Why Investment Banking?

How to Answer, “Why Investment Banking?”

The “Why Investment Banking?” interview question has become standard in the recruiting process, like the classic “Walk Me Through Your Resume” question.

In a nutshell, the investment banking industry is centered around two core functions:

• M&A Advisory Services → The financial and strategic advisory services provided to corporate and institutional clients on matters related to mergers, acquisitions, divestitures, and more.
• Capital Markets Underwriting → The underwriting of securities to raise capital for clients, most often via equity or debt issuances.

With that out of the way, the three most common behavioral questions asked at the initial part of most investment banking interviews are as follows.

1. “Walk me through your resume” (or “Tell me about yourself”)
2. “Why investment banking?”
3. “Why our firm?”

Of course, there are exceptions, but overcoming a poor first impression is difficult, especially for competitive recruiting processes.

Therefore, continuous practice via mock interviews is recommended to make sure that the answer delivered in the actual interview setting pans out as intended (i.e. “practice makes perfect”).

Crafting a compelling response is a tedious process, but becomes more manageable if there are some general guidelines established:

Learn More → Investment Banking Primer

Interview Preparation Guidance: Why Investment Banking?

Given the hours and workload in investment banking, the firm’s employees prefer to work with colleagues who are friendly and pleasant to be around.

Before we delve into our guidelines on how to answer, “Why Investment Banking?”, here are some practical interview tips to improve your performance in the recruiting process.

How to Structure Response to “Why Investment Banking?”

When an interviewer asks, “Why investment banking?”, their intention is to understand your specific motivations, long-term career goals, and suitability for the role.

The structure of your response to “Why Investment Banking?”, must connect to the position for which you’re interviewing.

When answering the interview question on the reason for pursuing a career in investment banking, convey the following points to the interviewer:

• Logical Decision → The career decision should be based on a personal factor, such as skill-building, personal development, building relationships with fellow analysts, and embracing challenges.
• Understanding of Investment Banking → The quality of responses to behavioral questions and performance on the technicals should illustrate that significant time was spent with preparation.
• Trade-Off Decision → The interviewer must understand that your choice to pursue a career in the industry was not made on a whim, with much introspection supporting the decision (i.e. not for shallow reasons, like money or prestige).

The following list contains common answers to the “Why Investment Banking?” interview question:

• Fast-Paced Work Environment Post-Graduation (Intense, but Worthwhile Learning Experience)
• Analyze Different Business Models and Develop an Understanding of Industries (and Unit Economics)
• Construct Financial Models and Perform Valuation Analyses (DCF, Comps)
• Obtain Proficiency in Microsoft Excel and PowerPoint
• Comprehensive Understanding of Shareholder Value Creation (M&A, Corporate Actions, Capital Markets)
• Develop Time-Management Skills and Strategies to Improve Workflow Efficiently

Why Investment Banking? – Example of a Good Response

Here’s an illustrative example of a good interview response.

The response is based on a sound understanding of the investment banking business model, the conflicting priorities (and resolutions), and demonstrates that the candidate is passionate about embracing challenges and continuous improvement.

Sample Good Answer Example

“Since entering university, my interests have shifted towards more analytically challenging projects.

In the past semester, I’ve taken more intensive coursework, including classes on computer science (CS) and quantitative finance.

From my perspective, investment banking is an exciting challenge that combines my interest in performing in-depth analysis to support corporate decisions with analyzing business models (and industries).

In particular, the reason I’m committed to working in investment banking is because the career presents opportunities to develop a well-rounded skill set in finance, including the fact that the workplace environment rewards competency.

While I certainly anticipate the long hours and workload to be challenging, especially early on, I’m looking forward to the personal growth that I’ll develop from working here.

Based on my coursework, leadership roles in university clubs, and internships, I’ve formed a strong work ethic and can manage my time efficiently.

I expect the physical toll and stress of investment banking to be a challenge to overcome, where I can adapt over time and eventually thrive in those conditions. Therefore, I’m excited and grateful to be considering joining this firm.

While I understand the firm’s workflow, where most technical work is handled by the more senior bankers, I’ll make it my priority to perform all assigned tasks well to prove that I’m more than capable of contributing real value to the firm.”

How NOT to Respond to “Why Investment Banking?”

Since we’ve reviewed a sample good response, we’ll now shift to the common pitfalls to avoid while answering the interview question.

Why Investment Banking? – Example of Poor Response

Contrary to the prior example, where we illustrated an example of a good response, here we’ll examine a response that falls flat for a few notable reasons:

Sample Poor Answer Example

“I’m not entirely sure why I want to work in investment banking. I suppose it’s a decent way to start my career, and I’ve heard it pays well from what I understand from my friends who are bankers.

I don’t have much experience in finance, but I’m open to learning. My parents also think it’s a good career choice. So, I think investment banking could be a good option for me.”

The response is poor because it lacks enthusiasm, while giving off a sense of carelessness (and entitlement) in tonality.

Clearly, external factors are more influential in the career choices of the candidate.

The final shortcoming of the answer is that no distinct skill is mentioned that differentiates the candidate from their peers.

What is Unique About Investment Banking?

Frankly, senior investment bankers expect most analysts to leave within one to two years.

The historically high turnover rate is not necessarily any firm’s fault, but rather an inherent part of the investment banking industry (and the trait is unlikely to change).

The investment banking industry is viewed as a “stepping stone” for many junior bankers, which is a statement that most understand but should never be explicitly stated in an interview.

