What is DCM? - Debt Capital Markets Definition
The team within DCM is responsible for providing advice on raising debt for acquisitions, refinancing of existing debt, or restructuring of existing debt.
A Debt Capital Markets Group will work with a client to organize borrowing and to help provide access to a global pool of investors who are looking for opportunities. Debt is often used as it is usually cheaper than financing through equity and can add diversity to funding.
DCM vs Investment Banking Groups - Pay and Lifestyle
Compensation in DCM is roughly the same as coverage/M&A bankers. Bonuses for coverage/M&A bankers may be slightly greater, but that varies by firm. Hours will be slightly less for DCM, more in the realm of 70 hours than the 80 hours other groups see.
What you'll end up doing is different than what the typical investment banking analyst does. Here's some insight from a user.
As far as responsibilities go, outside of basic financial functions (PV of cash flows, etc.), there is much less emphasis on modeling in Excel and more of your time will be spent using different debt sizing, refunding, assumptive applications (more of some than others based on if you are in Derivatives Banking, Public Finance/Munis, High Yield/Corporate, etc.). Most of my time is consumed by doing the majority of the analytics for my deal team (everyone will contribute to the pitchbooks).
Typically, you get more responsibility at the junior levels in DCM groups. There's more client interaction, but less financial modeling. There are two very important differences between a Debt Capital Markets Group and any other investment banking group - exit opportunities and skill set.
How do the exit opportunities compare to the typical IBD gig? Here's @bankonbanking" with a nice summary of exit opportunities out of DCM.
If, however, you are hoping to move on from IB into P/E or a boutique, you will have a much harder time since your skill set will be limited to high-grade companies, and you will have very limited financial modeling exposure - VERY limited. If you are interested in banking in general and more of the sales side, not as much the analytical modeling side of the business, then High-Grade DCM would be great for you. I personally prefer the modeling side of the equation, so for me, HG DCM wasn't a great fit. I know other bankers that absolutely enjoy it.
It's simple: exit opps out of DCM aren't as good as the typical investment banking gig for private equity. Yes, you can absolutely compensate for this with drive, networking, financial modeling competence, and more - but you are at a disadvantage compared to the typical investment banking group.
For hedge funds, DCM has better exit opps.
Coverage/M&A generally place better to PE. Go to the PE websites and you can see this yourself. Read the bios and see how many of the associates come from coverage/M&A versus DCM. You will find DCM is infrequent relative to coverage/M&A. Not improbable, but less frequent. HF placements tend to be better, especially the debt funds. For exit opps not PE/HF/high finance, I think being a coverage/M&A banker is more marketable.
DCM Skill Set and Exit Opps
What skillset is desired for these analysts? What skills can you expect to develop after a stint in investment banking DCM?
Going in, they're for the same thing as the typical investment banking group.
I'm an analyst in DCM and feel like the skill set desired of new hires (and there haven't been very many in the year or so I've been here) is similar to that of any prospective IB employee: sharp, analytically, attentive to detail, good work ethic, etc.
That said, because of the nature of DCM work, you will develop an atypical set of skills.
Capital markets are markets where capital is traded. It consists of the primary (new stock and bond) and secondary (existing securities) markets. There are books written on the matter, and it would take pages upon pages to try and condense that information, so we are not going to go into that.
Luckily, reading books isn't necessary whatsoever to break in. Here's what you need to know for DCM from @mrb87".
There's no book on how to "do" DCM, people. Understand bonds -- how they are priced (spread over Treasuries), duration, price/yield relationship, etc. -- and the macro environment. But no book is going to tell you what a pricing call is like or what type of things to put in a pitchbook.
Understanding capital markets is a basic aspect of securing the job in DCM, but understanding related aspects (think yield curves) will go a long way (@theaxe").
Skip to 4:10 of this video for an explanation...
Below are characteristics of DCM you need to know in preparation for your interview.
Interview Preparation for DCM Careers
Here's a nice trick that could impress your interviewers.
As far as the interview goes, having an even basic knowledge of how the debt markets work and an understanding of important related aspects (yield curves in particular) will go a long way as a lot of applicants are more familiar with the sexy equity counterpart of CM.
Understand your bond valuation down pat. Know exactly what Duration, Convexity, Rates, etc., is and how it affects bonds from an issuer and investor standpoint. Understand a bit of M&A valuation methodologies, DCF, etc. Also, understand the DCM IG Market. It's hot but not as hot as it was a couple months back. Understand Yield and where rates are (10 year treasuries) . What have they been doing the last couple months? Know what the fed said last week? Well, what happened to rates and the yield curve?
One thing @workerbee" mentions that we disagree with is focusing on M&A valuation techniques and DCF. If you are considering M&A/coverage then obviously study these, but if you are only preparing for DCM, then it's not necessary to study these things.
The Verdict - Is DCM a Good Career?
Hypothetical scenario: you have two offers, one from an M&A group and one from a DCM group. Which do you take? Take into account all that we've discussed above: hours, compensation, exit opps, and skill set.
Compensation is roughly the same but the hours in DCM are better.
The skillset you develop in DCM is less desirable and less transferable. Because of this, DCM exit opportunities are worse.
Coverage and M&A gigs are better than DCM gigs, but that doesn't mean a job in DCM is bad. It's investment banking; you'll be making more than most people ever will, and you'll be setting yourself up for some cozy job prospects in the future. You just might have to work harder to get those jobs than your M&A/coverage peers.
To learn more about this concept and become a master at bonds and fixed income, you should check out our Bond Course - Fixed Income (coming soon!).
Interested in Investment Banking - Breaking In
The fact of the matter is you won't improve unless you practice. While this guide is a great starting point, you need to get real questions and answer them as a simulation for interviews. The WallStreetOasis investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry.