Demystifying Investment Banking: Equity Capital Markets
Introduction
Businesses of all shapes and sizes, need capital (money) to
expand. Maybe they need money to increase their presence overseas, buy another
company, or build a complex piece of tech.
This capital can be raised by the business in the form of
debt (more on this next week) or equity. When a company raises money through an
equity issuance, it is giving up a slice (or share) of the company. Equity
investors now ‘own’ a slice of the company, and benefit from company growth
which (should) result in increased share prices and possible dividends.
Depending on the company’s sector, stage and strategy, it
will use a combination of debt and equity to finance its business in an
optimal, cost-effective manner.
So, when a large company wants to raise a significant amount of money through an equity issuance, it tends to pick up the phone and call the Equity Capital Markets (ECM) team, within an investment bank.
Businesses of all shapes and sizes, need capital (money) to
expand. Maybe they need money to increase their presence overseas, buy another
company, or build a complex piece of tech.
This capital can be raised by the business in the form of
debt (more on this next week) or equity. When a company raises money through an
equity issuance, it is giving up a slice (or share) of the company. Equity
investors now ‘own’ a slice of the company, and benefit from company growth
which (should) result in increased share prices and possible dividends.
Depending on the company’s sector, stage and strategy, it
will use a combination of debt and equity to finance its business in an
optimal, cost-effective manner.
So, when a large company wants to raise a significant amount of money through an equity issuance, it tends to pick up the phone and call the Equity Capital Markets (ECM) team, within an investment bank.
What do they do all day?
All bulge bracket banks have ECM teams, which are part of
the Investment Bank, but tend to sit between the Investment Banking Division (IBD) teams (long hours, late
nights, lots of modelling) and trading desks (early to work, clock off in time
for dinner). This is because so much of the role of ECM teams is to understand
investor sentiment and appetite, figuring out wider market trends in order to
provide the best advice to companies wanting to issue equity.
Much like other areas of IBD, ECM analysts get to work on
deals, but also need to spend a lot of time pitching to existing and potential
clients who are considering an equity raise. Often, these clients come through
the bank’s sector teams. For example, a low-cost airline is discussing its
global expansion plan with the transportation sector team within IBD. As part
of a wider strategic presentation, the ECM team will need to provide a market
overview, advice and guidance on a possible equity issuance.
This means that ECM analysts need to be well versed in valuation, knowing their way around financial and valuation models, in addition to having a firm grasp on sector and company fundamentals, from existing shareholder overviews to wider trading flow analysis. In fact, an ECM pitch deck will fuse company analysis with market analysis, to create a kind of hybrid deck, to try and win an ECM mandate.
All bulge bracket banks have ECM teams, which are part of
the Investment Bank, but tend to sit between the IBD teams (long hours, late
nights, lots of modelling) and trading desks (early to work, clock off in time
for dinner). This is because so much of the role of ECM teams is to understand
investor sentiment and appetite, figuring out wider market trends in order to
provide the best advice to companies wanting to issue equity.
Much like other areas of IBD, ECM analysts get to work on
deals, but also need to spend a lot of time pitching to existing and potential
clients who are considering an equity raise. Often, these clients come through
the bank’s sector teams. For example, a low-cost airline is discussing its
global expansion plan with the transportation sector team within IBD. As part
of a wider strategic presentation, the ECM team will need to provide a market
overview, advice and guidance on a possible equity issuance.
This means that ECM analysts need to be well versed in valuation, knowing their way around financial and valuation models, in addition to having a firm grasp on sector and company fundamentals, from existing shareholder overviews to wider trading flow analysis. In fact, an ECM pitch deck will fuse company analysis with market analysis, to create a kind of hybrid deck, to try and win an ECM mandate.
Equity Capital Markets products
ECM teams have different products, to suit a wide range of client profiles and circumstances.
When most people think about ECM, they tend to get excited about Initial Public Offerings (IPOs), with their private jets, roadshows, and ringing bells on the floor of the NYSE when their client goes public.
IPOs bring a private company into the public market and tend to be extremely challenging, exciting and profitable. However, although IPO fees are extremely high, an ECM team could not survive on these fees alone.
Other ‘flow’ products, including follow-ons (raising new equity in the public markets), or rights issues (selling new shares to existing investor) tend to keep ECM teams afloat, especially when there aren’t many companies contemplating an IPO. These products are much more straightforward than an IPO, as an issuing company is already well known to investors. Therefore, fees tend to be lower.
