ECM vs. DCM - Specialties of IB?

That_Aston's picture
Rank: Gorilla | 603

If there is anyone here, can you elaborate on these specialties of IB? I haven't really gotten any thorough explanations of the functions which DCM carries out within an Investment Bank. I have a somewhat better understanding of ECM which is why I currently have a greater interest in it.

Also, what kind of overlap is there between the two; Do they collaborate within the same unit/desk? Or am I mistaken and there is heavy overlap outside of a capital raising event such as an IPO?

Thanks guys in advance!

Investment Banking and Capital Markets

Equity Capital Markets and Debt Capital Markets are two groups that help their clients raise funds via the capital market. As a refresher, the capital market is the financial system that is used to raise capital by dealing shares, bonds, and other long-term investments. Consequently, each group focuses on its specific method of fundraising, i.e. debt and equity. Next, we'll take a look at some of the more nuanced differences between each group.

Equity Capital Markets

The function of this group is practically in the name. The group is focused on raising equity for clients through the capital markets. Generally, this group can be staffed on IPO'S, private investment in public equity deals (PIPE deals) etc.The ECM group may receive specialized support from an ECM division. This supporting group can provide data on IPO's in X industry, capital raised per product, and volatility of the overall markets. This information is then presented in the pitch book. Additionally, ECM groups are involved in both pitching and pricing. Certified user @MBAApply worked in equity capital markets as an analyst. Here's his description of a junior bankers role within the group.

MBAApply:

In plain English, at the beginning of a potential deal, at the junior levels you're basically like a resource for the bankers. You keep track of all equity deals (both IPOs and follow-on offerings) globally, and you compile this info for the bankers to use in their pitchbooks. Oftentimes, you are also responsible for putting together league tables (ranking the banks and essentially trying to find ways to make your bank look like it's #1).

ECM also acts as a conduit for pricing the issue (i.e. they decide in collaboration with the bankers, clients and equity sales what the price range will be which gets put in the prospectus, and then when the deal is ready to go, what the actual price per share will be - which ultimately is a compromise between what the salespeople think they can sell it for, and what the client wants).

ECM also helps put together the term sheet for the deal (price range, number of shares, greenshoe option, etc.).

Debt Capital Markets

DCM groups may have more exposure to a wider base of clients. That is because debt can be raised for corporations, agencies, and sovereigns. Consequently, there is the potential for seeing a greater a volume of deals within this group. However, this is subject to market type. User @spilinmy, an investment banking associate, worked for a bond syndicate and here is his description of the duties as an analyst.

Spilinmy - Investment Banking Analyst:

As an analyst, you'd generally be doing the same thing in either department - pitches, presentations, market commentaries, modeling, etc...all while learning about the specific product. You'd be building quite a general foundation in the early years...so I wouldn't worry too much about being "shelved" into a specific product - within the first 3 yrs I would imagine it's quite easy to transfer between products. for example, I was in bonds for about 18 months and was asked to transfer to loans for the last 12 (they needed the staff). took a while to catch up on product nuances, but I use most of the same basic skillset I developed in the first rotation.

Each group has its nuances but both are different from standard coverage groups. Additionally, the consensus is that both groups are less model intensive than leveraged finance or mergers and acquisitions.

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Comments (49)

Aug 7, 2012

Spent some time on an ECM desk so can provide some insight there. Basically, Equity Capital Markets exists to assist in the raising of capital for a company during an IPO, secondary offering, placing, rights issue etc. They work alongside the coverage team but tend not to specialise into any given sector. There will usually be senior bankers in ECM who specialise into a certain area and know all the main players, but the group as a whole will cover everything.

When a company needs capital they will go to their coverage team at the bank, who will bring in the ECM team. The ECM guys will give insight into the state of the equity markets and whether a deal is possible, they will then help the coverage team in determining a price / number of shares / dilution etc. Once the basic framework is decided, they go out to all the institutional investors and current large shareholders and see if they would be interested. They have to be careful to avoid specifics until the investors are wall-crossed however.

ECM is a lot of shareholder analysis, market commentary and equity pricing, there isn't that much modelling involved and they usually only contribute a few slides to a pitchbook - a "market update" section and then various considerations for capital raising.

