Ok, no more questions about Equity Capital Markets: this one interview with a reader should answer everything on your mind.
We cover how you get in, what the recruiting process is like, what you actually do in capital markets, the culture, and the exit opportunities.
Equity Capital Markets is sometimes labeled Structuring & Origination, and can involve more than just IPOs – for example, underwriting equity derivatives, convertible debt, and hybrid instruments may all fall under the ECM label.
The department also hosts teams for private placements and syndication.
Capital Markets Recruiting
Q: Can you tell us how you got started in ECM?
A: I started as a generalist in the Analyst pool and was eventually placed into the Equity Capital Markets group.
Like any other placement process, the choice was made on the firm’s need and what experience I could bring to the table (ex: investment banking summer internship).
Q: Ok, so you didn’t recruit specifically for ECM – but I’m guessing you’ve interviewed lots of people looking to get in. What’s the recruiting and interviewing process like for ECM?
A: It’s not much different from normal investment banking interviews.
You’ll still get the typical questions on accounting and valuation, but you need to show more of an interest in the markets : how indices are performing, previous issues in a sector you’re interested in, and if you’re interviewing for a convertible debt position you should know how calls, puts, and equity derivatives are used and why they’re used.
They’ll also focus on why ECM vs. other groups – you want to say that you like the markets but you’re still more of a banker than a trader.
Covering derivatives, you’ll get a chance to close hedging trades, and work with traders to see if a convertible could be done in the current market climate. Equity originators typically interact with the sales force and are focused more on the story of the deal (ex: use of proceeds).
A Day in the Life
Q: So what do you actually do in Equity Capital Markets? What does an Analyst there have to do each day?
A: First, note that working in equity origination is different from covering convertible offerings. Both are under the ECM department; other groups include Syndication and Private Placements as mentioned earlier.
On the equity side, most of your work consists of updating market slides, creating case studies on recent equity offerings, working on internal memos such as the sales team memo, and drafting up selling points for equity issues that are about to launch.
The “grunt work” consists of looking up stock ownership and analyzing the buying and selling history of stocks.
The convertibles team is significantly more technical because you’re working with derivatives and you need to develop valuations of convertibles and produce derivative structures suitable for the client.
Just like other types of financial modeling, the math isn’t “hard” but it is a lot different from what you learn in any training program – so there’s a learning curve when you first start.
Q: Ok, so there’s a mix of both qualitative work and quantitative work in ECM, and that the quantitative work with convertibles is a lot different from other types of financial modeling. What’s a day in the life of an ECM Analyst like?
A: The day usually starts at 7:30 AM – usually Syndication is the first group in the office.
The convertible team shows up around 8:00, and the staffer shows up around 7:45 – 8:00.
The actual workplace for ECM is very similar to a trading floor – each computer had Bloomberg, FactSet, and Capital IQ, and the floor is noisy because senior bankers are on the phone with clients and analysts are responding to requests.
After I finish up reading up on the markets and recent news, my Associate stops by around 8 AM with the work that we need to do for the day.
Usually I’m asked to update slides with market data needed for pitches, create case studies on recent equity offerings, make ownership diagrams (show how the composition of institutional investors in stocks changed over time), and create new slides based on the senior banker’s ideas.
Around 9 AM, I get my assignments on the convertible side – updating market summaries, case studies, and convertible valuations for upcoming pitches. Most pitch books have a market review slide to keep the client updated on current deals.
The rest of the day is taken up by these tasks, along with requests we get throughout the day – unlike M&A or industry groups, you do more “take 30 minutes to respond to this request”-type work in ECM. This is the case because you typically cover more than one industry vertical.
I usually leave around 7:30 or 8:00 PM, so the average day is around 12 hours – less than what the average banker works.
The convertible team works somewhat closer to “banking hours” more often and sometimes left at midnight or later, because the work is more quantitative and requires more frequent updates.
Q: Wow, only 12 hours a day – are you sure that was investment banking?
You mentioned a few times that the work in convertibles is more quantitative – for those not familiar with it, can you describe what exactly you have to do?
A: As long as you’re advising clients on raising capital, it’s investment banking. The career path for more senior bankers starts off in coverage and moves to capital markets.
The main tasks for the convertibles team include valuing convertible bonds, creating convertible bond term sheets, and then creating payoff diagrams or schedules for investors. Here’s a representative sample of other products being pitched.
There are a couple of ways to value convertible bonds. A simple method involves looking at each component – the regular bond and the option feature. Inputs to the models include the volatility of the equity and the credit risk for the bond component. Another method is the binomial approach, examining the value of the bond if it were in debt form or equity form at various points.
