Investment Banking: What Do Investment Bankers Do and Why are Revenues Down?

Investment Banking is an important sector of the global economy. Goldman Sachs, for example, is the second largest Investment Banking Company. While their overall revenues for 2022 were 47 billion dollars, the overall profit was 10 to 11 billion dollars. Despite these impressive results, the stock dropped by 6% when they released the results two days ago. This was largely due to the 50% drop in their Investment Banking division’s revenues.

In this article, we will analyze what Investment Bankers do, how they make money, and what is currently happening in the market. There are also some interesting takeaways for people interested in a corporate career, as well as for learning about the industry.

What Do Investment Bankers Do?

Let’s start with a simple example. If you are looking to purchase a house, and I am looking to sell a house, we don’t know each other, so there is an intermediary connecting us. This could be a platform, friend, relative, or broker. If the transaction goes through, this intermediary will benefit.

As a buyer, you will consider the following factors:

1. You want a great house
2. It should be a great price
3. If you’re looking for a loan, the interest should be low.

As a seller, all I’m worried about is a great price.

In an Investment Banking scenario, Goldman Sachs is the intermediary. If two companies are coming together, there are a lot of individuals and teams that have to go through the process. There is due diligence involved to understand the situation.

Even if the transaction does not go through, Goldman Sachs will be paid. This payment is broken down into two components: a fixed monthly income, or a success rate if the deal goes through.

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Why is the Market Sentiment Negative?

At present, both buyers and sellers are not willing to enter the market. This means that the revenues for Goldman Sachs are going down.

Buyers are hesitant because the interest rates are increasing, and the cost to borrow money is high. They are waiting for the interest rates to come down and for the seller’s company to survive the downturn.

Sellers are also hesitant because they think they will get a lower price in the current market.

These factors mean that Goldman Sachs is losing out as an intermediary.

According to a report from BCG, Mergers and Acquisitions (M&A) activity has decreased by 32% in 2022 compared to 2021. Furthermore, while the revenues of other Investment Banking companies are down, the stock of Goldman Sachs was the most hit. This is because their revenue streams are limited, especially in terms of retail banking.

What is Goldman Sachs Doing?

Goldman Sachs’ CEO has announced that they are aggressively focusing on other divisions such as Asset Management.

Takeaways

For individuals and companies, the primary takeaway is that diversifying income streams is important. This means looking out for side hustles and understanding the market dynamics.

Mergers and Acquisitions is also a great way to learn about the industry, the economy and market situations.

Finally, an article from BCG highlights how Investment Banking companies fare during a global economic slowdown.

Conclusion

Investment Banking is a vital part of the global economy. While Goldman Sachs is the second largest Investment Banking Company, their stock has taken a hit due to the 50% drop in their Investment Banking division’s revenues. In this article, we have explored what Investment Bankers do, how they make money, and the current market situation. We have also looked at the takeaways for people interested in a corporate career.

What are the two components of the payment for Investment Bankers?

The payment for Investment Bankers is broken down into two components: a fixed monthly income, or a success rate if the deal goes through.

What is the primary takeaway for individuals and companies?

The primary takeaway for individuals and companies is that diversifying income streams is important. This means looking out for side hustles and understanding the market dynamics.

What is the current state of Mergers and Acquisitions activity?

According to a report from BCG, Mergers and Acquisitions (M&A) activity has decreased by 32% in 2022 compared to 2021.

What is Goldman Sachs focusing on to make up for the downturn in their Investment Banking division?

Goldman Sachs’ CEO has announced that they are aggressively focusing on other divisions such as Asset Management.

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