Senior Management

At the top of the pyramid we have senior management. Senior management includes the CEO, CFO, and others who run the entire firm.

Investment Banking

Investment Banking is a group within the investment bank itself. The investment banking group is typically broken up into Coverage, Mergers and Acquisitions, and Capital Markets.

Coverage

This core investment banking department is divided into industry groups: Energy, Technology, Media, and Healthcare are good examples. The role of these groups is to go to clients within the particular industry and sell investment banking products—products aimed to drive growth in the client's business. These products are most likely Mergers and Acquisitions (M&A) and Underwriting. So if you were a managing director within one of these groups, you would be responsible for “covering” several companies within the industry group. The role would be to sell some M&A or Underwriting business to said client. Most often presentations (pitchbooks) are created as a tool to help “pitch” or sell business. An analyst would be responsible for researching the data for slides that would populate the presentations. These slides may require some analyses such as financial modeling, valuation, in addition to market research. The pitchbook would at its core provide an overview of the market environment, maybe a valuation of the client, and would hope to sell an M&A or Underwriting product. An analyst would also be responsible for drafting memoranda, setting up conference calls, and other process-oriented tasks. If the client expresses further interest in one of the products mentioned, then the coverage team would coordinate with the respective product team. For example, if the client expressed interest in raising equity (a subset of underwriting), then the coverage team would coordinate with the equity capital markets team to further the potential transaction.

Mergers and Acquisitions

Mergers and Acquisitions is probably the most sought after group (from a junior perspective) within the Investment Banking department primarily because it's the most model intensive. The goal of the Mergers and Acquisitions group is to aid in advising clients on the potential merger or acquisition of another asset or corporate entity. Mergers and acquisitions is a general definition that often also applies to divestitures and other types of restructurings, although some banks separate restructurings as another group. If a client is interested in acquiring or divesting all of or some part of their business, the M&A team is assigned to work on the transactions. The analyst will be responsible for modeling the financial impacts of the transaction in addition to drafting memoranda, setting up conference calls, and other process-oriented tasks. But it is the M&A modeling exposure that is typically most desirable for a junior analyst. This technical knowhow opens doors to other career paths such as private equity and hedge funds. My book, Mergers, Acquisitions, Divestitures, and Other Restructurings, walks step-by-step through the technical analyses.

Note: Some industries have unique enough account nuances that when more complex M&A modeling is needed, that industry coverage group performs their own “in-house” M&A as opposed to pairing with the more generalist M&A group. I'm mentioning this because often during the recruiting process the M&A group is in the most demand. It's wise to express interest in a less popular group (maybe Energy, for example) to alleviate competition. However, people often think that only in the M&A group will one get serious consideration for the larger private equity firms or hedge funds as the more sophisticated modeling often happens in the M&A group. So a strategic angle is to express interest in a less popular group that also happens to do its own M&A. This not only gives you that highly sought-after M&A exposure, but will give you exposure to the coverage process, which is important. It also gives you uniquely nuanced accounting skills of a specific industry, which may come in handy later in one's career. This is a good networking and positioning strategy I recommend utilizing.

Capital Markets

Capital Markets is typically subdivided into Equity, Debt, and Convertible. Each of these groups aids in the process of raising capital or trading securities for a client, be it equity, debt, convertible securities, or other types of securities respectively. So if the preceding client, for example, had expressed interest in raising equity, the coverage team would pair up with the equity capital markets team. The equity capital markets team would advise the client on the types of equity securities that could be raised based on various market conditions. They would advise on how much equity could be raised given the nature of the markets and a recommended type of security to get most value for their equity. Obviously it's the expertise of the managing directors in this equity capital markets group that would be able to provide this guidance. This takes years of experience and a strong understanding of the markets. Investment banks depend on these managing directors to give good guidance based on market conditions and further be able to follow up with their recommendation when it comes time to actually issue said securities. The results of their guidance would most likely also go into a section of the pitchbook presentation. This section would contain an overview of the equity markets, maybe the last few equity transactions and pricing information, and of course the managing directors' recommendation. The same idea would apply to debts, convertible securities, or other securities, if the client had been interested in those respective securities. In these groups the analyst would be responsible for populating the presentation slides (among other duties), which entails data mining, market research, and some modeling and analysis. But again the modeling would not be as intensive as in the M&A group. Actually it's sometimes known that the capital markets groups are the least intensive. This can be a benefit for those who want to get into the investment banking industry but are not interested in working 100 hours or more. On the other hand, the less intensive groups don't always get the attention of the premium private equity and hedge funds.

