Investment banking is a huge part of the financial industry. The fees generated by investment banks alone come to more than 80 trillion US dollars, according to Statista.
The largest, and most well-known, investment bank is JP Morgan. And they alone generated more than $9 billion in fees. Investment banks can be used in a variety of business transactions, from underwriting IPOs to advising on mergers and acquisitions.
All of these transactions require top-level security to block important documents from being leaked. Having confidential financial information leaked during an M&A transaction could be highly damaging, to say the least.
Companies today understand that ignoring cybersecurity threats is a bad idea. For investment bankers, it could cost them hundreds of millions of dollars, and destroy companies. Because of this, investment bankers use a very special type of online security called a data room.
What are data rooms?
These are sometimes called deal rooms, and they are basically a place where confidential and important documents are held. Access to the room would be restricted to certain authorised personnel involved in any particular deal.
In the case of an acquisition, access would be allowed to third parties employed by the buyer. These people would access documents to check the value of the company in question, and what business risks may be involved.
In the past, these rooms would be physical places, perhaps in the headquarters of the seller, or on the site of a financial institute such as a bank. Although deal rooms can still be physical locations, they are more likely to be situated in the cloud now.
What is a cloud-based data room?
Normally these types of data rooms would be referred to as virtual data rooms or VDRs.
If you have used any form of cloud-based sharing application then you will have a basic understanding of what a virtual data room does.
A VDR is a dedicated secure storage area that is overseen by the owner. This person can then provide different levels of access to other individuals depending on their position and role in the transaction being made. Documents and files can be uploaded and viewed by the owner, and other authorised individuals.
The difference between a VDR and a cloud-sharing app is the level of security involved, and the complexity of the platform. A VDR will have far more features than a cloud storage app.
What do investment bankers do?
Investment bankers carry out a number of roles within the financial industry and are involved in many transactions. Typically they will be involved in some or all of the following:
-
Manage Initial public offerings
-
Underwrite new stock issues
-
Negotiate mergers
-
Help with equity financing
-
Arrange private placements
-
Help to sell and acquire companies
-
Work as intermediaries and advise
All of these services require the sharing of very important documents and data, and this needs to be kept safe. There are many tips for keeping a customer’s data secure, and using a data room is one of them.
Why do investment bankers need data rooms?
One of the reasons that investment bankers need data rooms themselves, is because of due diligence.
Investment bankers are involved in M&A transactions, along with IPOs, raising capital, and the purchase and sale of companies. All of these require a vast amount of sometimes highly sensitive data to be shared.
Virtual data rooms are designed specifically for sharing this type of confidential information securely. An investment banker must always perform due diligence to check that all the facts presented are accurate and there are no additional business risks that are hidden.
The problem with this process is that time is often highly constrained, and mistakes can happen. A VDR can provide a smooth and easy way to access information for due diligence.
These days, there is pressure to perform ever more due diligence, this is called the Andersen Effect after the collapse of Enron. Failure to perform due diligence can kill off private equity and force deals to collapse.
What else can virtual data rooms be used for?
It isn’t only due diligence that VDRs are used for. They can be used for many purposes including project management. In fact, any process that requires documents to be shared discreetly can be done through a VDR.
IPOs are one process that can benefit from a deal room. They are extremely helpful during the early stages of preparation, but they can be used the whole way through the process.
There are security features in place that will stop the information pertaining to the IPO from being copied, along with real-time reporting on who is viewing what documents.
When an investment banker is involved in an IPO, they want it to be successful. A virtual data room can help avoid it becoming another Deliveroo which was the worst IPO in London’s history.
Which features should you look for when choosing a VDR?
When you choose a virtual data room, you need to know that you will have full control over who can access it. This means having different access levels for different personnel.
You will want to be able to watermark documents, control who can download and print data, and even be able to retrieve files if an individual has their access revoked.
For M&A deals it is useful to have granular reporting and in real-time. This allows the VDR owner to see which documents specifically seem to be interesting to the other party, and who exactly is viewing them. This can help forewarn potential bumps that may occur during the transaction.
Security is essential and is the whole point of using a VDR. Standards and certificates should include ISO 9001/ISO 27001, FedRAMP, FISMA, DIACAP, and more.
Customer service is also vital. You may be sharing the VDR with several parties, and the platform needs to be easy to use, and have customer service on hand for any issues during the initial learning curve. Due to so many transactions being international, customer service should be available 24/7.
How to find the right virtual data room for investment banking
Understanding what a virtual data room is, and why an investment banker should use one is one thing. Finding one that functions in the way you want it, however, may be something else.
You will learn more about data rooms by understanding what security levels and access control you should expect. There are several functions in virtual data rooms that you should check for before choosing one.
Ideally, a virtual data room would have an intuitive interface, be simple to use, and have drag-and-drop for easy document sharing. However, you need to know that it is suitable for investment banking tasks in particular.
-
Investment banking data rooms may be used for:
-
Raising funds
-
IPOs
-
Due diligence
-
Equity fundraising
-
Bankruptcies
-
Mergers and acquisitions
And a lot more besides.
Summary
Investment bankers carry out a variety of roles during many transactions especially involving the raising of funds for businesses to expand. But also during mergers and acquisitions, and IPOs.
They need to be able to access and share highly sensitive information securely, and easily. Data rooms provide the answer to this problem.
A virtual data room can let investment bankers perform due diligence, check for business risks, and assess the value of a business during a sale. Safely, and securely.
