Equity Capital Market Teams’ Functions in Investment Banking
Equity Capital Market
Equity market issuances surged in Q2 2020, with aggregate Equity Capital Market (ECM) offerings reaching an astounding USD75.32bn in May 2020.
Unsurprisingly, the US stood first in year-to-date (YTD) ECM issuances, with China lagging a distant second.
The pandemic-led lockdowns and restrictions imposed globally turned out to be a vital driver for ECM issuances.
Several enterprises were keen to shore up their liquidity to remain solvent.
However, as enterprises were breaching or coming close to breaching debt agreements, the logical alternative was to approach equity capital markets to raise funds.
Understanding ECM
ECM is the ideal place for a company to raise equity capital by selling a part of its shares in exchange for capital.
A company can trade any of the following instruments to raise capital:
Common shares, preferred shares, American Depository Receipts, and Global Depository Receipts.
ECM traders include investment bankers, angel investors, venture capitalists, and retail participants.
ECM enables marketing and distribution of share issues, allocation of new issues, private placements, initial public offerings (IPOs), secondary offerings, follow-on offerings, and trading of derivatives.
The ECM is divided into primary and secondary equity markets.
The primary equity market enables companies to raise capital for the first time. It is further divided into the private placement market and the primary public market. IPO comes under the primary public market.
The secondary equity market comprises stock exchanges and OTC markets. One can trade existing shares in stock exchanges. No fresh capital is raised through the secondary equity market.
Responsibilities of ECM team in investment banking
The ECM team, in an ECM investment banking firm, is responsible for advising the organization on equity. They suggest simple methods that can help the firm find its way through shares, futures, swaps, and options.
The ECM team helps the firm simplify its transactions and design the financial structure for equity offerings, thus helping it improve its valuation, which includes marketing, allocation, and the distribution of issues, private placements, and IPOs. Also, there are activities such as book building and derivative trading occurring in the equity market.
The ECM team consists of the equity origination group, the syndicate group, the convertible bonds/equity-linked group, and the equity trade-off group.
How can an ECM team offer value to a firm?
The ECM team in any ECM investment banking services firm plays a crucial role in providing holistic services for raising capital. Like other capital market teams at banks, ECM groups can be described as a cross between investment banking and sales and trading. Bankers in this group spend most of their time advising companies that want to raise equity capital.
They adopt the following methods to help firms raise capital:
- Targeting investors: Without investors, it is difficult for organizations to get capital or funds to proceed with their business plan.
- Designing a finance model: A finance model helps understand the firm’s cash flows and the driving factors. It will also provide an analysis of the potential changes in the company’s ownership and capital structure after the offering.
- Preparing supporting materials – If the firm is keen on attracting new investors, then it certainly needs to prepare supporting content explaining its activities and capabilities. This will give a clear picture to future investors.
- Conducting case studies – The ECM team drafts content (slides) based on the organization’s performance history (for existing as well as previous clients). When this task is performed, the database of the bank is updated on the equity offering.
Advantages and disadvantages of raising capital in equity markets
The main advantage of raising capital in equity markets is it lowers the debt of the equity ratio.
It does not have to access the debt market using high-interest rates. Start-ups and new firms can seek help from equity markets, using the advice of ECM teams.
Unfortunately, raising capital in the equity market offers a few challenges that are not difficult to overcome. One has to make use of several ECM team members, which can prove to be an expensive option for a new start-up.
Besides, it can be a time-consuming affair. Lastly, investors will be concerned about the financial health of the organization that they have invested in. The firm has to show a high return on investment (ROI).
If one is planning to raise capital through a public offering, then engaging a credible ECM group is vital. This not only helps the firm raise capital effortlessly but also provides it other value-added services. Advisory firms and investment banks can consider outsourcing this activity to get excellent ROI. Outsourcing ECM front office activities can benefit investment banking firms as the latter can remain nimble. They can scale up or downsize ECM operations depending on the response from clients.
Category: Finance
