Much of this material came from articles by Wall
Street Prep and Forbes.
As students consider a career in investment banking they need to be aware that
the large (bulge bracket) investment banks have undergone significant changes.
The opportunities for employment in the investment banking today is far
different from that of ten years ago. Finance students interested in careers in banking are strongly encouraged to consider middle-market, regional and boutique investment banks - rather than only the global, bulge bracket banks.
FINANCIAL CRISIS OF 2008-2009
One of the largest global financial crisis of the past
century was triggered in 2008 by multiple factors including the collapse of the
subprime mortgage market, poor underwriting practices, overly complex financial
instruments, as well as deregulation, poor regulation, and in some cases a
complete lack of regulation. The
crisis led to a prolonged economic recession, and the collapse of major
financial institutions, including Lehman Brothers, AIG and others.
The most substantial piece of legislation that emerged from
the financial crisis is the Dodd-Frank Act, a bill that sought to improve the
regulatory blind spots that contributed to the crisis, by increasing capital
requirements as well as bringing hedge funds, private equity firms, and other
investment firms considered to be part of a minimally regulated “shadow banking
system.”
European investment banks (Barclays, RBS, UBS, etc.) were
particularly hit by more regulation, including higher capital requirements and
the imposition of the retail ring-fence. The UK political climate today is
distinctly frosty towards investment banking, despite the fact that the
financial crisis actually hit UK retail banking activities much harder. Forced
retrenchment of the UK investment banks due to regulatory and political pressure
should have left the field clear for other European banks such as Credit Suisse
and Deutsche Bank , but the European Union has followed the UK’s lead with
higher capital requirements, and most European banks are now cutting investment
banking.
But European banks are not alone. In the post-Basel III era,
capital-intensive activities simply are no longer affordable. Even the American
giants Goldman Sachs, Citigroup and Bank of America are under pressure to cut
costs and make better use of scarce and expensive capital. We have not seen the
last of serious cuts to investment banking. Remuneration, particularly, will
eventually face the axe, although – perhaps understandably – investment banks
have so far preferred to cut jobs rather than risk losing star players.
INVESTMENT BANKS IN THE U.S. HAVE CONVERTED TO BHCS
The US “shadow banks” raise capital and invest much like traditional
investment banks but escaped regulation which enabled them to over-leverage and
exacerbated system-wide contagion. The jury is still out on Dodd-Frank’s
efficacy, and the Act has been heavily criticized by both those who argue for
more regulation and those who believe it will stifle growth.
“Pure” investment banks like Goldman Sachs and Morgan
Stanley traditionally benefited from less government regulation and no capital
requirement than their full service peers like UBS, Credit Suisse, and Citi. During
the financial crisis, however, the pure investment banks had to transform
themselves to bank holding companies (BHC) to get government bailout
money. The flip-side is that the BHC
status now subjects them to the additional oversight.
INDUSTRY PROSPECTS AFTER THE CRISIS
Investment banking advisory fees in 2010 were $84 billion
globally, the highest level since 2007, while 2011 saw a significant decline in
fees. The future of the industry is a highly debated topic. There is no question that the financial
services industry is going through something pretty significant
post-crisis. Many banks had near-death
experiences in 2008-2009, and remain hobbled.
Profitability is lower for many of the largest financial institutions.
This directly impacts bonuses for even the entry level investment banker, with
some pointing to smaller fractions of Ivy League graduating classes going into
finance as a harbinger of a fundamental shift.
That being said, those trying to break into the industry
will find that compensation is still high compared to other career
opportunities. Also, the job function of
an M&A professional has not dramatically changed, so the professional
development opportunities haven’t changed. Investment banking itself is not
dead. There will always be a need for the services that investment banks offer:
M&A activity has increased in 2013 and 2014 after being flat since 2008,
and corporate investment is also beginning to rise. Wealth and asset
management, too, seem set to become increasingly important as the world’s
capital glut shows no sign of dissipating and interest rates remain stubbornly
low.
What does seem to have ended – for the moment – is that
investment banks primarily making money by doing leveraged trades with each
other. Proprietary trading is dying and consolidation is likely to occur with the
larger investment banks.
MIDDLE-MARKET BANKS
So where are the opportunities in investment banking? The “middle-market”
banks. To the layperson, middle-market banks are “bigger” than boutiques or
regional banks, but smaller than bulge bracket banks. The deals they work on are in between what you
see at regional boutiques and bulge brackets or elite boutiques – a larger deal
at a middle-market bank might be around $500MM, whereas a smaller one might be
about $50MM.
Middle-market banks are also in the middle in terms of
geography . They operate in many cities, but are not as global as bulge bracket
banks. Often they have a strong presence domestically, but aren’t quite as
strong internationally. Unlike small boutique banks, middle-market banks
provide the full range of services: M&A advisory, equity and debt capital
market, restructuring, and other variations on those. They advise on buying and
selling companies and provide the financing to make it happen.
Some middle-market banks focus on a particular industry. The
same also applies to many regional boutiques, but the deals they advise on are
much smaller so they rarely become famous for a certain industry or deal type. Examples
of Middle-Market banks would include Piper Jaffray, Baird, Cowen, Jefferies,
Houlihan Lokey, KBW, Lazard, William Blair & Company. These firms should be
attractive to students seeking entry level positions in investment banking.
