Stock markets may be the public face of the financial sector, but before a company’s shares can be traded, they must be created and it’s the equity capital markets (ECM) investment bankers who help them do this.
When a company chooses to raise capital by issuing stock for the first time, possibly to fund an expansion, it’s known as going public, and an initial public offering (IPO) is simply the method by which shares are sold on a stock exchange.
Investment banks act as ‘underwriters’ in the process, meaning that, in exchange for a fee, they guarantee that they will sell the shares a company is issuing for a certain price. If they can’t find enough people to buy the shares at the price they’ve agreed for the company, the bank is obliged to buy the shares. IPOs are the best-known form of share issuance, but ECM bankers are also involved in a number of other types of, often more complex, deals. 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.
Like other front office roles in investment banking, job titles and career progression is relatively straightforward. You start out as an analyst, either structuring products by being at the heart of the valuation process, or being part of the syndication team (preparing the sale of finished products to investors). Associates stay with the number crunching, but are also likely to be more involved with clients. As you move up to vice president, expect the role to become more process-driven – namely, stepping away from the data and liaising with third parties like lawyers, accountants and other financial advisers in order to gather and synthesise information for clients.
It’s only later, at director and managing director level, where the pressure mounts and you become an ‘originator’, nurturing relationships with existing clients, pitching for new business and ‘hand-holding’ clients, particularly those going to market for the first time.
Within the ECM team you can either choose to become an industry specialist – consumer, financials, telecoms etc – or move into a particular group. For example, working in a team originating deals is different from the syndication division, which more closely liaises with investors and the banks’ equity sales team. Or, you could specialise in convertible bonds – a low-yielding corporate debt issuance that has the option to convert into equity. These roles sit in the ECM team, but are much more quantitative.
Longer term, you may wish to exit out of ECM entirely. While it’s generally acknowledged to be harder to move from investment banking into private equity if you specialise in ECM – a common route for M&A bankers – there are other options. A common move is to switch into a hedge funds, which have close links to banks’ ECM teams anyway and often want to bring in an internal ECM competency.
If you harbour ambitions to become a senior ECM banker who originates deals, banks will expect you to come armed with a natural charm. “As we are private side working with very senior company executives, we look for charisma and confidence (but not over-confidence) so that a team member can engage well with clients,” said Ben Canning, managing director UK ECM at BNP Paribas. “We try to envisage what a person will be like in 5 to 10 years’ time, to see if they can manage client relationships.”
Trust between a bank and a client is very important. Going public is an integral and nerve-wracking time for companies and every case is unique, so banks need to ensure their advice on pricing and timing is absolutely spot on. Not surprisingly, considering the constant movements of the stock markets (and its effect on appetite for equity issuance), banks expect their graduates to be news junkies.
“We can teach you all the corporate finance skills you will ever need but I have never hired anyone who did not have a strong interest in financial news and markets - be informed; have a view,” said Rupert Mitchell, managing director, head of equity syndicate, Citigroup, Asia.
On the syndication side of ECM, you’re ensuring that a deal that has been given the go-ahead in principle doesn’t end up falling through because one-party is dissatisfied or gets cold feet. “Syndication is more about project management and being able to solve all sorts of issues that may come up throughout the deal execution process and work effectively with different professional parties both internally and externally,” said Melody Ngan, director in the Asian equity capital markets team at Bank of America Merrill Lynch.