The following post is from a friend who works in investment banking. He formerly worked for a large investment bank and currently works for an M&A boutique. The perspective is invaluable – coming as it does from a practicing Muslim about an industry on which there is a dearth of such inside voices. I’ll let you make your own mind up below, but in short, I agree with him that the Shariah-compliant options within investment banking are either boutique M&A-only firms, where they are not involved in the debt side at all, or failing that, as an analyst/broker in ECM/equities, where your primary role is related to either analyzing stocks, or IPOs.
I look forward to all your thoughts on this!
A Muslim’s guide to a career in investment banking
In this article we will explain the investment banking landscape within a typical bulge bracket with the aim of providing clarity to those considering a career in investment banking on what the work entails, which teams are most or least involved in interest related activities and the typical junior banker’s life-style. We will add a few words at the end on boutique investment banks.
What we mean by investment banking
We should start by clarifying that by investment banking we are referring to mergers and acquisitions (M&A), equity capital markets (ECM) and debt capital markets/leveraged finance (DCM/LDCM). These activities are referred to as being on the the private side of the wall due to the fact that these bankers have access to non-public highly confidential information relating to their clients. This article does not cover the public side of the wall, sales and trading, which is a very different profession.
We will begin with an overview of the main product categories and then move into the other teams, starting with M&A. The primary role of M&A bankers is to advise their clients on the acquisition of other companies or the sale of their own company (or a portion of their own company). M&A bankers act as advisers and intermediaries between companies and aid in the various processes involved in buying/selling companies including valuation, transaction structuring, regulatory issues, due diligence amongst others. As a junior banker your role will function primality around valuation, due diligence and process management. You will build arguably the most technical skill set amongst investment bankers and also typically work very long hours. Although M&A bankers’ responsibilities are as described above, every transaction will need a financing structure and most of them will involve some form of debt. In such cases there will always be a LDCM or financing team involved whose responsibility will be to deal with all finance related issues. As an M&A banker you will rely on the financing team’s debt structure to appropriately build your model and arrive at a valuation. However, the primary value add of M&A bankers is strategic advice around the asset being bought/sold.
ECM bankers provide companies, whether private or public, with access to capital by acting as intermediaries between equity investors and the companies. If the company in question is private this is primarily done through an initial public offering which is the process of transitioning a private company with illiquid shares into a publicly listed company with its shares trading on a stock exchange. If the company is already publicly listed they can help the company raise additional funding through selling more of its equity in a follow-on offering to the market. In addition to plain vanilla equity issuances the ECM team also aids companies in issuing hybrid instruments that have both equity and debt like features, an example of this is convertible bonds which function just like bonds paying the investors a fixed interest rate but come with an option to be converted into shares at a certain stated price per share. Given the distinct nature of these two instruments, the straight equity and the equity hybrid teams within most banks are likely to separate, however this may vary from bank to bank. As a junior banker in the ECM team you will have much closer proximity to the equity markets and see a world that M&A bankers won’t see, however this comes at a cost of not building as technical a skill set when it comes to financial modelling and company valuation as compared to other bankers. Hours will again be quite long although typically not as long as in M&A, but this again varies from bank to bank with some banks having their ECM teams working comparable hours to their industry teams.
DCM and LDCM bankers, quite similarly to ECM bankers, provide companies with access to capital, the only difference between the investors in this case are debt investors who are receiving fixed interest income in return for their investments. The debt world is very vast and can get quite complex with a variety of different teams and sub teams. The common feature amongst all teams is that the primary role of the banker will be to aid companies in issuing interest bearing debt instruments. As a junior banker in the LDCM team your main role will be providing financing to companies being bought via a leveraged buy-out (wherein a financial sponsor buys a company with a portion of their own equity and preferably a large portion of debt raised by the company itself). You will develop a highly technical skill set, slightly different to M&A bankers, but on par and a better understanding of debt instruments and the debt capital markets. Many junior bankers transition from the LDCM team into a private equity firm after one or two years of joining.
Banks will in addition to the above have a a variety of industry teams which include industrials, technology, media and telecoms (TMT), financial institutions, consumer, natural resources, healthcare and others. The senior MDs within these teams will serve as client relationship managers for the various companies within their industry. Their main role will be to pitch ideas on a regular basis, provide strategic advice and then hopefully be mandated when their client decides to make use of any of the banks products mentioned above. The key value add of these teams is in their understanding of the industry as well as the clients they have favourable relationships with (although as a junior banker the job may seem all about the numbers and the detail, as one progresses the job is more and more about relationships and building trust and credibility with your clients so they mandate you). As a junior banker you will work across all the different products the bank has to offer and also build some expertise in your sector. Having said that, your role when working with the various product groups will differ. An industry banker working on a financing during an LBO for example will have a secondary role to the LDCM team. The industry banker will be required for his input on the more commercial and business related aspects of the company as well as comparing the company to its peers and ensuring the financial projections used by the LDCM team are credible and make sense in light of his view of the company’s business model and the industry it operates in. Hence the industry banker will be supporting the financing team whose responsibility will be to drive the actual issuance of the debt instruments and placing them with investors. During an IPO the industry banker will have somewhat of a more involved role as he will be expected to lead in positioning the company, drafting the equity story and provide valuation views. As for M&A processes then the industry banker’s role varies from deal to deal, some M&A deals can be done with just an industry team and no other teams, other times it might be required to involve either the local or a foreign M&A team due to their experience in public takeovers or with local regulation. By default, you can think of an industry banker as primarily an M&A banker that also supports, via his industry expertise, in debt and equity deals. It is also worth mentioning that the more senior you get the less well-defined these roles are, you may have an MD in an industry team that just does ECM (if for example there are a lot of IPOs conducted in that sector) because that is where his past activity and experience has been. As a junior industry banker, assuming you get the right exposure, you will develop arguably the best skill set, you will develop the core technical and financial skills needed by M&A bankers but also have worked on ECM and LDCM transactions in addition to having experience within a particular industry.