The convertible bond term sheet simply states the key features of the bond – conversion scenarios, interest rates, maturity, anti-dilution provisions, covenants, and so on (sample term sheet).
The payoff diagram just shows the profit/loss to convertible bond investors at a range of share prices – it’s more complex for convertibles, but you can see a simple example for options right here.
Murders & Executions
Q: Ok, I know almost nothing about convertible bond math so let’s abruptly switch topics. You mentioned before that the equity side had a lot of qualitative work and that convertibles were more quantitative, but how much time do you spend on pitching vs. deal execution?
A: The breakout of my time is something like this:
- Pitching: 60%
- Processing Internal Memos: 10%
- Deal Execution: 30%
Keep in mind that it’s not uncommon to spend over 50% of your time pitching in investment banking, unless your group happens to be very busy with clients.
Q: Ok, so let’s say you’re working on an IPO. What type of work would you do and what would the industry coverage team do?
A: First, note that there are really 2 roles for banks in an IPO: book runner and co-manager.
Book runners do most of the work, get the majority of investors, and collect the largest fees, while the co-managers are proportionately less involved and get lower fees. At the book runner level, analysts will develop sales force memos that will highlight selling points and risks for the client’s security.
Most bulge bracket banks will only be involved with IPOs if they serve as book runners, while boutiques and middle market banks fulfill the co-manager role.
In terms of the IPO process itself, both ECM and Coverage are involved:
- IPO Valuation Model: The industry coverage team begins the model with capital markets’ assumptions about the appropriate discount and how much can be issued.
- Customer Due Diligence Calls: Mainly coverage.
- Sales Force Memo: ECM is responsible for this one – we have to analyze and understand the company, and then summarize the key points for the sales force so they can properly pitch it to investors.
- S-1: Initially the lawyers give us a template, then the industry group makes their additions, then ECM provides feedback, the lawyers weigh in, and this cycle repeats dozens of times until it’s done.
- Road Show: The coverage bankers are responsible for the road show, but every once in a while ECM gets to see a sales force presentation.
Culture & Lifestyle
Q: So what’s the culture of the ECM group like? I’m guessing there are fewer “Patrick Batemans” if most people leave the office by 7:30 or 8:00.
A: Yeah, that’s accurate. The equity, syndication, and private placements teams are very casual and relaxed – most people play sports, have interests outside work, and everyone is easy-going and approachable.
There is no real “face time” on the equity side – if you’re done at 7 PM, you can go home and no one complains about it.
The convertibles team is more like traditional banking, and staying late / getting saddled with face time is more common.
You’ll get asked to stay late and help with more random tasks and projects in convertibles vs. the equity side.
Q: What about the pay? How do base salaries and bonuses in ECM compare to other groups?
A: Base salaries are standard across all investment banking groups, at least at large banks – so they were identical to what you’d get as an Analyst anywhere else.
Bonuses are dependent on group performance as well as how well the analyst ranks, so it’s hard to generalize there.
Q: So what types of exit opportunities do you have access to if you’ve worked in ECM?
A: You have 3 options:
- Move to a coverage group.
- Move to a hedge fund in an ECM / markets-related capacity.
- Move to an investor relations firm.
The skill set in ECM is more niche: the modeling and analysis is similar to what an analyst in a coverage team would do, but you look at the financial statements in different levels of depth. For example, the valuation of a convertible bond has little to do with the company’s “story.”
You do need to understand those concepts in ECM, but you don’t actually create the models yourself – so it’s more difficult to get into private equity or groups that require a lot of modeling. If you are placed in ECM, you should still review how trading comps are put together, how transaction comps are done, and learn how to walk through an operating model to see how each part fits together.
Q: That makes sense, but what about on the convertibles side? You said it was more technical – so do you have better exit opportunities there?
A: Theoretically, yes, you should have better exit opportunities and you should be able to go to hedge funds that do convertible bond investing.
It’s still difficult to move into PE or anything that requires coverage modeling because your skill set – though it’s more technical – is still different from what’s required in those fields.
Q: So what advice do you have for someone placed into ECM who wants to move elsewhere?
A: Many people sign up for ECM after they complete their investment banking years – it’s an easier schedule, though you can still be on call when the client has a question or request.
As an analyst, it’s very important to know how the valuations are done and how the client’s operating model works.
When preparing to transfer to another group, focus on what’s transferable (hint: making case studies, market slides, working on internal memos) and be sure to hone in on how the groups are similar rather than their differences.