Investment Banking: The Industry that Rules the World, Demystified for Non-Financial Professionals

Investment banking rules the world, yet the general public remains largely uncertain about their true functions.

Governments, in fact, are many times under investment banks, depending heavily on them to maintain fiscal stability and access to capital. Companies, both private and public; funds, both closed-end and open-end ones; or even non-profits, all could face severe financial constraints without the capital introductions investment bankers provide.

And, investment banking is, undeniably, one of the most misunderstood industries due to its complexity, its wide scope—it encompasses up to nine distinct verticals—and its inherent opacity. Beyond basic content such as "how to land a job in investment banking through mastering financial modeling," there is little accessible information about the industry, particularly about its key dealmakers.

This opacity is so pervasive that few, if any, comprehensive resources exist on the full scope of investment banking—most are limited to specific areas of focus, mainly M&A. If this lack of transparency exists in developed markets, it’s even more pronounced in Emerging Markets.

Just in 2023, bulge bracket banks like Goldman, JP, BoA, Morgan Stanley and the rest, generated more than $100 billion of EBITDA combined -only from their investment banking services. Together, with boutique firms such as Lazard, Evercore, Jefferies..., along with numerous independent advisory firms, the industry moves tens of trillions of dollars each year, significantly influencing the future of the society.

In summary, investment bankers drive the world and the general public do not know what they do, so this article provides a clear and comprehensive overview of the full scope of investment banking.

We will first define what investment banking really is, then examine its nine key verticals, and then delve into the future of this industry.

What Is Investment Banking At Its Core?

Investment banking is the intermediation of the monetary flux.

Non-depositary in nature, investment banks bridge capital with opportunity, pairing investors with the entities and structures that require funding. Much like a real estate broker intermediates property, investment banks broker assets—though their transactions resonate far beyond individual deals, influencing the entire global economy.

Financial modeling and valuation, often regarded as the core of investment banking, are in fact, at least most of the time, junior-level tasks, typically handled by analysts in their early twenties and thirties—tasks increasingly poised to be replaced by AI.

The true core skill in investment banking isn’t finance; it’s psychology. Understanding human behavior, managing relationships, and navigating complex negotiations are the defining elements that drive the high-stakes deals in this industry.

More Psychology Than Finance

At its core, investment banking is about one thing: closing the deal.

It’s about building long-term, trustworthy relationships between capital pool managers and capital raisers—a task that demands an exceptional level of emotional maturity. Contrary to public perception, investment bankers play a critical role -and, many times, a very ethical one- in the functioning of society.

Investment bankers scout and structure investment opportunities that are then shared with private bankers and other financial intermediaries, including fellow placement agents and additional investment bankers. They wholesale investments. In this ecosystem, their work is vital to shape the future of markets.

The 9 Verticals of Investment Banking

There are numerous methodologies for categorizing investment banking, and many may not agree with the following approach. However, I believe these categories are the most practical and understandable for the general public:

1. Private Placements
2. Private-to-Liquid
3. M&A
4. Market-Making
5. Global Underwriting
6. PPPs (Public-Private Partnerships)
7. Asset Management
8. Research
9. Brokerage

Private Placements

When a fund, corporation, or government seeks to raise capital, they rarely approach the institutional buy-side directly—just as most homeowners don’t sell their properties without the help of an agent. Investment banks possess already the deep connections, established relationships, financial mastery and general expertise to organize private roadshows and commercialize investment mandates.

In addition to their direct access to institutional investors, investment banks leverage a vast network of financial intermediaries, including private banks, placement agents, advisory firms, and other investment banks, often collaborating across borders on fee-sharing agreements to distribute deals.

Taking this into consideration, each time a capital raise occurs in private markets, it is called a private placement. Private placements occurs in all major Alternative Investments:

1. Private Equity (Buyout funds, Venture Capital funds or Growth funds).
2. Real Assets (Real estate funds, Infrastructure funds or Natural resources funds).
3. Hedge Funds (Systematic and Discretionary funds, including CTAs).
4. Private Debt (Mezzanine, High-yield, Leveraged loans or Distressed debt).

Beyond connections, investment banks excel in conducting both quantitative and qualitative due diligence like no other. In Private Placements, investment banks:

• Prepare the necessary transactional documentation, which varies depending on whether the capital raise is for a private company, a public company, a closed-end fund, or an open-end fund. Across these categories, up to 30 different documents may be required—and the deck is usually not the most important one.
• Conduct thorough background checks on stakeholders seeking to raise capital.
• Organize private roadshows, investment conferences, and industry events that connect synergistic investors.
• Provide neutrality and intermediation, ensuring psychoanalytical alignment between investors and investees.
• And, of course, guarantee that the mandate is institutional-grade and potentially profitable.

Considering that this service comes at no cost to the buy-side, the difference between an investor approaching an investment opportunity directly and working with a top-tier investment bank is immeasurable.

Investment banks often work on a contingent basis, meaning their incentives are aligned with the success of the deal.

They just not just value, but trust, quality, and efficiency to every transaction.

Recent Private Placements

• Stripe raised $6.5 billion in a private placement at a valuation of $50 billion in early 2023, despite the challenging economic environment.
• SpaceX raised over $1.9 billion in a private placement in 2023, continuing its leadership in the space industry.

Private-to-Liquid Transactions

Corporate structures, whether corporations or funds, gain significant advantages by going public. Going public enhances their ability to access liquidity for M&A, boost their valuation, and offers soft benefits such as increased reputation and visibility. There are various pathways to go public across the more than 50 exchanges of the World Federation of Exchanges, including:

• Direct Listings: A company can go public by selling existing shares instead of offering new ones.
• SPACs: Public corporation formed for the sole purpose of raising investment capital through an IPO.
• Reverse Mergers: A private company becomes a public company by purchasing control of the public company.
• IPOs: Unlisted company sells new securities and offers them to the public for the first time.

These transactions unlock liquidity for private shareholders while providing businesses with essential growth capital.

For public companies, investment banks also offer additional capital-raising strategies that could be included into another category, such as follow-on offerings, PIPEs (Private Investment in Public Equity), or GDRs (Global Depositary Receipts) deals, further supporting their financial expansion.

Recent Notable Private-to-Liquid Transactions

• In 2023, Birkenstock, the German sandal maker, completed its much-anticipated IPO, raising over $1.5 billion. Investment banks, including Goldman Sachs and JPMorgan Chase, played a crucial role in the underwriting and advisory process.
• On the SPAC front, the high-profile SPAC merger of WeWork in 2023 highlighted both the risks and rewards of this increasingly popular exit strategy. WeWork merged with a SPAC to go public after a tumultuous few years, although it faced significant volatility post-merger.

M&A Advisory (Mergers & Acquisitions)

There comes a pivotal moment in every corporate structure's history when companies must shift from organic growth to inorganic growth by acquiring other firms.

Corporate buyers do not approach potential acquisition targets directly due to privacy concerns, the absence of established relationships, and a lack of quantitative M&A knowledge—such as valuation, regulatory expertise, modeling, and the professionalism that M&A demands, which is far more complex than many realize.

Mergers and Acquisitions (M&A) advisory for low, middle, and large-cap companies—both public and private—represents one of the strongest areas of investment banking.

Investment banks also provide "anti-M&A" services, helping companies defend against hostile takeovers by third parties in public markets.

Whether a company is acquiring another to penetrate a new market or merging to create a global leader, investment banks provide essential advisory services that are critical in navigating these transactions. The world of M&A is a universe of its own.

Recent M&A Transactions

One of the largest M&A transactions in 2023 was Microsoft’s acquisition of Activision Blizzard for $68.7 billion, advised by Goldman Sachs and Allen & Co. The deal brought together two industry giants, with Microsoft seeking to expand its footprint in the gaming industry.

Another significant transaction was Pfizer's acquisition of Seagen, a cancer treatment specialist, for $43 billion. Pfizer used this acquisition to strengthen its oncology portfolio.

Market Making & Proprietary Trading

Both spot and derivatives markets owe their liquidity to market makers, a branch of investment banking. This is one of the more controversial practices of investment banks, as acting as a liquidity provider, or market maker, is often doing proprietary trading against retail clients.