    • 5
Aug 7, 2012
Asatar:

Spent some time on an ECM desk so can provide some insight there. Basically, Equity Capital Markets exists to assist in the raising of capital for a company during an IPO, secondary offering, placing, rights issue etc. They work alongside the coverage team but tend not to specialise into any given sector. There will usually be senior bankers in ECM who specialise into a certain area and know all the main players, but the group as a whole will cover everything.

When a company needs capital they will go to their coverage team at the bank, who will bring in the ECM team. The ECM guys will give insight into the state of the equity markets and whether a deal is possible, they will then help the coverage team in determining a price / number of shares / dilution etc. Once the basic framework is decided, they go out to all the institutional investors and current large shareholders and see if they would be interested. They have to be careful to avoid specifics until the investors are wall-crossed however.

ECM is a lot of shareholder analysis, market commentary and equity pricing, there isn't that much modelling involved and they usually only contribute a few slides to a pitchbook - a "market update" section and then various considerations for capital raising.

Thanks, great insight on ECM. Will SB when I have one. In terms of the draw, would you say ECM attracts more or less individuals as opposed to M&A or LBO?

Here to learn and hopefully pass on some knowledge as well. SB if I helped.

    • 1
Aug 7, 2012
That_Aston:
Asatar:

Spent some time on an ECM desk so can provide some insight there. Basically, Equity Capital Markets exists to assist in the raising of capital for a company during an IPO, secondary offering, placing, rights issue etc. They work alongside the coverage team but tend not to specialise into any given sector. There will usually be senior bankers in ECM who specialise into a certain area and know all the main players, but the group as a whole will cover everything.

When a company needs capital they will go to their coverage team at the bank, who will bring in the ECM team. The ECM guys will give insight into the state of the equity markets and whether a deal is possible, they will then help the coverage team in determining a price / number of shares / dilution etc. Once the basic framework is decided, they go out to all the institutional investors and current large shareholders and see if they would be interested. They have to be careful to avoid specifics until the investors are wall-crossed however.

ECM is a lot of shareholder analysis, market commentary and equity pricing, there isn't that much modelling involved and they usually only contribute a few slides to a pitchbook - a "market update" section and then various considerations for capital raising.

Thanks, great insight on ECM. Will SB when I have one. In terms of the draw, would you say ECM attracts more or less individuals as opposed to M&A or LBO?

Almost certainly less as it is less "prestigious" and you won't learn as many analytical / modelling skills. However, you can't actually apply to ECM or a certain group, you simply apply for "Investment Banking Division" and then choose your group after you get an offer.

Aug 7, 2012
Asatar:

They have to be careful to avoid specifics until the investors are wall-crossed however.

+1 SB, good info... can you explain this in more detail when you get a minute?

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Aug 7, 2012

Edit for quote

Aug 7, 2012
The Kid:
Asatar:

They have to be careful to avoid specifics until the investors are wall-crossed however.

+1 SB, good info... can you explain this in more detail when you get a minute?

He's referring to the Chinese wall. On the private side, you are given pro forma financials and other info that can't be shared with non-institutional investors. This distinguishes the more traditional banking groups and capital markets groups from the sales and trading side of the business.

Aug 7, 2012
The Kid:
Asatar:

They have to be careful to avoid specifics until the investors are wall-crossed however.

+1 SB, good info... can you explain this in more detail when you get a minute?

If you're working in ECM and you call up your guy in BlackRock or Fidelty and say "Hey, company X is looking to do a capital raise in a few weeks, would you be interested?" that guy / company can no longer buy OR SELL any shares he may own in the company, as this would constitute insider trading.

Instead, the ECM people will be extremely vague and offer something like "We're doing an equity raise for a mid cap company in industry y, might you be interested in being wall crossed?". Then, the investor can decline if they are not interested and trade freely, or they can accept the wall cross and be limited to not trading in that share, but will have the ability to partake in the capital raise.

Chinese Wall is a dangerous thing.

Aug 7, 2012

I'd take DCM over ECM if those were the two choices. In DCM you'll use many of the same fundamental analyst skills (navigating excel, tracking deals, market pages etc.) but in DCM there is more depth to the level of analysis you'll do, usually. It also takes a little more brain power to wrap your mind around the pricing dynamics of fixed income deals relative to a vanilla equity pricing. ECM will involve more companies you're likely to be familiar with, but DCM has more breadth and depth IMO.

