Corporate Finance Explained

Saying you want to be an investment banker is like saying you want to be a lawyer – there are so many kinds of lawyers! Do you want to be an entertainment lawyer? An environmental lawyer? Do you want to work in a niche subject like shipping or copyright? Equally in investment banking you’re going to have to choose where you want to concentrate on finding a job – and there is a lot to choose from. One division of investment banking is called corporate finance. Corporate finance (which is part of merchant banking) is one of the most demanding areas of investment banking. Forget 9-5 or even 7-7, your hours are set by your clients and not the opening and closing of markets. But for all of those hours and hard work, you will be rewarded. Hopefully this brief explanation will help you figure out where you best fit in.

 

 

So what is corporate finance anyway?

 

Within an investment bank, the corporate finance team is almost like a financial advisor for large companies, corporations and even some governments. The corporate finance team will sit with the client and come up with strategies for what that company wants to do. It’s the corporate finance team’s job to listen to what the client wishes to achieve in the future and then offer different suggestions of deals that will make that wish a reality. Most of the time a corporate finance team will suggest a merger or purchasing a company or part of a company if the client wants to expand their business and increase profit. If the client wants to raise funds they might suggest an IPO – issuing stock – or advise issuing other securities such as debt. They may also bring up things like joint ventures, debt restructuring or management buy-outs (or buy-ins). The different suggestions may come about through financial modelling or just a deep understanding of that particular industry/experience within that industry. Then the corporate financiers will act as a kind of broker to get the job done. So even within the corporate finance division there are lots of teams, each one handling a different way that the client can implement their financial plan for the future.

 

 

Who are these corporate financiers?

 

The whole corporate finance section is split up into teams and within those teams are the different roles. Though one team may only be concerned with M&A and another might only work with the oil industry, their structure is basically the same.

 

 

 

First you have the analysts. They are at the bottom of the ladder and unfortunately, that’s most likely where you’ll have to start. Analysts do a lot of the not-so-fun work that is necessary for transactions to go through. As an analyst you’ll find yourself evaluating financial statements as well as reviewing things like management structure. You may also have to value that company based on similar companies in the same industry and see how your client measures up.

 

After analysis comes the financial modelling that will tell the team if a proposed deal is a good idea or not and from there you’ll draw your conclusions as to what the best strategy is – does the client need to raise more cash? Should they be purchasing a competitor or is it better to let a competitor purchase them? If you’ve read our article called Investment banking interview: corporate valuation, you might already know what DCF Analysis is, and that is an example of a financial model. There are many other kinds of models and which ones you’ll use obviously depends on which team you sit, but you could be tasked with looking at balance sheets to predict a company’s future profits, thinking broadly about a company and its situation (what if this happens or what if that happens), or you could be asked to use a complicated mathematical algorithm dealing with risk, credit or interest rates. If you are an analyst, spreadsheets will become your best friends. 

 

If you are into maths, you may love being an analyst; or you may only be using the position as a way to move up. Either way, you will be worked hard as an analyst. A VP or director might have a hunch about a certain deal, but it is you who will provide the data to either back up or disprove his (unfortunately it usually is a his) theory. This means that you are on a short lead and cannot get anything wrong. You’ll work very long hours and might not get much of the glory, but you will be an integral part of your team.

 

 

 

Associates are higher up on the ladder than analysts, but sometimes not by much. They might handle the more complicated models, but they also concern themselves with the pitches to the clients for whatever deals the team thinks are best. This takes the form of pitchbooks and generally associates work with analysts to create these. The pitchbooks are used to gain new clients and usually for each potential client, the associates and analysts create two: a general pitchbook outlining the bank and what the corporate finance division has accomplished, and then a more specific one that contains particular models aimed at exactly what this client wants to achieve. So though associates still have to do a bit of the grunt work of the analysts, they do also get face time with clients, which can be a nice change. An associate with an MBA might have a better work life than one without, as this can mean more experience and thus more responsibility and more leeway from the bosses. Here you don’t necessarily have to be a maths wiz to shine, but as long as you possess general business knowledge, business sense and an overall grasp of the markets and your clients, you can really stand out as an associate. 

 

 

 

As you may have guessed, VPs are on the next rung of the ladder. They oversee the analysts and associates and while they still keep an eye on the modelling, they really don’t do any themselves. They do, however, oversee the pitches because one of the main responsibilities of the VPs is client management. These are the people who spend time with most of the clients and so will be in lots of meetings and disappear for many working lunches and dinners. VPs get paid more, have more responsibility, but also travel a lot visiting clients, so they are sometimes barely in the office. They are also probably the ones who represent the company at various conferences and industry gatherings, trying to gain new business and network. Yes, the grunt work is over by this point and you’re probably getting paid quite a bit, but you may not see your family as often as you’d like.

 

 

 

This is where all that financial modelling pays off! MDs sit at the top of the corporate finance division so they pretty much get to do what they want. They are in the office only when they want to be and only visit the clients that they want to – usually the most important clients are the ones the directors handle themselves. The directors’ real job is to represent the team, make sure the clients are happy and drum up as much new business as they can.


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