Private Equity Capital Markets

Happy to give my two cents here. My experience with PE capital markets guys and gals stems from my previous work in LevFin / Sponsors at a GS/MS/JPM. Currently work in a special sits seat where these folks are a massive source of deal origination as well. 

I’ll try to frame what the acquisition and cap mkts teams do (in a typical environment) in an effort to draw distinctions between the two, but bear in mind my experience comes from the seats mentioned above (large txns, auction process, etc.). The Acquisition/Investment team works tirelessly for months upon months on end to diligence a business, take it through investment committee, etc. to ultimately decide if they like a business and if so, what price they would be willing to pay for it. Over the course of this time period, of course they will have to think through how they could structure an acquisition and what sort of financing they could attain from banks, but generally can use desktop work to back solve into these figures (e.g. what is its closest competitor levered at, how is their cap stack structured, how is their debt trading, and boom, you have a structure and implied pricing). 

As the Sponsor advances in the auction process, they are able to bring in financing sources. This is where the bulk of the capital markets work at private equity firms is done during the acquisition phase. The capital markets team will call up 6 banks and say hey, here’s the business we’re looking at, what structure can you provide us and at what price? The way this is typically formally done is through grids/term sheets, in which capital markets teams at sponsors will provide the financing sources with the structure / pricing by individual economic and non-economic term they want (leverage, pricing, OID, flex, sweep, RPs, covenants, baskets, etc.), and negotiate back and forth with financing sources based on responses. The banks are incentivized to get the widest terms possible to make the deal as attractive as possible to investors and therefore easy to get off of their balance sheets, while the Sponsor is incentivized to get the tightest rates (and thus cost of capital at the portfolio company), widest covenant package, basket availability, etc. They will whittle down the field of potential financing sources, while bidders are simultaneously also being whittled down throughout the auction process for the business at hand. Eventually, when there are only a couple parties left and you are in the final round of bids for an asset, you will move to commitment papers, for which you will work with lawyers and the bank works with their lawyers to negotiate a set of legal documents that are informed by the grids you previously negotiated back and forth. The documents say we, banks a, b, and c, commit to financing this transaction with this structure at these terms, enabling the private equity firm to “speak for” what is typically a large portion of their bid given the debt-heavy nature of PE.

Eventually, typically 3-9 months later, banks a,b,c take this debt to market to syndicate to institutional investors to get it off their balance sheets ahead of the M&A transaction consummation. The banks talk with the PE firm and they agree what terms they want to whisper the debt at for the market, work to garner interest in the loans / bonds, and eventually sell the loans / bonds. The capital markets guys are extremely involved in this process as they are market facing, and the terms that they agreed to 3-9 months ago may or may not apply to the market conditions in which they are trying to get this debt syndicated to investors. This can go extremely south if those market conditions have significantly changed in a negative way, and typically it is all blamed on the capital markets team if the deal goes sideways (even when it is oftentimes out of their control). You better believe the investment team and by proxy, the rest of the firm is going to be upset with you when they have to slug in additional equity to cover the debt that you had to beg investors to buy at 93 cents on the dollar, thereby diluting returns for that investment and ultimately the entire fund.

From a career perspective, you also typically do not get carry in a capital markets role (no matter how senior) which is certainly a reason many to go into PE in the first place. I would say that generally the senior guys in these roles lead pretty decent lives, and that their day-to-day is a lot more market-facing and relationship-based than your typical investment professional, though that varies firm-to-firm, given the fact that you’re dealing with the same sponsors / LevFin relationship guys at each bank time and time again. There are always exceptions - if you’re an Apollo capital markets guy, you call bank to bank yelling at them to tighten terms, that they should be lucky to have your business at all and can easily take it elsewhere, that 4x leverage on a 5x business isn’t that much for some random PoS asset, and ultimately when it comes to deal time, you’re yelling at banks for not educating debt investors well enough, for going to market too wide, etc. But that’s just them.

For a junior, I would imagine there is a ton of BBG cap structure analysis, debt comps spreading, etc. that I personally am not sure I would find terribly interesting time and time again, especially while I know there are people on the other side (in investment roles) who are actually learning how to understand and operate businesses.