How to Pick the Ideal Market for Investment Properties
How do investment banks work?
To raise or place capital, corporations and large investors turn to middle market investment bank. While traditional banks are engaged in lending and placing deposits in deposit accounts, the activities of investment banks are carried out in a different area. Which one? This will be discussed below.
Definition and fundamentals of investment banks
Middle market investment bank is a financial institution that helps corporations and large investors to enter the stock, foreign exchange and commodity markets of the world. Hence, virtually any bank of this type functions as a broker function.
Equally, an investment bank can be said to be a financial intermediary between consumers and providers of capital. Bank intermediaries unite those who need funds (for example, for modernization or construction), with those who have the opportunity to invest in production capital. Those. functions are performed by the stock exchange.
Intermediary banks are rewarded in the form of a commission for organizing transactions. They only work with large trades, such as:
- introduction to the securities market;
- release of derivative products;
- long-term lending to large businesses;
- investing in large projects;
- reorganization of companies;
- Management of risks
Placement of securities is often the main investment operation of banks, which is called underwriting. Investment banks, called bookrunners, collect applications for the purchase of securities during the initial offering.
▶ It is worth noting, however, that in addition to these economic activities, investment banks often sell not only stocks and bonds, but also derivatives, called derivatives. They have nothing to do with the benefit of themselves, as through the enhancement of leverage. The bank acts as a croupier by two parties, receiving a commission, i.e. risk-free earnings.
The atmosphere within such organizations in the 1980s / 1990s is well documented in Liar’s Poker and A Trader’s Confessions. You can read reviews of these books here and here. Nevertheless, further we will focus on more transactions for banks.
How are investment banks different from commercial banks?
Investment banking institutions differ from commercial ones in that they redistribute risk: they bring securities or derivatives to the market, bring buyers and sellers together, and also act as a party to the transaction. Commercial banks attract funds from individuals and companies, issue consumer loans, mortgages, loans.
Bankers become an advisor to the client, accompany transactions, talk about investment opportunities and risks. And as the bank’s task is to make money, the opportunities often look very promising and the risks are small. Bank specialists prepare market analytics for investors, provide legal support.
Another difference: commercial banks are regulated by the country’s central bank. In Russia, the Central Bank has also been a mega-regulator of the entire financial market since 2013. Foreign investment banks are regulated by special agencies: for example, in the United States, the Securities and Exchange Commission (SEC). In Europe, in addition to general supervision, the ECB, there is a federal supervisory authority for financial services (BaFin), the Office for Prudential Control and Disputes (ACPR), etc.
Investment and commercial banks: differences
Investment banks usually do not engage in work with individuals. For example, to form private investment portfolios from securities.
American middle market investment bank is most focused on big deals and markets. In 1933, they were separated from operations to attract credit banks, when a ban was introduced in the United States on combining operations to attract deposits from individuals. The ban was due to the high risks for investors and the situation with the decline in the stock market in 1929-1932 by 90%. Today there are more than 3000 investment banks and investment corporations in the USA.
In other countries, such a division is not always traced, and an investment commercial bank may place deposits of corporations and investors. For example, in Europe commercial funds are funded, as they specialize in supporting small and medium-sized businesses. All credit institutions in Russia carry out mixed activities, as in the laws of the Russian Federation there is no clear division into commercial and middle market investment bank.
Types of investment banks
- Depending on the main functions, investment banks at the highest level are subdivided into:
- organizing the placement of securities;
- providing long-term loans
- Financial institutions of the first group attract long-term investments, establish legal entities, organize the issue of securities
In the USA, Canada, Great Britain there are no middle market investment bank of the second type, their function is performed by other credit and financial organizations. Germany, the tasks of investment banks of the second type are assigned to large commercial banks, while in France they exist as banks of medium and long-term credit. Japan, long-term loans were provided by Shinsei Bank and Aozora Bank. In the developing countries of Asia, Latin America, there are still investment banks of the second and mixed types.
The following classification of investment banks operates in the United States:
- cans with convex brace
- banks “elite boutiques”
- mid-tier banks
- Regional investment boutique banks
1. Bulge Bracket (BB) investment banks (banks with a “convex bracket”) or full-service banks, offer all types of products and services, operate in all regions. For example, these are Goldman Sachs, JP Morgan, Bank of America Merrill Lynch, Deutsche Bank, Credit Suisse, Morgan Stanley, etc.
2. Investment banks “elite boutiques”. They provide a range of services in the areas of mergers and acquisitions, as well as debt restructuring. They may also have a narrower specialization: for example, the investment bank Rothschild in Europe specializes in M&A transactions in the oil and gas industry. Examples of high-end boutiques include Lazard, Evercore, and Moelis.
3. Medium Market (MM) banks offer a wide range of products and services, but handle smaller transactions. Examples of medium-sized banks: Jefferies, Houlihan Lokey, William Blair, Lincoln International, Stifle, Robert W. Baird & Co. etc.
4. Industry boutiques (ISB) and regional boutique banks (RB) – these tend to focus on narrow industries, and most often only operate in one region with a lot of small deals. For example, Cowen & Co. (healthcare), Allen & Co. (Media), Berkery Noyes (education), etc.
Basic and additional services of middle market investment bank
Banks’ investment activities include such areas as the already mentioned underwriting, asset maintenance, corporate finance, dealer and brokerage services.
Investment activity of banks: scheme
Full cycle investment banks offer the following services:
- Underwriting – raising capital and preparing the issuer’s securities for entering the stock exchange (publication of memorandums, road shows, registration and initial placement of securities);
- Mergers and Acquisitions (M&A) – consulting and fundraising for the transaction, risk assessment, process management;
- Equity Research – market research, assistance in making investment decisions;
- Servicing of securities – accounting of transactions and cash flows;
- Sales and trading – selection of buyers and sellers of securities in the secondary market;
- Asset management – servicing investments of a wide range of investors, including individuals
- Additional services include financial consulting, preparation of financial analytics, forecasts, organization of research, development of investment programs and project documentation. In addition, investment banks can provide services for the financial recovery of companies.
What is a middle market bank investment fund?
To manage the capital of private investors, Russian banks create investment funds. For example, a large number of Sberbank mutual funds are managed by its Sberbank Asset Management division, which at the end of 2020 has under management $ 1.3 trillion. rubles. Mutual funds under the management of their subsidiaries are also owned by VTB 24, Tinkoff and other banks.
In addition, within the framework of Russian legislation, credit institutions have the opportunity to create general funds of bank management, OFBU. They are more closed and less regulated by the supervisory authority than shares.
