Partnerships

Traditionally, investment banks have been organised as partnerships and remained as such in most cases until the early 1990s, while commercial banks gave up their partnerships in the majority of cases well before the Second World War. Partnerships operate such that there are no traditional shareholders, but the owners, called “partners” are active in the business themselves. Each partner will hold a specified stake in the company and any profits generated are distributed to the partners. This is different from shareholder-owned investment banks, whose owners are not actively engaged in the investment bank’s business. Another main difference is that partners are typically chosen from existing employees, often referred to as “associates”. On becoming partner, they buy a stake of the investment bank, and when they leave the investment bank, on resigning or retirement, they sell this stake again. These stakes might be sold to newly appointed partners or be returned to the investment bank. Similarly, buying a stake can be from an exiting partner leaving the investment bank or a newly issued stake created by the investment bank. Thus, for employees in partnerships there is the prospect of being promoted to a partner and becoming a co-owner of the investment bank. While many senior employees in shareholder-owned investment banks are given remuneration packages that include shares or share options in the investment bank, the employee does not directly invest his own funds into the business and the stake held is usually very small. In contrast, the stake of a partner is substantial.