18 Insights About Investment Banking (From Bankers)
7 min read

18 Insights About Investment Banking (From Bankers)

Insiders reveal 18 secrets on how investment banking really works so you can understand and navigate the field with inside knowledge.
18 Insights About Investment Banking (From Bankers)

For this post, I interviewed dozens of investment bankers and surveyed hundreds more to collect their views on investment banking. The result is a collection of thoughtful and intelligent takes on the world of high finance. Because my research was anonymous, many of the takes are funny and witty, and they are definitely brutally honest.

It's like having a connected friend in banking telling you all the secrets of how investment bankers really work. I hope you find this post illuminating and useful for navigating your relationship with your bankers, or your career in investment banking. Please feel free to contribute if you have anything to add to the discussion.

Top 6 Takeaways

If you only have a few minutes to spare, here are the top 6 takeaways:

  • There is intense internal competition in investment banks. You think bankers are A-type personalities who look to crush their competition? It’s 10 times worse internally. It’s a dog eat dog world, a vipers nest. These descriptions are common, and realistic.
  • Behind closed doors, a lot of bankers treat clients with disdain and make terrible jokes at their expense. Clients come way down the priority stack after bonus, ego, rivalry, winning, status and power. The best clients don’t see this as a bad thing, they use it to their advantage.
  • Shot selection is everything for bankers. You need to make sure you spend time on the mandates you are likely to win and the deals that are likely to close. All time spent on business development and failed deals is a cost of business that reduces margins and lowers the probability you will bring in revenue. Getting this right is a core competency that isn’t talked about that much.
  • Fees could be halved and the economics of the business still work. The margins and returns would still be really good. However, clients should negotiate on the fee structure, not the fee. High fees are an industry wide problem, they are structurally embedded, but the fee structure can be negotiated to the clients advantage.
  • The major value-add of banking (negotiating a higher price for our client) is a zero sum game because bankers represent both sides of the deal. Bankers just move value around. Sometimes one client wins, sometimes another. However, it does mean that the very top investment bankers who consistently win should come at a premium, and are worth every penny.
  • The industry structure is what drives investment banking forward. It is fundamentally an attractive industry with strong existing brands and a regulatory framework creating a barrier to entry for new entrants. Money rains down on banking, yet the individuals in the industry take all the credit and grow massive egos. It’s so funny.

These are just 6 interesting snippets from the interviews and surveys with investment bankers, and the full responses are below. Please read on for more insights on investment banking (points #12, #17 and #18 are my favorites). If you’re leaving now, do you want to know how to 10x your impact in your chosen field? You should sign up for free and I’ll show you how.

18 Insights on How Investment Banking Really Works

1. A lot of people call themselves investment bankers, most are not. Graduates, analysts and associates are not investment bankers. Not yet. They’re on the path but not investment bankers at this point. Investment bankers land deals. That’s what makes an investment banker, and there are very few of them around. Magnitudes fewer than the people calling themselves investment bankers.

2. This will not shock experienced bankers (or anyone who has spent time in or around an investment bank), but there is intense internal competition. You think bankers are A-type personalities who look to crush their competition? It’s 10 times worse internally. It’s a dog eat dog world, a vipers nest. These descriptions are common, and realistic.

3. Behind closed doors, I have seen a lot of bankers (my colleagues) treat clients with disdain and make terrible jokes at their expense. At best, it’s to let off steam, build rapport with their team, or just to look cool to their colleagues. At worst, it speaks to some of the personalities that our industry attracts.

4. Clients come way down the priority stack after bonus, ego, rivalry, winning, status and power. The best ones don’t see this as a bad thing, they use it to their advantage.

5. We way over complicate the process actually needed to achieve the outcomes required by our clients. Sometimes this is our fault, sometimes it’s the client. But the clearer they can be and the less games we play, the quicker and more painless the outcome.

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6. A little understood fact about investment banking is that it is mostly driven by success fees, meaning that we only get paid on completion of an outcome. Sure, there are fixed fees and retainers but the real money comes for success-based fees. Few people really understand this, and even the ones that do underestimate its pervasiveness in the industry. It drives the type of people investment banking attracts (risk taking) and the behavior across the industry.

