Equity Capital Market (ECM)
What is the Equity Capital Market?
Equity Capital Markets (ECM) is the team / group that is responsible for providing advice on equity, equity-linked and equity derived products. This includes:
This group will work closely with a client to organize transactions, structure the equity offering, and to improve valuation.
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 IPOs or private investment in public equity deals (PIPE deals). This group may receive specialized support from an ECM division. This supporting group can provide data on:
- IPO's in any industry
- Capital raised per product
- Volatility of the overall markets
This information is then presented in the pitch book to clients as a way to try and show knowledge and win an advisory mandate.
Additionally, these 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 banker's role within the group:
In plain English, at the beginning of a potential deal, at the junior levels you're basically like a resource for the investment 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 pitch books.
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).
Capital Markets also acts as a conduit for pricing the issue. In other words, they decide on the following (in collaboration with the bankers, clients and equity sales):
- What the price range will be which gets put in the prospectus
- 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
They also help put together the term sheet for the deal (price range, number of shares, greenshoe option, etc.).
Equity Capital Market
Some activities that an ECM group will advise on are:
- Distribution of new stock
- Equity private placements
Within these Capital Markets you have three groups: 1) Origination, 2) Execution, and 3) Syndication
The Origination team can sometimes be merged into a coverage group or into an M&A team. Basically that's the team which does the pitching to clients and tries to get mandates.
The Execution team deals with official documents (prospectus and other mandatory fillings), lawyers, and the overall processing of the issuance.
The Syndication team is very close to the markets. In fact, its desk is next to the traders & sales people. The job of this group is to:
- Contact investors to test their appetites
- Evaluate how much they would offer
- Coordinate with the sales force to sell the paper
- Build the book of orders
- Decide how much each investor is going to receive (if the transaction is over subscribed)
- Keep up with all deals in the Capital Markets and make some Excel files with the main information (pricing, number of shares etc) to be sent to the Origination team
The Origination team usually coordinates the whole process since they are the closest to the clients and know more precisely what they want.
However, this exact division of labor all depends on banks since their structure can often be slightly different.
Origination is definitely a corporate finance job and is usually done by coverage or M&A bankers whereas the equity syndication is more related to markets.
Read more about these three groups in this discussion.
IPO: Quick Definition
An IPO is an initial public offering, in which the equity capital markets team helps a company issue shares to the public market to invest in on public exchanges.
Private Placement: Quick Definition
A private placement is when an ECM team helps a company issue equity (not traded on an exchange) to a buyer or helps an existing investor sell shares to another private entity.
A roadshow is when bankers take the company looking to issue equity (or other financial instrument) around to potential large-scale investors such as hedge funds and pension funds. Together the bankers and the company management team pitch the new issue to potential investors.
Fellow WSO user [Justavgjoe] details their experience with roadshows below:
- Overview: You pull together a roadshow deck (a company overview deck), and then you travel with Management to meet investors in the investor offices.
- Time: Usually the roadshow is about a week long, depending how many meetings you go to (I've usually seen about 8 per day).
- Travel: You usually start in NY, then you do Boston, Baltimore, then you fly into Chicago (not always), Denver, San Francisco and potentially San Diego. The best outcome is when you have to travel to two cities on the same day as there's private jet travel involved.
It's usually the lead left bankers traveling (one or two per meeting), but sometimes the lead left alternates attending meetings with the second chair.
It's very hectic, but honestly my favorite part of the job as you really get to know the management team!
Read more about ECM roadshows in this discussion.
ECM vs DCM
While both divisions work in the capital markets, there is a distinction to them. Here's a fellow WSO user breaking down the difference between the two capital market groups:
This is actually a question to which there is no 100% correct answer. There are three ways banks typically categorize ECM and DCM:
- Under the Investment Banking Division, which usually also includes research
- Under Sales and Trading
- ECM under IBD and DCM under S&T (or FIC, or FICC)
The difference really is that Equities and Debt are product groups that are close to the capital markets, and therefore it makes more business sense to put them closer to the S&T groups (physically and/or operationally). M&A is a product group, too, but the nature of their work makes it more logical to organize them closer to the industry coverage teams.
