Is a career in investment banking worth it?
Is a career in investment banking worth it?
How much can one make as an investment banker?
Investment banks’ primary role is to facilitate strategic growth. Achieved through Initial Public Offering (IPOs), issuing bonds, private placements, debt financing, mergers and acquisitions (M&A) or buyouts.
Investment bankers are typically the highest-paid workers in the finance industry. High salaries are most prevalent even among younger employees. The starting salary for the typical investment banker exceeds that of most other finance positions, but working in this field has its challenges.
The largest investment banks:
- JPMorgan Chase.
- Goldman Sachs.
- BofA Securities.
- Morgan Stanley.
- Credit Suisse.
- Deutsche Bank.
What about the future of Investment Banking?
Crowdfunding & SPAC’s?
In recent years Special Purpose Acquisition Companies (SPAC) and Crowdfunding have expanded this landscape, offering additional solutions. Most of these solutions involve elaborate processes which consume time, resources, and incurs cost.
For example, an underwriter starts the IPO process by performing due diligence. This includes preparing Firm Commitment, Best Effort Agreement, Engagement Letter, Letter of Intent, Red Herring Document, Underwriting Agreement and potentially forming Syndicate of Underwriters.
This is before they can take the IPO roadshow to gauge demand in the investor community which helps to determine the number of shares to be offered. In the meanwhile they have to seek SEC approval. IPO pricing will then be determined based on the value of the company and investor demands. The same due diligence is typically performed in the case of the M&A or buyout. Of course, there have been cases where they deviated from this process.
For example, the merger of Bank of America and Merrill Lynch during the financial crisis of 2008 circumvented due diligence to achieve Bank of America’s long desired goal of becoming a top tier investment banking business. “Due diligence” commenced on Saturday September 13th, 2008 and was completed by Sunday night.
Needless to say this merger became deemed to be a failure since the shareholder ended up assuming large short term losses and has become the subject of many case studies.
The new investment banking solution landscape and the pressure for streamlining and shortening the process of raising financing can become a recipe for circumventing the required checks and balances. SPACs have been around since the 1990s.
However, in recent years it has become a popular vehicle for raising large amounts of funds in a relatively short time. SPACs, considered as likely candidates for shortchanging the process designed to protect investors and shareholders.
SPACs typically raise capital at $10 a share which is considered a benchmark. SPAC has typically two years to identify and complete an initial business combination transaction. If it fails to do so, it will have to return all funds to investors.
The relatively short time window and the ever-increasing number of SPACs looking to acquire viable businesses could place pressure on lower requirements, expectations on returns and performing a thorough due diligence on the targeted business, hence putting shareholders at risk.
ATI Physical Therapy Inc (ATIP) shareholders are among those who fell victim to such practice. Following its merger with a blank-check firm, in its first earning debut, revised its revenue projections and disclosed issues with employee retention.
This resulted in the stock price dropping below $4.00, more than 50% over two days.
One negative on SPAC’s becomes heavy dilution. Since the sponsors receive highly discounted shares on upwards of a fifth of company stocks. Furthermore, a recent study by NYU School of Law and Stanford University shows while SPACs raise $10 per share, at the time of merger, the median SPAC only has $6.67 in cash for each outstanding share.
Moreover, retail investors should also be wary of the hype and overselling of the SPACs. These blank-check firms with no products and revenue are all competing for retail investors. To attract investors some of them are now associating themselves with sports figures and musicians.
The other issue is the management’s track record.
Sponsors of a SPAC may not have the required experience and track record for the business that they ultimately acquire.
Could SPAC’s Ultimately Cause The Demise of Investment Banks?
Seems farfetched. Although, large lawsuits might enter into the fray.
These are some of the red flags that question the adequacy of the protection that SPAC affords. Is there enough liability for the SPAC sponsors and target managers to incentivize them to do appropriate due diligence and disclosure to public investors?
The SEC has come to realize some of the pitfalls with SPACs.
This greatly impacts accounting, valuation and flags out the inherent stock dilution of SPACs.
Crowdfunding is another new solution for raising funds for a growing company. Typically a large group of people provide small individual investment to a company. In loan-based crowdfunding, investors get their money back with interest. As opposed to an investment-based crowdfunding platform, shares of the company are awarded. Donation based, reward based, royalty based are among other types of crowdfunding types.
There are a number of online services such as GoFundMe and Kickstarter that provide the framework and the infrastructure for setting up the campaign and bringing the investee and the investors together.
In 2012, Jumpstart Our Business (JOBS) Act was signed into law. Establishing limitations on the amount of funds raised by a company. And the amount that individual investors can invest. For the most part, crowdfunding has been a low overhead solution for raising funds for small businesses.
Technologists and investment banking professionals are employing the latest technologies to streamline, shorten and reduce the cost of raising funds. This also has a corollary effect of lessening motivation for taking shortcuts, hence more protections for all parties involved.
Major investment bankers have been developing their own in-house platforms using Artificial Intelligence (AI), Artificial Neural Network (ANN), and advanced quantitative techniques to automate everyday tasks. There are also technology companies that are hard at work, developing tools with direct application to IB tasks.
Investor risk profiles analysis, contract analysis, investment research, regulatory compliance, financial modeling and forecasting are among candidate IB tasks for automation. There are also platforms such as PitchBook and CB Insights that directly market their platforms to Investment Bankers.
Overtime, startups and target companies will adhere to a set of standards for producing and formatting their financial, marketing and product data.
This will make it possible to automate most of the routine and mundane work. And greatly reduce cost and time to bring about M&A, IPO or SPAC.
The investment banking solutions landscape for financing companies is expanding. There will also be new vehicles for financing businesses. They all share the same goal of making financing available to companies to realize their full potentials. And help them grow while maximizing the risk-adjusted returns for investors who provided financing.
The use of breakthrough technologies can reduce time and cost of due diligence. It can also be used to interlace regulatory compliance with every step of the process.