7. For bankers, shot selection is everything. You need to make sure you spend time on the mandates you are likely to win and the deals that are likely to close. All time spent on business development and failed deals is a cost of business that reduces margins and lowers the probability you will bring in revenue. Getting this right is a core competency that isn’t talked about that much.

8. There is a lot of variability in the statement I’m about to make, and the extent of this practice differs greatly across the banks I’ve been at. But when we have a mandate to sell an asset for a client, we will push them to sell at a lower price, and spend a lot of time thinking about how to justify it to them, though we are actually doing this to lock in our fee. Basically, $50 million now is worth more than $52 million or $0 in 2 months. This comes from the bankers themselves (e.g. driven by bonuses and deal fatigue) and internal forces looking to close deals and get closer to cash collection.

9. Overall, our fees are way too high and we could find a number of ways to reduce our fees and maintain the same margins. But there is no incentive or motivation to do this.

10. In my corner of the market, you could half our fees (in absolute and relative terms) and the economics of the business still work. Better yet, the margins and returns would still be really good - still top quintile across all industries.

11. More clients should negotiate on the fee structure, not the fee. High fees are an industry wide problem, they are structurally embedded. No one client is going to change them, even Warren Buffett has tried and failed. But there is a lot of value for clients in negotiating on the fee structure, not trying to get 5% down to 4%. There are many ways to do this and you should do your research and get advice from someone who’s experienced in the matter. I’ll give a simple example: if you believe your asset is worth $1 billion, then only pay a 5% fee on a sale value above $1 billion (give them an incentive to fight for you, negotiate or find more buyers to compete). Everything below a $1 billion sale price will have a smaller fee (one that should sting a little). Of course they’ll insight on a waterfall but use the fee structure to make sure their incentives are aligned to yours.

12. Okay, at a high level this is what we do to get a deal across the line: collect information from the client, collate research on the market and industry, prepare a document summarizing the client and market information, organize 50 calendar invites, manage a data room, file some paperwork, manage some stakeholders and “negotiate”. Sure, I simplified (only a little). All this for $50,000,000.00. Because we came up with the keen insight that Competitor A should acquire Competitor B using arguments the same as those in college assignments.

13. Sometimes the company on the selling block is seriously flawed, and we have to hide this from the buyers. I’m putting it bluntly here, but it’s one interpretation. Of course the banker on that particular deal will tell it otherwise, “our job is to sell our clients business”, “I don’t know what I don’t know” and “buyer beware” (they’ll say it in Latin, of course). The flaws can go really deep so seriously, buyer beware!

14. In 99% of cases, investment bankers have no loyalty to the bank they work for. We always go for a higher or better offer, just like we do for our clients. We’re players, and we’re playing the game. Any banker who tells you otherwise is lying to you, or themselves (or they are in the 1% of bankers that no-one understands).

15. Once you progress beyond analyst roles, the skill set of investment bankers is relationship building, sales and negotiations. These skills are only transferable to a short list of industries and roles where it makes sense, like company management, politics and real estate. (Note: for analysts the skills are Excel modeling, slide building and project management).

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16. Our major value-add - negotiating a higher price for our client - is a zero sum game, and because bankers represent both sides of the deal it means we don’t add value as an industry. We just move it around. Sometimes one client wins, sometimes another. It does mean that the very top investment bankers who consistently win should come at a premium, and are worth every penny.

17. Most bankers I know keep the bulk of their wealth in real estate, not the financial products they help design, build and sell. If they invest, it’s in index funds. It is telling that people who advise others on alpha generating ventures keep their own money in passive vehicles.

18. The industry structure is what drives investment banking forward. It is fundamentally an attractive industry with strong existing brands and a regulatory framework creating a barrier to entry for new entrants. Money rains down on banking, yet the individuals in the industry take all the credit and grow massive egos. It’s so funny.

Final Thoughts

I hope these insights from current and former investment bankers informed you about the true nature of investment banking and provided useful information on how to navigate your relationship with your banker, or career in banking. All told, there is a lot that investment bankers bring to the companies, markets and the economy, if you use them correctly. I hope this post has made it clearer how you can make that a reality.

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