They're all front-office "investment bankers" though, in the sense they are client-facing, do high-profile transactions, and make a lot of money.
In these two capital market groups, there is less intensive modeling and they are more market-focused and a little "softer" in terms of the skill set required to succeed.
M&A is very modelling intensive and analytical, but a lot of bankers only know how to model and can't see the forest from the trees. M&A tends to be more competitive to get into, but in reality the standards are not that much different.
As far as skillset *required* to get into M&A versus the Capital Markets: beyond taking an accounting or corporate finance course, it doesn't matter -- you have no skills right now, nor does any other college sophomore/junior.
Here's the full breakdown of the difference between the two groups.
Capital Market Hours - Day in the Life
The hours are relatively more reasonable when compared to industry groups and M&A. Usually somewhere in the neighborhood of 8 A.M. - 9 P.M.
Those usually decrease as you go up with most directors doing 8/9 A.M. - 6/7 P.M. Weekends usually have at least one full day off, and the day that work is required is usually only a half day at most.
It's really not that bad, especially when you see how much the other groups are working in comparison.
- ECM Analyst Hour Range: 65 - 85hrs per week
- ECM Associate Hour Range: 60 - 80hrs per week
- VP, MDs and above: 50 - 70hrs per week
Read more on ECM hours in this discussion.
Equity Capital Market Skillset
The skills you will learn working in the capital markets will not be as broad as those in the more popular M&A division, however, you will still get a front row seat to the IPO process and other interesting financial considerations.
The two capital market groups tend to generate more fees because they are leveraging the bank's balance sheet. M&A is purely pay for advice, that's why individual bankers can set up their own shops but not an ECM shop and to a certain extent is why fees in ECM are very good (and they vary significantly by geography unlike M&A), since you've only got a certain amount of banks who can underwrite large deals.
Equities Analyst Tasks
As an Equities analyst you will be making
- Lots of little graphs
- Balance sheet pages on distribution when pitching
- Manage an enormous timetable that you constantly have to update with comments from different people
Unfortunately, whether you like it or not most of the pages will be the sort that aren't even looked at. It will be the industry team people who will add the real deep financial analysis to the book and it will be dependent upon them whether a bank gets a deal or not (leaving out fees etc and assuming it's a BB with good distribution).
Sadly, these tasks leave you with very few transferable skills and so you will have less exit opportunities compared to some of the other front office positions.
Career wise, you can think of ECM as a halfway house between markets and banking with better hours, slightly lower pay but without much of the upside.
Read more details about the daily tasks in this discussion.
ECM Interview Experience
While an equities interview can be similar in many ways to a traditional investment banking interview, there are a few specific nuances that separate them. Specifically, they tend to put more of a focus on current equity trends.
Here's a quick checklist of common capital market interview topics:
- General banking technical and fit question
- Show a personal passion for equities
- Be able to pitch stocks (at least two long ideas, preferably two long and one short)
- Current macro trends
- Performance of all the major indices
- Performance of certain sectors
- Current event in the markets
- Recent/past IPOs or other equity offerings
- Explain what the ECM group does and why you want to be a part of it
You can get access to ECM interview questions from our company database.
Equities Capital Markets Exit Opportunities
While many people believe that capital markets don't have the same exit opportunities as the more popular M&A, exit opportunities to the buy side do exist. However, this is most commonly done through transferring to M&A first. Here's a fellow WSO user's experience with the exit opportunities:
Truth is, many people from Capital Markets transfer to M&A within the bank and eventually end up with the same exit opportunities as M&A people. Apart from that, there are many exit opportunities for example within investor relations, corporate broking or even hedge funds or consulting. In the Capital Markets, you will not be doing any modeling which is done by other product or industry teams, but you will be heavily exposed to markets. You will do a lot of market research and understand equities fairly well.
The lack of exit opportunities compared to M&A is however made up by much better work life balance and similar pay. If you want to stay in banking long term, and if you value your life outside work, ECM is a great choice. You will still be making a lot of money and have a life. If you only care about exits to Private Equity, then yes, ECM is not for you.
Read a more detailed breakdown of exit opportunities in this discussion.