Usually there isn't much overlap between DCM and ECM since the company profile of their respective issuer universes tend to be quite different. You won't see companies in sectors like SaaS, internet or life sciences do straight debt deals. Debt issuers tend to be lower growth with strong cash flow vs the typical equity issuers that hit the market semi-frequently to fund growth because they're less mature and not generating enough cash for GCP. Exceptions when DCM and ECM might overlap could be with large sponsor backed IPOs that sometimes do a debt deal while they're still in the backlog or with potential convert issuers who generate enough EBITDA to make high yield a viable option as well. If there isn't a pure convert group, sometimes ECM will consult with DCM to evaluate what the credit would be for an issuer before pitching them terms.

These are just generalizations though. Large banks sometimes have more diversification within ECM and DCM and sometimes DCM can be more syndicate oriented if the bank also has a dedicated lev fin and/or sponsors group who do some more of the analyst work that would otherwise fall on your shoulders in the DCM group of a smaller bank. Its not a bad idea to ask questions about the roles and responsibilities of the respective groups with your interviewers. It will show them you have done your research and anyone in a product group can sympathize with how difficult it can be to get a read on what the role actually involves as an outsider.

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Aug 7, 2012

A few months back, I interviewed at a BB DCM. The interview comprises of mostly market questions, for example(s): "what's holding the economy?", "If you're a Europe HQ based company, how and what would you structure for this company if current interest rate is xyz and FX rate is xyz?" It would be wise to be well prepared in your macroeconomics, know where the Fixed Income market stands as well as broad equity market, know the benchmark rates (LIBOR, treasuries...etc) It would also benefit if you went on Bloomberg Terminal and look them up on the league table, and bring up one of their recent deals, and have the hiring manager talk about it.

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Aug 11, 2012

I've been in M&A my whole career but if I had to do it again, ECM is a very interesting place to work, particularly in a strong IPO environment. Essentially your job is to position the equity stories of companies with investors, which is a fascinating job, and senior ECM guys are some of the bst paid, highest regarded bankers at any firm because they have the relationships with the big investors.

    • 1
Sep 7, 2012

what would the typical exit opps be for DCM?

Best Response
Sep 13, 2012

hi, i used to work in bond syndicate - essentially the chinese wall - and worked a lot with DCM. the ECM/DCM function is essentially the same - to help corporates (primarily in both DCM and ECM) raise funding via the capital markets. the differences I can think of are:

  • Product. One of equity and the other is debt (duh!). And with that, the different nuances and structures you can imagine coming with it.
  • Market breadth. The bond world is a lot bigger than the equity world. in DCM, you'd be raising funding not just for corps, but also sovereigns (UK gilts, Spanish GBs, etc), agencies (KfW, Fannie Mae), supranationals (The World Bank, EIB, Asia Development Bank), municipals (Andalucia, Ontario, German State of Hessen), financials, etc. Don't think many non-corps raise equity.
  • Market depth/volume/frequency. Usually a lot larger in volume (although not necessarily) and definitely more frequently. Frequent borrowers tend to the bond market to refinance existing debt and keep churning away for example. In short, DCM generally sees more deal flow (although this depends on the market type).

As an analyst, you'd generally be doing the same thing in either department - pitches, presentations, market commentaries, modelling, etc...all while learning about the specific product. You'd be building quite a general foundation in the early years...so i wouldnt worry too much about being "shelved" into a specific product - within the first 3 yrs i would imagine it's quite easy to transfer between products. for example, i was in bonds for about 18 months and was asked to transfer to loans for the last 12 (they needed the staff). took awhile to catch up on product nuances, but i use most of the same basic skillset i developed in the first rotation.

Overlaps - depends on the deal. Some deals can be pure ECM or DCM only. but larger transactions (usually m&a related) may require first a bridge loan financing put into place (LCM) to officially engage M&A dialogue, and then taking out the bridge using bonds (DCM) or equity (ECM) or even a hybrid of the both. other parts of the bank will also be involved - for example, RSG might be required to structure swaps or other forms of hedging. Sales will be working to distribute the bonds/equity to the public market. Secondary traders will be working throughout this process to help facilitate, as well as to monitor fair value pricing throughout the bond (in my world) curve of the issuer. helping to support the deal if underwrite is required. etc etc. it's quite interesting how the many parts of the bank overlaps to serve a single transaction.

