus on mergers and acquisition, while others focus on initial public offerings (IPOs) or on private placements or bond issues.
In every scenario, whether it’s an IPO, bond issue, or private placement, the investment banker is helping their client raise money. The exception is in mergers and acquisitions. In mergers and acquisitions, investment bankers play a slightly different role, but more on that later. In the rest of this article, with inside insight from banking executive Anil Chaturvedi, we’ll explore the many functions and job duties that investment bankers fulfill.
Raising Money, Through Bonds and/or Equity
Large companies or governments often take on huge projects that require significant amounts of capital. But when a government needs capital to say, build an airport, they can’t just walk into a bank and take out a loan for that kind of money. In other words, raising enough money for a large project is complicated. So investment bankers, as experts in capital markets, help the large corporations or governments raise the money they need.
For a large government project, money will generally be raised through what’s called a bond issuance. Bonds are securities that an entity exchanges with an investor in exchange for cash. The entity receives cash in the short term and the investor receives periodic interest payments and a promise of full repayment at a later date. But again, issuing bonds is complicated. Among other things, you have to know how to set the price of the bond and the interest rate correctly so you can raise the money at a reasonable cost.
Moreover, there is a significant amount of regulatory hoops you have to deal with when you raise money using a bond issuance. The investment banker helps facilitate this entire process. The same can be said, in terms of regulation, before and during an IPO. The SEC has very strict rules about disclosures that need to be made to investors before an IPO. An investment banker helps companies ensure that they’ve done everything they need to do before they actually go to IPO.
When a company or government issues stock or bonds, they take on all sorts of risk. There’s no way of knowing for sure what price investors will pay for an issue of stock or bonds, so to help their clients manage the risk in the process of issuing stock or bonds, investment bankers take on part of the risk. They do this by underwriting the deal. When an investment banker underwrites a deal—in the context of a stock or bond sale—it means that the banker actually buys the stocks or bonds and then sells them to the public.
To compensate themselves for the risk of buying the stocks or bonds, investment bankers purchase the securities at a discount to the price they plan on selling the stock. Of course, because there’s so much risk involved there’s usually more than one investment banker involved in the issuance of a stock or bond. That way, the risk is more spread out.
In some cases, as some of Anil Chaturvedi’s colleagues have done, the investment banker simply acts as a middleman to these transactions. In other words, the investment banker markets a particular IPO or bond issuance to investors like hedge fund managers. When investment bankers act in this capacity they take on less risk, but also make less money.
Mergers and Acquisitions
As mentioned earlier, unless they need to finance a purchase through other means, corporations don’t necessarily raise money when they merge or make an acquisition. However, before a merger or acquisition happens, all parties will want to know the fair market value of the company they are acquiring or merging with. This is vital information because it affects the terms of the deal.
For example, if Company A wants to buy Company B, Company A wants to pay at or below the fair market value for Company B. In the case of public companies, you might think you could just look at Company B’s stock price and come up with a value from there. But while Company B’s stock price would play a role in informing its final valuation, it’s far from the only factor. For one, stock price is not always a good indicator of value. Moreover, depending on the state of the market for mergers and acquisitions, Company A may be willing to pay a premium (a price above fair market value) for Company B.
Research and Due Diligence
Everything we’ve covered in this article actually requires tons of research and due diligence on the part of the investment banker. However, research and due diligence are so critical to the job functions of investment bankers like Anil Chaturvedi and his colleagues, that it needs special mention.
In short, investment bankers don’t take anything on face value. Whether they’re preparing their client for a merger or an IPO, it’s the investment banker’s job to learn everything they need to know about the value of their client’s company. This means going over the company’s books, talking to accountants, and all sorts of other due diligence. Anil Chaturvedi and other investment bankers, with their emphasis on research and due diligence, ensure that capital markets function as they should. For the success of the global economy, this is a vital function.
Reducing Friction on Wall Street and Beyond
It’s hard to understate the importance of investment bankers in the modern economy. Many critics like to point the finger at them for the recent financial crisis of 2008. But that criticism is both misguided and counterproductive. To be sure, some investors were irresponsible with their investments. However, investment banking is a critical component of the financial system that creates prosperity around the world. The duties outlined above bear this out, and executives like Anil Chaturvedi show us through their work how important investment bankers are.
Want more? Read our last article on Anil here!