Investment banking starts with an item for sale, usually a property or business. The investor borrows from the bank, and then the investor finds a way to make a profit as quickly as possible. The idea is to pay off the loan taken from the bank and pay as little interest as possible so that the investor can keep as much of the profit as he/she can. That is the basic explanation. For a more thorough explanation of the investment banking cycle (i.e., borrow, make money, repeat), the following is provided.
Borrowing in Exchange for Either Interest or a Piece of the Pie
Partnerships are made between investors and investment bankers. Usually, the investment banker is making a loan to the investor with the understanding that interest will be paid on the loan, and that is generally the profit that the bank sees on the loan. However, investment bankers can cut other deals, most notably a deal for a piece of the proverbial pie. In this instance, the loan is made, with a lower than typical interest rate, in exchange for a percentage of the profits after the investor sells the property or item of value that the investor initially purchased with the loan funds from the investment banker. If the investor does really well, the investment banker can stand to make a lot of money on the deals that the investor cuts.
Selling What Was Just Purchased
There are mergers, acquisitions, and real estate deals. Mergers merge two businesses, and the company that buys out and merges with the second company pays back the loan with interest over time. Acquisitions, however, are acquired companies that are typically thriving but need a little extra help. The investor helps push profit margins up by funding these companies with investment loans.
The loans are repaid with interest, of course, but the deal between the investor and investment banker may include a percentage of the profits as well. In short, the investment banker is helping to fund/finance what the investor is doing, but the investment banker is also laying claim to the acquisition/investment for a stake in the profits. With real estate, it could go any which way, but funds are generally loaned for the purpose of renovating and remodeling a property before it is sold.
Once the property/building/investment/merger/acquisition/item of value is sold, the investor repeats the process. He or she looks for a slightly more expensive opportunity, taking the profits he/she just garnered, and borrowing another loan to beef up available funds to buy into this new opportunity. If he/she is really successful, this process repeats until he/she hits the big dollar amount that is his/her ultimate goal.