DCM exit opps - you can enter Syndicate if you'd like a taste of some market (public) action in addition to the private side. if im not mistaken, you can enter Investor Relations at certain PE/HFs (correct me if im wrong). As part of IBD, transferring to ECM/LCM/M&A should be quite viable. there're also boutique advisories one could move into. less sure about these as im still quite "young" in my career - would be interested to get answers here too!

    • 6
Sep 13, 2012
spilinmy:

hi, i used to work in bond syndicate - essentially the chinese wall - and worked a lot with DCM. the ECM/DCM function is essentially the same - to help corporates (primarily in both DCM and ECM) raise funding via the capital markets. the differences I can think of are:

  • Product. One of equity and the other is debt (duh!). And with that, the different nuances and structures you can imagine coming with it.
  • Market breadth. The bond world is a lot bigger than the equity world. in DCM, you'd be raising funding not just for corps, but also sovereigns (UK gilts, Spanish GBs, etc), agencies (KfW, Fannie Mae), supranationals (The World Bank, EIB, Asia Development Bank), municipals (Andalucia, Ontario, German State of Hessen), financials, etc. Don't think many non-corps raise equity.
  • Market depth/volume/frequency. Usually a lot larger in volume (although not necessarily) and definitely more frequently. Frequent borrowers tend to the bond market to refinance existing debt and keep churning away for example. In short, DCM generally sees more deal flow (although this depends on the market type).

As an analyst, you'd generally be doing the same thing in either department - pitches, presentations, market commentaries, modelling, etc...all while learning about the specific product. You'd be building quite a general foundation in the early years...so i wouldnt worry too much about being "shelved" into a specific product - within the first 3 yrs i would imagine it's quite easy to transfer between products. for example, i was in bonds for about 18 months and was asked to transfer to loans for the last 12 (they needed the staff). took awhile to catch up on product nuances, but i use most of the same basic skillset i developed in the first rotation.

Overlaps - depends on the deal. Some deals can be pure ECM or DCM only. but larger transactions (usually m&a related) may require first a bridge loan financing put into place (LCM) to officially engage M&A dialogue, and then taking out the bridge using bonds (DCM) or equity (ECM) or even a hybrid of the both. other parts of the bank will also be involved - for example, RSG might be required to structure swaps or other forms of hedging. Sales will be working to distribute the bonds/equity to the public market. Secondary traders will be working throughout this process to help facilitate, as well as to monitor fair value pricing throughout the bond (in my world) curve of the issuer. helping to support the deal if underwrite is required. etc etc. it's quite interesting how the many parts of the bank overlaps to serve a single transaction.

DCM exit opps - you can enter Syndicate if you'd like a taste of some market (public) action in addition to the private side. if im not mistaken, you can enter Investor Relations at certain PE/HFs (correct me if im wrong). As part of IBD, transferring to ECM/LCM/M&A should be quite viable. there're also boutique advisories one could move into. less sure about these as im still quite "young" in my career - would be interested to get answers here too!

Wow! Thanks a lot for the great insight. The breadth part of DCM is what I'm looking for in terms of exposure to macro knowledge. This may be a stupid question but...Would one group over the other provide more exposure into the derivatives markets than the other? I ask because I am really interested in options instruments but I don't have the guts for trading, lol..

Here to learn and hopefully pass on some knowledge as well. SB if I helped.

Sep 13, 2012

thanks for the detailed post. really appreciate it

Sep 13, 2012

Derivatives..hmm...think both may come across it in terms of helping clients to hedge etc. but will more likely be passing them onto teams that specialise in such instruments (particularly the risk solutions group, structures). can't speak so much for ecm, but for dcm that's likely to be the case. you might need to know a bit about the market of course, but doubt you'll play an active role in the instrument.

ultimately dcm works to originate deals and hopefully lead onto ancillary business (such as swaps etc) via pitches.

    • 1
Sep 20, 2012
spilinmy:

Derivatives..hmm...think both may come across it in terms of helping clients to hedge etc. but will more likely be passing them onto teams that specialise in such instruments (particularly the risk solutions group, structures). can't speak so much for ecm, but for dcm that's likely to be the case. you might need to know a bit about the market of course, but doubt you'll play an active role in the instrument.

ultimately dcm works to originate deals and hopefully lead onto ancillary business (such as swaps etc) via pitches.

Thanks again. As far as you know, are there any groups within IB that deal with Equities/Debt CM?

Here to learn and hopefully pass on some knowledge as well. SB if I helped.

