In this blog post, Mohammad Farooq from Nirma University describes how to get the right break into finance as a Lawyer.
When a law student graduates from a law school, he/she is armed with the knowledge of the law and certain skill sets typical to the legal profession. The common career trajectory for most law school graduates are litigation, law firms or pursuing masters from Indian or foreign universities.
Traditionally, corporate law firms have been considered to be the most lucrative career option, especially by fresh graduates across most NLU and law college campuses.
Lately, another area which has begun to gain the interest of law students is investment banking. A select few lawyers with a keen aptitude for finance have broken into this coveted field of finance even in the past regularly, but interest in investment banking has been growing in a wider section of law students in recent time. However, investment banking is extremely difficult to get into and very few ever get even close to breaking into the circle of investment bankers.
However, some of the most successful investment bankers in history are lawyers, and lawyers often have an unsaid advantage in this heavily regulated industry. Just to give you an idea, the current CEO of Goldman Sachs, the most well known investment banker ever, is a law graduate. Many dozens of American corporate law world worked as an investment banker at some point of their career, as few people get an inside view of the high finance and deal making world as well as investment bankers do, which can lay an amazing foundation to a corporate law career.
Yes, a lot of lawyers and law students will give an arm to break into investment banking, but what does it really take to get there?
What is Investment Banking?
Investment banking is a special area in banking segment which helps in raising capital and fulfilling the financial requirements including consultancy services to individuals or organizations. Investment bankers work for private as well as public companies. The investment bankers act as intermediaries between security issuers and investors and help new firms to go public. They perform several functions like preparing disclosure documents, marketing materials for public and private offerings, buying and selling shares, giving mergers and acquisitions advisory, negotiating and structuring deals, restructuring businesses to make them efficient, etc. Most importantly, they act as an intermediary between potential investors and those seeking capital and identify and analyze potential M&A.
Usually, investment banks make money from raising capital by issuing equity (stock), debt (bonds), or through commissions on M&A.
To illustrate an example of how an investment bank earns money, let us suppose “A” is a company that is looking to buy another company “X” but is not aware or sure about the feasibility of the acquisition in terms of the worth of X, the long term benefits, costs, revenues, etc. Here, an investment bank comes into play and does the due diligence in order to determine the value of the company, prepare the necessary documents for the deal and further advise on the same. In this scenario, there will be investment bankers on both sides of the transaction. The bigger the deal size, the more commission (which is usually a percentage of the deal amount) the bank will earn.
Major Areas of Investment Banking
Mergers and Acquisitions (M&A) – Bankers give strategic advice the corporations which intend to buy or merge with another company on the business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation. In cases of potential acquisition, investment bankers perform “due diligence” in order to reduce the risk and exposure of the acquiring company and evaluate the target company. They also provide “fairness opinions” which is basically an attestation as to the credibility and fairness of the transactions. The role of advisor played by an investment banker to an acquiring or buying side is called buy-side engagement and similarly for potential seller or target side it is called sell-side engagement. Other functions include joint ventures, takeovers, buyouts etc.
Raising Capital and Security Underwriting – When capital is raised for a company to fund any acquisition, investment banks act as middle men. It is done by issuing new securities, pricing, underwriting and selling new bonds for the purchasing public. In this regard, they act as intermediaries between the issuers of securities and the investing public.
Sales & Trading and Equity Research – The investment bankers buy and sell securities out of their own accounts as well as match up buyers and sellers in order to assist the trading of securities. They are also used by the institutional investors (mutual funds, university endowments, pension funds, hedge funds) in order to trade securities.
Front Office v Back Office – The investment banks are divided into sectors of front office, middle office and the back office functions. The critical functions like M&A form the part of front office functions. Other functions like compliance, risk management, financial control, corporate strategy, operations and technology are also important as they assist the front office functions therefore form the part of middle and back office functions.
Venture Capital – Some firms assist smaller companies or new startups with their capital requirements. They are called venture capital firms. Here, although there would be losses because many of these companies fail in their early stages, but the gains arising out of the successful ones offset all the losses.
What’s in it for the Lawyers?
The key attraction for lawyers is that while they are “driven by the process” in law, they are the ones “driving the process” in investment banking. They can actively take part in the negotiation process, impact the decision making and strategic business planning while working with the upper echelons of the company like the CFOs and CEOs. For those lawyers who complain of boredom or saturation with their work or lack of any excitement therein, investment banking can be exciting but something that takes extreme levels of hard work. Investment banking brings them closer to the real action as they are the ones putting together the entire deal.
The new associates in an investment bank begin to contribute right from the start and add value by attracting new clients and generating business and have greater responsibility as opposed to an entry level law firm associate. Apart from the incentive to make deals happen, there are various other tasks for an investment banker besides mere drafting and researching in a typical law firm. The financial incentive in this field is also greater for an entry-level associate and the pay rises steeply as compared to the corresponding rise in the legal profession.
How to Switch from Law to Finance?
Based on the lucrative benefits in investment banking, one may consider going for it straight after law school but most banks are more willing to recruit someone who has some transactional experience and who can show how their legal knowledge and experience is applicable to investment banking industry. Therefore, it’s better to work at a top corporate law firm and gain experience in financial transactions like M&A or capital markets and subsequently have a viable story to tell in the interviews as to why you want to shift to finance. Business schools also come in handy after law if you have had no related experience in corporate, M&A, securities, etc. In case you do not have an MBA degree, your interview becomes particularly important because this is where you can show that to the prospective recruiter that you have the prerequisite skills and brains and a good understanding of the markets and businesses in today’s economy.
Here are 5 things you need to do if you want to break into investment banking from a legal background:
- Make sure your reasons for switching from law to finance are right. Mere lucrative attraction towards banking and finance is not enough because law and finance are two radically different areas requiring different set of skills and competence.
- You may begin by using your contacts amongst friends and relatives and ask for getting referrals across to recruiters and exploring your former clients who may set up informational meetings or prospective opportunities at their firms, etc.
- You can use your prior experience of working with clients and industries. If they belong to any particular field, say technology companies, pursue investment banking in technology or if you’ve worked a lot on M&A, then pursue M&A departments at investment banks.
- If you have been working at a big brand or popular law firm, you have an added advantage because the banks are aware of the top law firms. However, if you have been working at a smaller law firm, your ability to set yourself apart will depend on how much sector expertise you have gained in a specialized area. Then, begin by targeting smaller banks.
- Ace the Interviews – It’s particularly crucial for lawyers to present a viable story to convince the recruiters. Broadly, the interviewers wish to know how you would count as a lawyer in this challenging industry and whether you are prepared to throw away your career in law for investment banking. To tackle these questions, you need to show all the credentials you’ve got such as undergraduate courses in finance, self-study, any other classes you took besides work/study and the knowledge you acquired during law school. If you have experience of a few years of working in corporate or securities law, your case becomes even more compelling. Show them that you are absolutely certain of making this switch after having spoken to several bankers/investors and from your own experience of working on cases, that finance is more apt for you. They will test you even more if you do not have a finance background and would expect that you are just as learned as any new analyst or associate just out of any undergraduate finance or MBA program. Leave them with an impression that you invariably had an inclination towards finance and deal making and hence decided to enter the investment-banking sector for these reasons.