Even if there are no "major controversies" when providing liquidity to spot markets (equities, fixed-income...) or exchange-traded derivatives (futures, vanilla options...), when talking about OTC (over-the-counter) derivatives such as CFDs (Contract-For-Differences), Forwards, spot FX, exotic options, or other OTC products, market makers literally absorb retail money, as explained in this article.

Nevertheless, aside from the ongoing controversy surrounding OTC derivatives, market making not only supports trading activities but also strengthens the overall health of capital markets, enabling smoother transactions and fostering greater confidence among participants.

Recent Market Making Developments

Investment banks like Barclays and Deutsche Bank have recently expanded their market-making capabilities in exotic options and cryptocurrency derivatives, taking advantage of increased institutional interest in digital assets. Forwards and CFDs continue to be popular in forex trading, with significant volumes traded on a daily basis.

Structuring & Underwriting

Some companies undergo restructuring by modifying their HQs or opening new entities internationally. While these changes do not alter the underlying business itself, they transform the "structure" in which they operate.

In the investment industry, investment banks play a crucial role in achieving market completion by developing new investment products that address the demands of institutional investors. Many of the products these investors seek either do not exist or have yet to be developed, which is where structuring and underwriting come into play.

So, financial structuring involves creating complex products that redistribute risk and provide investors with unique opportunities. By changing the structure, even if the underlying investment is the same one, investment banks allow specific investors to access prior unaccessible investments.

These sophisticated financial products are primarily within the fixed-income or lending space, but the originality is infinite.

The most implemented structured products include Collateralized Debt Obligations (CDOs), particularly Collateralized Mortgage Obligations (CMOs) via Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities (CMBS), but additional ones are Business Development Corporations (BDCs), Master Limited Partnerships (MLPs), Credit-Linked Notes (CLNs), Real Estate Operating Companies (REOCs), or Real Estate Investment Trusts (REITs), among many others.

Structured products represent the future of investment banking, especially when integrated with emerging blockchain-based innovations, mainly perpetual future contracts or synthetic tokens. This combination pushes the boundaries of financial innovation to meet the evolving needs of the market.

Recent Transactions in Structured Finance

In 2023, Blackstone successfully issued a $1.5 billion CMBS to finance real estate acquisitions across the U.S. Similarly, JP Morgan structured a $2.3 billion RMBS in early 2023, continuing to play a dominant role in mortgage-backed securities.

PPPs (Private-Public Partnerships)

Public-Private Partnerships (PPPs) are collaborative arrangements between governments and investment banks designed to fund and manage large-scale projects across various sectors, not just infrastructure.

Investment banks play a vital role in raising funds through private placements and public offerings, including Treasuries.

This is perhaps the most controversial area of investment banking, specially in Emerging Markets, as it requires deep connections with decision-makers in public bodies. And, unfortunately, whenever such connections are involved, there is often an unfortunate backdrop of intrigue reminiscent of something out of a Netflix drama.

Given the reputation of politicians, particularly in Emerging Markets, many investment bankers tend to avoid engaging in Public-Private Partnerships (PPPs) for the same reasons that many commercial banking divisions are cautious about opening accounts for Politically Exposed Persons (PEPs).

Nevertheless, PPPs present significant funding opportunities for government bodies, as they provide funding for the projects society needs.

Three notable examples of large PPPs include:

1. London’s Crossrail Project: One of the largest infrastructure projects in Europe, funded through a mix of government bonds (Treasuries) and private placements. Investment banks like Barclays and HSBC facilitated the financing.
2. Indiana Toll Road: A $3.8 billion PPP where Macquarie Group and Cintra raised funds via private placements and bond issuances, structuring the deal with investment banks like JP Morgan.
3. Denver FasTracks Rail Expansion: A major public transit project financed through a combination of municipal bonds (Treasuries) and private capital, with Goldman Sachs acting as the lead investment bank for fundraising.

Asset Management

The investment management industry, as other branches of investment banking originally part of sector, has grown into a standalone industry worth hundreds of billions annually, managing over $100 trillion in assets globally.