Sep 21, 2012

Most IB groups deal with capital markets when it comes to financing. A merger/acquisition/restructuring etc will require some form of financing...even the cash rich companies like P&G, InBev, etc. So the different teams are usually in constant dialogue.

Atm, active groups would be corporates (non fig) especially utilities liaising with debt capital markets given attractive financing terms/conditions. The loans market is kinda dying as the bank-to-bond disintermediation occurs.

Sep 21, 2012

i really think that ECM is being slaughtered on this forum because there are too many college kids that dont have a clue what theyre talking about.
its not just IPOs and follow ons... theres PIPEs, secondary offerings, rights offerings, converts (inc. exchangeables, mandatories, CoCos) and an endless array of derivatives that they deal with.
the "strategic equity transactions group" as theyre sometimes called advise on and execute stake monetisation strategies, hedging and yield enhancing of strategic stakes, the disposal of stakes and derecognition strategies... They help clients manage the likelihood of conversion (convertibles/exchangeables).
Furthermore, they also help corporates hedge stock option plans and help M&A advise clients on certain issues in the M&A process.
Equity financings, share buybacks, bank regulatory capital (basel III).
A former colleague of mine worked in strategic equity solutions and made EU375.000 (all in) as a first year associate.

Sep 21, 2012

ECM may not do the actual hedging (depends on how the bank teams are structured tbh) but regardless, they advise the client on this and "shadow" revenues earned.

EU375k is a lot for an associate! that's like higher than an MD's base salary...(and maybe even some all-ins in this market im guessing). Maybe in the golden years?

Sep 21, 2012

@spilinmy, agreed, it really depends on the bank. but nevertheless, they structure the deals/trades. in those areas you're looking at more banking-like hours (although not 120+ weeks).
that was at the very end of the golden era at dresdner. the following year he was obviously ripped off by commerzbank big time

Sep 22, 2012

DCM is a lot more interesting than ECM -- in ECM, you're just selling stock, but DCM comprises everything from plain-vanilla bond deals to highly structured transactions. The skillset and work (market update pages and pricing) is very similar but you will have more exposure to all sorts of deals in DCM.

Sep 22, 2012
Sep 22, 2012

hey im a newbie so wats ECM and DCM stand for??

Sep 22, 2012

serious? it says it on the right hand side of the webpage.

    • 1
Sep 22, 2012

i gotcha

Sep 22, 2012

Go DCM please

Sep 22, 2012
PoolSideBanker:

Go DCM please

"please"

lol

Sep 22, 2012

I agree with the above post.

"Cut the burger into thirds, place it on the fries, roll one up homey..." - Epic Meal Time

Sep 22, 2012

Do people in ECM/DCM generally work weekends? Or since their work is more market driven do they get the weekend off?

Sep 22, 2012

what do you mean do the dcm please? im kinda lost with that response

Sep 22, 2012
hoyer:

Equity for vc, and debt for pe?? If you know debt products really well wouldn't that allow you to possibly trade f.i. in the future?

I think you're right about getting into FI trading. A PE job, though, can't be attained by just working in DCM for two years, UNLESS it's LevFin. Otherwise, you'd have to hop to a more traditional IBD job.

Sep 22, 2012

DCM for sure over ECM.

Sep 22, 2012

i was thinking this too... what could anyone give me a specific reason? I know that debt is more complicated (more products) but what else...

Sep 22, 2012

ER, I have never seen people in DCM build any models. Maybe it was just my bank?

My group worked a bunch with dcm (power/natural resources specifically) and one of their associates was constantly asking us to give him some models to play with because in his 3 years as an analyst, he never had to build a model.

As for exit opps, again, I personally have never seen people in DCM/ECM move to the buyside. That's not to say it doesn't happen...it's just rare. Most of the people I knew in DCM loved what they did and never felt the need to move.

The skillset you learn in DCM is a bit different than the traditional lev fin/m&a skillset. Your job is to know the markets, where bonds/loans are being priced, etc and whether or not you'd be able to syndicate the debt in the capital markets (lots of work with the syndication/origination team). You technically mediate between the bankers and the traders, if you'd like a really rough definition.

Sep 22, 2012

ECM drives the business in Asia. I don't see why DCM given the choice, except if you have specific preference towards the fixed income market.

Sep 22, 2012

Isn't ECM/DCM IBD?

.....it's corporate finance after all

Sep 22, 2012
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Sep 22, 2012
Sep 22, 2012