Lots of definitions exist, but ...

Perhaps the basic role of an investment bank is - helping agents (firms, states and other organisations) get hold of FinancialCapital through FinancialMarkets transactions. They do this in a number of ways. Above all:

  • they use their contacts to bring together borrowers and FinancialMarkets investors.

In all these cases, they can be seen as providing a service directly to (potential) Borrowers in a financial market (they are in this sense 'sell-side' intermediaries? - and generally take their cut from the borrowers), though indirectly to the market as a whole.

Underwriting

Suppose blogsrus corporate wants to raise 100 million of financial capital. To do this blogsrus is looking to sell shares on the EquityMarkets, or borrow on the DebtMarkets. Blogsrus is a new high-tech company and its hands-on managers have had little contact with financial markets. SquealerSqueezerandStitch is an investment bank and offers invaluable advice on which particular market would best suit blogsrus' needs. But more - blogsrus needs to raise 100 million to carry out a planned expansion programme. With its lack of expertise, how can blogsrus know that the chosen financial market will raise the required sum of money, on acceptable terms? SSS, which has superior information, is in a position to take a risk and give blogsrus the 100 million up front, believing that it can recoup the money from market investors. It gives blogsrus the 100 million - or rather, publicises and sells the deal on the open market, or if it prefers sells it privately to a number of chosen investors it has regular dealings with and knows will be interested, and undertakes to personally make up any shortfall to blogsrus. Obviously it will take a cut for this service.

Warehousing. An investment bank might go further than this. Blogsrus wants to raise the capital now, but SSS believes that there will be better demand in the market in, say, a year's time. If it has the available funds, SSS will give blogsrus its money now, and wait to sell the securities to the market for a year. This is called 'warehousing' the deal.

In general a deal will have more than one underwriter. No one investment bank will have the funds to take on full responsibility. Or, more accurately, like any investor an investment bank manages its 'exposure' to the risks of different assets by aiming to 'diversify' its portfolio of investments - it wants its eggs in many baskets.

Some more terminology. The 'lead manager' / 'lead arranger' of a deal is the investment bank (generally an underwriter of the deal) in charge of selling the deal to investors.

The 'bookrunner' is the investment bank (generally an underwriter) in charge of finding other underwriters for the deal. And also for working out the structure - and pricing - of the deal.

Often the lead manager and the bookrunner are the same entity. Or often these roles are shared by a number of banks. So there may be eg. 'sole bookrunner and joint lead manager' or vice versa.

see also:

http://www.sbs.ox.ac.uk/downloads/tjhjbookbuilding.pdf

on underwriting scandals - are underwriters in share issues (IPOs) selling too cheap? Think of those UK privatised utility scandals in the 80's and 90's - shouldn't investment bankers have known they were seriously undervaluing? Why would they do such a thing?