Asset management is divided into systematic asset management (rule-based, model-driven based on algorithms) and discretionary asset management (human-managed by "fundamental analysis") strategies. Systematic funds rely on mathematical models, while discretionary funds rely on portfolio managers’ judgments, adapting to market shifts. Evidently, systematic management is an evolution from discretionary one and the future of the industry.

Investment products cater to different investors:

• Retail products: Mutual funds, UCITs, ETFs, or REITs provide accessible, regulated, and liquid investment options with professional management and moderate fees.
• Accredited investor products: Hedge funds, private equity, and venture capital funds offer high-return potential but carry higher risk, lower liquidity, and require wealthier, sophisticated investors.

The industry includes major players like BlackRock and Vanguard for passive investments, Fidelity and Schwab for retail and institutional products, and hedge fund leaders such as Bridgewater and Citadel. Investment management’s vast reach and specialized offerings make it essential for global capital allocation and wealth growth.

Research

Research, including credit ratings, involves providing analysis and recommendations to help institutional investors make informed decisions. Analysts evaluate companies, industries, and markets, assigning investment ratings such as:

• Long/Buy: A recommendation to purchase the financial instrument, signaling expected growth or undervaluation.
• Hold: Advises investors to maintain their position, implying limited near-term upside or downside.
• Sell: Recommends selling the financial security, often due to overvaluation or deteriorating business prospects.

Credit Ratings are a key aspect, assessing a company's ability to meet its debt obligations. Agencies like Fitch, Moody's, and S&P Global Ratings issue ratings based on credit ratios like debt-to-equity, interest coverage, and cash flow ratios. Higher ratings (e.g., AAA) indicate low risk, while lower ratings (e.g., BBB or below) suggest higher risk.

Investment banks also focus on emerging industries and innovations, analyzing sectors such as fintech, renewable energy, biotech, and artificial intelligence. These industries often offer significant growth potential but come with higher risks, making deep research essential.

Brokerage

Yes, the brokerage industry is also a branch of investment banking, connecting investors to markets across asset classes like spot makers such as stocks or bonds and derivatives such as futures or forwards. Brokers come in various types:

• Retail Brokers (e.g., Robinhood, Schwab) serve individual investors with user-friendly platforms.
• Prime Brokers (e.g., Goldman Sachs, J.P. Morgan) services support hedge funds and institutions with lending, leverage, and capital access, including securities lending for short-selling.
• Full-Service Brokers (e.g., Merrill Lynch, Morgan Stanley) offer investment advice alongside trading.
• Discount Brokers (e.g., Fidelity, E*TRADE) provide low-cost, self-directed trading options.

Major players like Goldman Sachs, Morgan Stanley, and Charles Schwab ensure liquidity and connect retail and institutional clients globally.

Behind All Large Transactions, There Is Always An Investment Bank

Every time there’s a significant capital raise—whether for a corporation, a fund, or a complex financial product—an investment bank is at the helm.

Governments raising capital? Through investment banks.

When you see a significant IPO, SPAC, Direct Listing, or Reverse Merger, there’s mostly always an investment bank driving the process.

Major mergers, acquisitions, and buyouts? An investment bank is orchestrating the deal.

Large infrastructure projects in your city? Investment banks are behind the scenes, facilitating the funding.

The capital markets themselves are shaped by the pricing strategies of market-making desks within these banks.

And research? It’s investment banks that conduct the in-depth analysis driving market decisions.

Investment banks are essential for the smooth functioning of society.

The Future of Investment Banking

Activities like private placements, private-to-liquid transactions, and M&A are traditionally done in person. However, with the right innovation, there’s potential to successfully digitalize these areas.

Even in 2024, investment banking still centers around genuine, trustworthy relationships. While AI is likely to take over many junior roles, the ability to cultivate these relationships online will be the true differentiator.

If you’re looking for a partner skilled in raising capital or sourcing exclusive, institutional-grade investments—with a focus on building authentic relationships—contact us.

Francisco F. De Troya

Investment banking & brokerage professional