Country teams can be thought of as similar to industry teams, they are there in order for the bank to manage relationships with key clients within those countries and are headed by sector agnostic bankers that have experience and relationships with client within their respective countries. Again, by default these can be thought of as M&A bankers although they may help out on other product related transactions. They can sometimes work with an industry team on an M&A deal either taking the lead role with the industry team providing their industry specific expertise or vice versa where the country team plays the supporting role and aids in country specific issues (regulations, local takeover law, e.t.c). Again, depending on exposure, a typical junior banker should develop a solid M&A skill set working in a country team and will also work across industries.
Teams that are most exposed to interest related activities and other considerations
It should be clear that all DCM/LDCM roles will involve issuing interest related instruments as the primary function, there is no ambiguity with regards to this. On the other spectrum, we would put ECM (assuming no hybrid instruments) which is involved the issuance of pure equity instruments. In M&A the primary role is strategic advice around the asset and the process, debt financing may be a component of the deal however there will always be a financing team running that. If the financing bank is the same bank that is providing M&A advice, most likely then the M&A bankers will be supporting the financing team in their views on financing so there will be a support role here by the M&A banker in the financing. Likewise if you are an industry banker, your primarily role will be in M&A but nevertheless you will have to provide a support role during financings.
Another area that requires attention is what the client you are serving does. It is questionable to be providing any form of investment banking service regardless of what product it is to a beer or tobacco company. The only way of avoiding this will be to join an industry team that doesn’t have these questionable activities (think industrials, energy and healthcare vs consumer, financial institutions and gaming & leisure).
It is also important to note that the descriptions provided above are generally how things work and individual cases may be very different in reality. For example you may be working in an industry team and after two or three years have only worked on M&A and ECM transactions simply because you didn’t get staffed on debt deals. Alternatively, you might have worked only on debt deals.
Analysts are at the bottom of the hierarchy, they are often the closest to the numbers and data, actually create the outputs requested by their seniors in ppt and in addition to this do a very wide variety of basic tasks including couriering materials to their seniors and printing and binding books (in smaller country teams). Banks either have a two and a half or three year analyst cycle.
After three years of being an analyst many banker leave to what is known as the buy side (private equity, hedge funds, asset managers, venture capital…).
Those that decide to stay work three years as an associate, then three years as a vice president, followed by working as a director until you qualify to become a MD, although the exact promotion structures varies from place to place.
In brief, expect to work long hours. Typical hours for an analyst are from 9am – 11pm/12am but this is highly variable. Regularly working till 2am/3am is not uncommon and during busy parts of a deal your life will just be about the deal and you will literally just go home to get a few (less than 3) hours of sleep and shower. There will be that odd day, or maybe string of days, where you are in-between staffings and leave the office at 7pm or 8pm (what is known as downtime) but this will be short lived and isn’t the norm.
It is very difficult to summarise the wide array of personalities you will find in investment banking, but one thing that can be said with confidence is that in the UK the stereotype of bankers being on drugs and visiting clubs at every opportunity isn’t true. Although going for drinks on a Friday evening isn’t uncommon, but this is found in most city jobs. Some bankers can be quite arrogant, grumpy and constantly agitated (the nature of the work is partly responsible for this). Anyone coming into the industry should just be ready to be heavily criticised and shouldn’t take it personally.
Boutique investment banks compete with bulge brackets in almost all of the aforementioned products and services with two main differences, they don’t have a balance sheet of their own so they never do financings, and secondly, their primary function is to serve as M&A advisors. Think of Lazard, Rothschild, Evercore, Centreview, Perella, PJT and Moelis amongst others. The key benefit of working in a boutique is that if M&A is what you’re after then it is pretty much all you will do. The hierarchies are also less well defined so as an analyst you might be expected to step up and take on more responsibility. Hours shouldn’t be expected to be too different from a bulge bracket and pay can sometimes be better, although this will again depend on the boutique.
In summary, investment banking provides the opportunity for a high-effort high-reward (both financially and skill development wise) career path. It can and has been used by many as a stepping stone onto a variety of other careers or start-ups. There are undoubtedly many areas within it that the cautious muslim would want to steer clear of but also some “cleaner” areas which he might be comfortable with, such as the ECM or M&A roles highlighted above.
Whilst we are confident the contents of this article accurately reflects information relating to investment banking, prospective applicants are advised to themselves research what they believe to be permissible or impermissible from an Islamic view point.