On that note, be sensible enough to not mention the potential investment banking exit opportunities as the main reason for wanting to work in investment banking.

While investment banks anticipate high attrition among their analysts who leave to join the buy-side, bringing up exit opportunities in a summer analyst internship interview is tactless.

Instead, focus on the incentives of the investment bank and ask yourself, “What does the firm want?”

So, rather than rambling about what you personally want, shift the conversation to what you bring to the table and the value that you can contribute to the firm if hired.

Why Choose Investment Banking Over Private Equity?

The distinction between private equity and investment banking must be understood to decide which career path to pursue.

• Business Model → Investment banks and private equity firms have different revenue models. While investment banks offer advisory services, private equity firms are active investors. Thus, the source of revenue for investment bankers is the collection of fees, while PE firms are compensated by the performance of their investments. The distribution to the firm is based on the contractual agreement between the fund’s GPs and LPs (i.e. “2 and 20”, catch-up provision, and other clauses).
• “Hands-On” Work with Portfolio Companies → Private equity firms, or “financial sponsors,” that engage in traditional leveraged buyouts (LBOs), are intricately involved with their portfolio companies, which refer to the investments in which the firm acquired a majority stake. Therefore, private equity firms work closely with their portfolio companies (“hands-on”) and monitor their portco’s performance (and strategic decisions) over the holding period, which usually lasts between 3 and 8 years. In contrast, most client engagements for investment banks are short-term (<1 year), barring unusual circumstances.
• Engagement with Clients → In short, working at a private equity firm presents opportunities to build long-term relationships with portfolio companies and be truly engaged with internal decisions (and financial performance) for several years. On the other hand, investment banking professionals work on shorter-term client engagements.
• Skills Required → There is much overlap in the skills required to work in investment banking and private equity. Hence, most private equity investors are former investment bankers. For example, building financial models and performing valuation analyses is common in both career paths. The predominant model built by private equity investors is the LBO model, while investment bankers construct a wide range of models, such as the DCF model – but comps analysis is commonplace in either field.
• Hours → The hours in private equity are often touted as much lower than investment banking, which is a common misconception. In particular, a private equity associate should expect to work hours comparable to that of an investment banking associate. There is a marginal improvement in work-life balance on the buy side, but you’re in for a disappointment if you expect the workload in private equity to be easy.
• Salary → With that said, investment banking and private equity are two of the most prestigious career paths in the financial services industry. However, private equity is viewed as an ideal exit by junior analysts from the higher compensation and type of work completed on the job.

Therefore, the decision to choose investment banking or private equity ultimately boils down to your preference to either be an “advisor” or an “investor”.

How to Break into Investment Banking as a Non-Finance Major?

Thus far, we’ve provided guidance around the steps to answering “Why Investment Banking?” for undergraduates majoring in finance, economics, or other adjacent business majors.

However, not all candidates recruiting for investment banking are finance majors. In fact, some are not even enrolled in their university’s undergraduate business program.

On that subject, non-traditional candidates majoring in the liberal arts field face an “uphill battle” in investment banking interviews, especially when it comes to justifying their decision not to study finance.

Instead, students enrolled in liberal arts programs must not only convey a convincing narrative to explain their rationale for pursuing a career in investment banking but also illustrate the following:

• Clear Understanding of the Investment Banking Occupation
• Technical Acumen in Financial Modeling and Valuation Theory
• Convincing “Story” on the Personal Decision to Choose a Degree in a Non-Business Field
• Strong Commitment to a Career in Investment Banking
• Logical Narrative on the Cross-Over Between Past Experiences and Investment Banking (i.e. Relevance of Skills)
• Tangible Actions to Learn the Practical Skillset (e.g. Self-Study Courses)

Q. If you’re studying art history in college, why is investment banking the career path that you’ve chosen to pursue?

This question is on the trickier side and is asked bluntly, causing candidates to often go down the wrong path if answered incorrectly.

Many people enter the industry intending to make a lot of money and/or because of the myriad of exit opportunities.

However, be careful about being “too honest” in your answer. While lying is not recommended, of course, neither is showing your entire hand.

Career Recruiting Tips for Non-Traditional Candidates

If you’re a non-traditional candidate studying a non-business major, expect to receive some “blunt” questions intended to rattle your composure.

Therefore, remain calm and respond with a thoughtful answer, rather than appearing deflated or defensive.

The example answer to the interview question focuses on skill optimization, i.e. figuring out what unique tasks that you’re uniquely “good” at.

Example of Great Answer from Liberal Arts Major

“I do not regret majoring in art history. That said, my interests have evolved towards more analytically challenging pursuits. This past year, I have taken more quantitative classes like computer science, economics, and accounting, and believe that investment banking is an exciting challenge that marries my interests in critical thinking and quantitative analysis.

Specifically, investment banking interests me because it offers the opportunity to develop substantive analytical skills, while developing a close network of colleagues. While working long hours is scary to some, to me, it is in a strange way exciting. I have a strong work ethic, and I am excited to be involved in work that helps companies better off strategically and financially.”

In conclusion, come into the interview prepared and recognize that you deserve to be there, just like any of the other candidates.

The opportunity to interview for the investment banking position – whether it’s a summer analyst internship or full-time role – was offered to you because the firm viewed your candidacy and qualifications and decided you could be a good “fit” for the open position.

On that final note, best of luck with your investment banking interview!