Tue. Oct 15th, 2019

Key Investment Banking Functions

3 min read

Investment banking is divided into front officemiddle office, and back office activities:

Key Investment Banking Functions

  • The front office drives revenue generation and includes divisions such as corporate finance, sales and trading, and research.
  • The middle office supports processes that are related to revenue generation, such as risk management and treasury.
  • The back office includes roles that exist regardless of revenue generated, such as compliance, accounting, information technology (IT), and HR.

This is the “traditional” classification, but it may be more helpful to think of it in terms of revenue-generating roles, risk-related roles, and support roles.

If you are a competitive, high-achieving person, you should aim for revenue-generating, front-office roles since they pay higher salaries and offer better career options, promotions, and exit opportunities.

Corporate Finance

banner

Corporate Finance

Corporate Finance includes many of the most “prestigious” roles in investment banking, including capital raising, advising on mergers and acquisitions, and helping companies to restructure.

It is also labeled simply “Investment Banking” or the “Investment Banking Division” (IBD), and it is further divided into Product Groups and Industry Groups.

Product Groups focus on a specific deal type, such as equity or debt issuances or acquisitions, but they work across all industries.

Examples of Product Groups include:

  • Mergers & Acquisitions (M&A)
  • Debt Capital Markets (DCM)
  • Equity Capital Markets (ECM)
  • Leveraged Finance (LevFin)
  • Restructuring (RX)

Industry Groups, by contrast, work on many deal types but specialize in a specific industry and often work with individual companies in that industry on an ongoing basis.

Examples of Industry Groups include:

  • Real Estate
  • Healthcare
  • Media & Telecom
  • Financial Sponsors Group (FSG)
  • Financial Institutions Groups (FIG)
  • Technology
  • Public Finance

Then, there are some other groups where the classification is not 100% clear or universal.

Sales & Trading

banner

Sales & Trading

The Sales & Trading (S&T) group at an investment bank helps institutional investor clients, such as hedge funds and asset management firms, to buy and sell securities such as stocks, options, and bonds.

These clients buy and sell these securities to earn a high return and make more money for their clients, also known as their “Limited Partners,” or LPs, which are often pension funds, endowments, insurance firms, and wealthy individuals.

This process is more difficult than it sounds because these institutional investor clients often place large orders that would disrupt market prices if they were executed all at once.

So, the salespeople and traders at banks must divide up these orders, match buyers and sellers, and get the clients prices that are as close as possible to what they desire.

The two main divisions within Sales & Trading are:

  • Equity Trading (primarily companies’ stocks and their derivatives, such as options)
  • Fixed Income Trading or FICC (“everything that isn’t equities,” including rates, municipal bonds, corporate bonds, CDS, FX, commodities, money markets, and more)

We cover Sales & Trading as an entirely separate topic, but we list it here since it is still a specific division at most investment banks.

Research

banner

Research

The research division writes reports about companies and their prospects, often accompanied by “Buy,” “Sell,” or “Hold” ratings.

Historically, banks issued these reports to encourage higher trading volume and to solicit orders from institutional investors for the sales & trading division.

For example, if a bank liked a company’s prospects and wanted to encourage more trading to earn higher commissions, it might have issued a favorable “Buy” report about the company.

Middle Office and Back Office

There are some nuances to these “support divisions,” but many people use the following definitions:

  • Middle Office (MO) roles support processes related to revenue generation; examples include risk management and treasury. For example, a bank doesn’t make money directly from risk management, but as a result of risk management, front-office staff such as traders can do their jobs more effectively.
  • Back Office (BO) roles relate to processes and systems that must exist regardless of revenue generated; examples include compliance, accounting, information technology (IT), and HR. As a back-office employee, you’re in much the same role as any other white-collar support professional.

Middle-office and back-office jobs are OK for early-stage internships, but if you want the highest compensation and the most career options and exit opportunities, you should aim for front-office positions.

It tends to be extremely difficult to switch out of the middle office and back office, particularly in smaller markets, so if you want to leave, do it early.

Leave a Reply

Your email address will not be published. Required fields are marked *