Why Is It Called Investment Banking?

I was talking to one of my friends (he's a grad student so he doesn't know anything about investment banking or money) and was telling him that I work as an investment banking analyst. 

He asked me what we invest in, and of course I told him that we don't invest in stocks. Then he asked if we take deposits from people and I said we don't do that either. I told him we do mergers and acquisitions.

My friend told me that would be the same thing as walking into a Pizza Hut and asking for a pizza and being told that sorry we don't sell pizza, this is a mergers and acquisitions hut, which I think is a fair point. So why are we called investment bankers if we don't invest and don't bank? Maybe it's time we rebranded this industry?

 

Investment banks are called so because they primarily deal with raising capital for companies, governments, and other entities through the issuance and sale of securities. They also provide services such as mergers and acquisitions, trading of derivatives, and other financial instruments. The term "investment" reflects their focus on FACILITATING investment and capital formation rather than actual investing.

 

In the old days, Investment Banks would facilitate (underwrite) loans and credit to companies making an investment or acquisition. Hence the name Investment Banking. Once they realised they could make money and provide advisory services to those seeking to make investments, Investment Banking as we know today (M&A advisory) was born

 
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Historically investment banks were agents for securities issuers. They were called investment banks because they didn’t have money to lend, like commercial banks and merchant banks, they created and sold securities to investors on behalf of issuers.

In many cases, investment bankers became financial advisors to companies. They had knowledge of financial markets, which was useful for considering mergers, acquisitions and restructurings. Also they were familiar with the financial attributes of other companies.

In other cases, investment banks built up networks of institutional and retail investors. This made them more effective at issuing securities, and they were able to earn profits both from investment banking fees when issuing securities, and brokerage fees when trading them for investors.

Full service investment banks had all three operations, and naturally added investment research, proprietary trading and asset management. In some cases, the original defining business of issuing securities was dropped. But the name stayed the same.

 

Investment bank is a bank for the investors. Investment banks process transactions for investors, exactly like commercial banks process transactions for a guy buying pizza in Pizza Hut

 

How else would you call it?

Investment Banks act as intermediary between corporates and investors. So they facilitate investments. Hence, they operate in banking and deal with investments... Investment Banking seems like a pretty straightforward description.

But ofc, you can go - hihi, I am going to ignore the word Banking and focus on Investment. But thats a bit like saying "parkway" is strange because you drive on it, not park, just ignoring "way".

 

Mergers and Acquisitions are the largest type of Investments.

Further, we do the full cap structure, Revolvers, Term Loans, Senior Debt (Secured / Unsecured), Preferred Debt / Equity, SPVs, JVs, etc. It depends on your shop.

The key that ties all of this together is Valuation, which is the core facet of making an investment.

So it is all aptly named…you and your friend should ask Pizza Hut to be renamed to Grease Hut, since that is closer to their core product.

 

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