While the M&A departments of investment banks still hold the ‘glamour’ tag, places on their equity capital markets (ECM) desks are highly sought-after. As far as the general public is concerned, stock markets represent the face of finance, but before stocks can be traded they must be created and it’s the legions of investment bankers in the ECM teams who assist companies in doing this.
ECM teams are all about helping companies raise money through the stock markets. When a private company issues shares for the first time, this is called ‘floating’ or an Initial Public Offering. When an investment bank gets involved, these deals are worth at least $100m but can easily run into multi-billions.
The ECM teams make these deals happen. They originate, structure and market the deal to potential investors – as well as marketing the deals to the man on the street they also connect these companies with large institutional firms with money to invest. This means pension funds, insurance funds, fund managers and hedge funds.
Investment banks can either be the sole ‘book-runner’ on the deal, meaning that they take full responsibility for the IPO and obviously get larger fees for their work, or work as part of a group of investment banks issuing new stock to the public called a syndicate.
IPOs dominate the front pages of the financial press. There can be huge hype when a company decides to go public and investment banks need to get both the valuation and the timing right. Twitter, for instance, was valued at $14.2bn when it listed in October 2013 to a vast fanfare. On its first day of trading, its share price went from $26 to $44.90. Its IPO was a success, but revenues at the firm have since continued to underwhelm.
IPOs are the best-known form of ECM deal, but investment banks are involved with other, often more complex, types of transactions. These include:
Follow-on offering: After a company has been public for more than a year, it may choose to issue additional stock. Because the firm is already publicly-traded, the markets determine the follow-on issuance share price, so investment banks focus their efforts on marketing, rather than valuation.
Secondary offering: A chance for companies to increase the amount of tradable stock and spread market capitalisation (its value) over a greater number of shares. Usually, it’s down to major shareholders, typically company founders or initial shareholders, looking to offload some of their stock.
Rights issue: Allowing publicly-listed, cash-strapped companies to issue additional stock, usually at a discount rate, in order to meet their financing obligations.
Block trades: A privately negotiated stock sale organised through investment banks that allows two parties to buy and sell large quantities of a company’s stock without affecting its supply and demand. Big trades can cause dramatic fluctuations in share price.
Registered direct offerings: A pre-determined amount of stock sold to a select band of registered institutional and accredited investors, rather than the man-on-the-street.
Convertible bonds: Often referred to as a ‘hybrid’ product as it crosses the divide between the debt and equity capital markets teams, covertibles are decidedly more complex than most types of ECM transactions. They are bonds issued by a company that can be converted into equity by the bondholder if they wish to do so. The advantage of this is that it allows companies to raise more capital without issuing more stock, which is often interpreted by the market as the stock being overvalued. Equity capital markets teams also underwrite equity derivative products like futures and options.
Private Placements: While most equity deals are available to investors on the open market, private placements are way for a company to raise capital by selling stock to a select band of large investors. This means pension funds, fund managers, insurance firms and other institutional investors. The prospectus – an extensive document on the financials of companies produced in most equity deals – is often not produced and the general public is only made aware of the deal after the event.