ECM teams also offer Convertible Bonds. These are hybrid instruments that start out as debt (interest bearing, repayable), but convert to equity if the company’s share price hits a certain level.
ECM teams work with private companies, helping raise money through equity Private Placements. Private Placements are attractive to large private companies, and later stage technology companies that are not quite ready to go public.
ECM teams help companies buy-back, or repurchase their shares. If a public company has a lot of cash that it doesn’t know what to do with, ECM teams can help companies spend some of that money buying back shares from its investor base.
ECM teams don’t tend to help raise money for smaller private companies, simply because the fees aren’t large enough.
Speaking of fees, ECM teams, especially at bulge-bracket banks, want to win a ‘bookrunner’ mandate. Which essentially means that they run the entire fund-raising process and, in some cases, bear some risk if the issuance is not successful (i.e. the bank cannot raise enough money for the company through its investor networks).
Smaller banks and boutiques might get a ‘co-manager’ mandate, which means they are responsible for a small part of the fundraise.
For example, on a very large IPO, there might be two or three bookrunners and 10+ co-managers, who all have some responsibility for raising money from investors.
ECM teams have different products, to suit a wide range of client profiles and circumstances.
When most people think about ECM, they tend to get excited about Initial Public Offerings (IPOs), with their private jets, roadshows, and ringing bells on the floor of the NYSE when their client goes public.
IPOs bring a private company into the public market and tend to be extremely challenging, exciting and profitable. However, although IPO fees are extremely high, an ECM team could not survive on these fees alone.
Other ‘flow’ products, including follow-ons (raising new equity in the public markets), or rights issues (selling new shares to existing investor) tend to keep ECM teams afloat, especially when there aren’t many companies contemplating an IPO. These products are much more straightforward than an IPO, as an issuing company is already well known to investors. Therefore, fees tend to be lower.
ECM teams also offer Convertible Bonds. These are hybrid instruments that start out as debt (interest bearing, repayable), but convert to equity if the company’s share price hits a certain level.
ECM teams work with private companies, helping raise money through equity Private Placements. Private Placements are attractive to large private companies, and later stage technology companies that are not quite ready to go public.
ECM teams help companies buy-back, or repurchase their shares. If a public company has a lot of cash that it doesn’t know what to do with, ECM teams can help companies spend some of that money buying back shares from its investor base.
ECM teams don’t tend to help raise money for smaller private companies, simply because the fees aren’t large enough.
Speaking of fees, ECM teams, especially at bulge-bracket banks, want to win a ‘bookrunner’ mandate. Which essentially means that they run the entire fund-raising process and, in some cases, bear some risk if the issuance is not successful (i.e. the bank cannot raise enough money for the company through its investor networks).
Smaller banks and boutiques might get a ‘co-manager’ mandate, which means they are responsible for a small part of the fundraise.
For example, on a very large IPO, there might be two or three bookrunners and 10+ co-managers, who all have some responsibility for raising money from investors.
The verdict
You will also spend time with lots of different teams across the Investment Bank, building relationships and being exposed to lots of new challenges. As you get more senior, you will realise that the best ECM bankers are also the best salespeople.
As ECM bankers you need to sell your services to potential clients (the pitch). Once you have won a mandate, you need to sell the client issuance to investors, building a compelling investment case and bringing enough interested investors into the deal, to create competitive tension and drive up the offer price.
Students may be offered an internship (and then a graduate job) within ECM or might end up in ECM after receiving a ‘general’ offer for IBD.
If you are a modelling guru whose only goal in life is to work in Private Equity, then ECM might not be the place for you. However, a career in ECM can be extremely rewarding, with opportunities to progress within and outside of IBD.
You will also spend time with lots of different teams across the Investment Bank, building relationships and being exposed to lots of new challenges. As you get more senior, you will realise that the best ECM bankers are also the best salespeople.
As ECM bankers you need to sell your services to potential clients (the pitch). Once you have won a mandate, you need to sell the client issuance to investors, building a compelling investment case and bringing enough interested investors into the deal, to create competitive tension and drive up the offer price.
Students may be offered an internship (and then a graduate job) within ECM or might end up in ECM after receiving a ‘general’ offer for IBD. If you are a modelling guru whose only goal in life is to work in Private Equity, then ECM might not be the place for you. However, a career in ECM can be extremely rewarding, with opportunities to progress within and outside of IBD.
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