Sales and Trading

The Sales and Trading department is outside of the Investment Banking department. Salespeople and traders are responsible for the selling and trading of investment securities. So, for example, if the preceding client was in fact interested in raising equity as per the advice of the equity capital markets managing director, the sales and trading team would be responsible for the execution of said security. The sales process begins with calling potentially interested investors and other institutions about securities such as hedge funds and mutual funds. A list of interested buyers would be maintained in a process called “bookrunning.” A firm would want their books to be oversold, meaning they have more potential buyers than needed, which better guarantees a complete execution of the security when it becomes time. When the time comes to sell the equity, trading begins. Nowadays this is done via computers as opposed to the yelling and screaming you may see in the news. An analyst in the sales and trading group would likely maintain records of trades and the portfolio positions. They could also be responsible for calling potential investors and over time executing the trades. Hours are generally limited to market open and close in addition to some early morning meetings and possibly some after-market analysis, but certainly not the 100 hours or more demanded in the investment banking groups.

Equity Research

The Equity Research department is responsible for providing written reports demonstrating the expected valuation of a stock based on the opinion of the Wall Street “analyst.” These reports are sold to clients and funds among others who are interested in the analyst's stock expectations. Here's another confusing note of convention: An equity research analyst is often referred to as the managing director responsible for the entire report and its opinions. This differs from the idea of an analyst being the junior person on a team. This is confusing, but the norm. The Equity Research department is also divided into sectors, just as the coverage group is (i.e., Energy, Technology, Healthcare). As a junior analyst, one would be responsible for constructing and updating models resulting in stock valuations. Working in the Equity Research department is strong as it entails modeling and valuation. However, it is important to note that often the type of modeling performed is not as robust as the investment banking type of modeling. On the other hand, another positive in the Equity Research department is that one would get specific knowledge of an industry, which can come in handy later in one's career. The hours in the Equity Research department are significantly less than in investment banking. Weekends are generally free, and a junior analyst is often out by 7 at the latest (except for the quarterly and annual earning seasons when all models need to be updated based on company performance results).

Asset Management

Asset management helps manage the client's assets and investments in certain securities. Clients typically include high-net-worth individuals in addition to other institutions. Asset managers diversify a client's portfolio by investing across different asset classes, including equity, fixed income, and derivatives.

Analyst

The analyst is the most junior level in the investment banking industry. Note the difference between “analyst” in terms of hierarchy and an equity research analyst as defined within the equity research overview discussed earlier. Most often, an investment bank would hire an analyst for two years. Often an analyst is allowed to stay for a third year before exploring other options. If an analyst does stay for a third year, it is recommended to do so in a different group to expand network and gain more skills. After two or three years, an analyst may be able to get promoted to the associate level, or be required to go to business school and get an MBA before getting a promotion. Sometimes, however, an analyst moves on to venture capital or private equity or leaves the industry altogether.

The key roles of an analyst entail financial modeling, updating presentations, drafting memoranda, facilitating research, performing due diligence, and setting up meetings.

Associate

An associate is one step above the analyst. Associates are responsible for the technicals and memoranda in a transaction. They are responsible for the quality of output of presentations, the data and flow of key memoranda, and the execution of deal process. Associates manage the analysts and aid in quality control of their work. An associate role will typically last three to four years before getting promoted to vice president. There is a major distinction here between the role of an associate and the role of a vice president, which often becomes a big hurdle for budding vice presidents. Analysts and associates have largely technical roles, responsible for the underlying data, materials, and process of transactions. Once transitioned to VP, one is more responsible for structuring and selling the deal—a more client-focused role. Often very technical candidates are great analysts and associates but are not personable or articulate enough to be good vice presidents. This causes a roadblock for many junior bankers.

Vice President

Typically, the vice president, although still responsible for technicals and execution, starts to gain exposure to the management process, including more direct interaction with the client. The duration of service varies vastly from firm to firm. I've seen vice presidents stay in their role for many years or get promoted after three to five years. It completely depends on the firm, their staffing needs, and the state of the markets.

Director

The director is also another vague role. Some firms refer to this role as executive director or president, and the specifics vary. Directors typically shadow managing directors and are being groomed to be the next key contact to a client. The move from director to managing director is typically not as structured a time as from analyst to associate. It depends on the state of the particular investment banking group.

Managing Director

The managing director is the key client relationship holder. The managing director is responsible for advising the client on particular M&A or underwriting products. The success of the managing director's role is often determined by how many products can be sold to the clients covered by the managing director.

This brief overview of the major divisions and roles within an investment bank is solely to provide a very high-level overview. More specifics on the investment banking recruiting process and interview preparation follow.