Deal origination is the most important part of investment banking business. It refers to the process of identifying potential clients, pitching services, and securing mandates to advise on mergers, acquisitions, IPOs, bond issuance and other deals. Successful deal origination requires strong client coverage and relationship building, industry expertise, innovative solutions and senior banker involvement. This article will analyze the deal origination process in investment banking, explain the roles of various teams, and compare origination practices between Chinese and foreign investment banks.
Investment banking core business areas related to deal origination
Investment banking consists of three major business divisions that engage in deal origination – the Investment Banking Division (IBD), Sales & Trading (S&T), and Research.
IBD focuses on executing traditional investment banking businesses like M&A, ECM, DCM – they originate deals by identifying clients, pitching services and securing mandates. The S&T division supports IBD in deal execution, while Research analyzes sectors and companies to produce reports that help IBD with pitching and securing new deals.
So IBD bankers are the main drivers of deal origination through coverage of clients in specific sectors and geographies. S&T and Research play a supplementary role in the origination process.
Typical deal origination process in investment banking
The deal origination process typically involves these key steps:
1. Client coverage: IBD bankers regularly connect with potential clients to understand their business needs and maintain relationships. This helps them identify opportunities for advisory mandates.
2. Pitching services: When a potential M&A, IPO or other deal is identified, the IBD team pitches their capabilities to the client to win the sell-side advisory mandate.
3. Securing mandate: The client selects an investment bank as its exclusive financial advisor based on the strength of relationships, expertise and proposed solutions.
4. Deal execution: Once mandated, the IBD team executes the transaction by preparing marketing materials, identifying potential buyers/investors, facilitating due diligence and negotiations until deal completion.
While sector, product and country teams collaborate on a deal, the coverage bankers normally drive the origination process while execution is led by product specialists.
Roles of investment banking teams in deal origination
While IBD coverage bankers focus on origination, different banking teams play specialized roles in securing and executing deals:
1. Sector teams: Have specialized industry expertise needed to value companies, identify synergies and potential buyers. Critical to origination success.
2. Product teams: Structure innovative deals and understand technical aspects of ECM, DCM, M&A transactions. Help win complex mandates.
3. Country teams: Important for coverage relationships and navigating local regulatory issues. Necessary for securing local mandates.
So while sector coverage bankers drive origination, product and country teams provide vital expertise. The interplay between these teams enables investment banks to win the most lucrative and complex advisory mandates.
Differences in origination between Chinese and foreign investment banks
There are some key differences in how Chinese investment banks perform deal origination compared to foreign bulge brackets:
1. Relationship-driven: Origination by Chinese banks is more relationship based rather than expertise driven pitch processes at foreign banks. Personal connections are highly influential.
2. Policy direction: Many mandates secured by Chinese firms involve SOEs or support government policy objectives like acquiring overseas strategic assets.
3. Synergy focus: Chinese banks pitch deals involving Chinese acquirers and overseas targets by focusing on China entry strategy and synergies.
4. Team stability: Frequent job changes at local Chinese banks leads to weaker client relationships versus very stable sector coverage teams at Wall Street banks over long periods.
So while overseas banks win deals through institutional coverage and specialist knowledge, Chinese banks leverage policy priorities and personal connections of senior executives.
Deal origination is the lifeblood of investment banking, involving identification of advisory opportunities, persuasive pitching to clients and securing mandates for lucrative M&A, IPO and bond transactions, through intimate client relationships, deep industry expertise, and deal structuring innovation by stable, integrated banking teams across coverage, product and geographical areas. While foreign banks originate business via institutionalized coverage processes, Chinese investment banks depend more on policy directed transactions and senior level personal connections.