Equity Capital Markets (ECM) 101: How You Get In, What You Do, and What You Do Next
NOTE: This is a revamped and updated version of an older article on Equity Capital Markets. Since the time of the original article, we’ve added a lot of content about this topic and wanted to provide a more detailed overview and list of resources.
If you hear the words “Equity Capital Markets (ECM),” you might immediately think of initial public offerings (IPOs) and companies raising billions of dollars in huge stock-market debuts.
But there’s a lot more to the group than breaking records and making headlines in the process.
Like other capital markets teams at banks, ECM groups can be described as a cross between investment banking and sales & trading.
If you’re in this group, you’ll spend most of your time advising companies that want to raise equity capital.
“Raising equity capital” means that the company sells a percentage of ownership in itself in exchange for cash – as opposed to raising debt, where the company maintains its ownership but must pay interest on the funds it raises.
There’s a surprising amount of controversy online about this group, from how “good” it is to what the true exit opportunities are.
We’ll take a look at all those points in this article, as well as recruiting, team structures, typical deal workflows, on-the-job tasks, and more.
Breaking into Equity Capital Markets (ECM)
In some cases, students intern in ECM and then accept full-time offers; in others, they are brought in via a placement or “sell-day” process.
Some Analysts also find their way into the group via lateral hiring, and sometimes bankers from industry coverage groups join because they’re seeking a better work/life balance.
The recruiting process and interview questions for ECM teams are quite similar to what you would receive in investment banking interviews anywhere else.
Expect questions on accounting, equity value and enterprise value, valuation approaches, DCF analysis, and transaction modeling.
Questions on M&A deals and leveraged buyouts are a bit less likely since you do not work on them in ECM, but almost anything is fair game in entry-level interviews.
The main difference is that you need to show more of an interest in the markets – be able to discuss recent equity issues and trends, how indices are performing, and how IPOs and follow-ons have done recently in your region of interest.
You can follow our deal discussion examples to plan out what you’ll say for these questions.
To learn more about recent IPO filings, Renaissance Capital’s “Commentary & News” section is helpful.
It’s tougher to find information about follow-on offerings and convertible bonds, but sometimes the NY Times DealBook has good coverage.
If you’re interviewing for a convertible bonds role, you should also familiarize yourself with calls, puts, and the basics of how to value convertible bonds and create payoff diagrams.
The textbook Options, Futures, and Other Derivatives by John C. Hull can be a useful reference; we also cover convertible bond accounting and valuation in our IB Interview Guide and Excel & Fundamentals course.
Your story will be similar to what you would say for other groups, but you should emphasize how you like both markets and deals, so capital markets is the perfect combination, given your past experience, current interest, and future career goals.
The Structure: Three or Four Teams in One
Most people speak about ECM as if it’s a single group, but it is actually divided into a few different subgroups at most banks:
- Equity Origination: This team pitches companies on raising capital and then executes financing deals such as IPOs and follow-on offerings.
- Syndicate: This group communicates with other banks to coordinate deal execution – since most equity deals involve other banks in order to distribute risk.
- Convertible Bonds / Equity-Linked: This group helps companies raise capital with “convertible bonds,” which start out as debt issuances but convert into equity if the company’s stock price reaches a certain level.
At some banks, the ECM team might sit on the trading floor since there’s significant interaction with salespeople and traders.
Finally, some banks also have Private Placements teams, which help companies raise capital by selling equity to a small group of large investors (rather than a broad market offering).
Private Placements let companies raise significant capital without going public, and they’re especially popular among later-stage technology companies.
Workstreams, Projects, and Sample Assignments in ECM
Your main job in Equity Capital Markets is to tell stories about companies’ growth potential so that the companies can raise capital from investors.
The work differs depending on which team you’re in, and it gets more technical if you cover convertible bond offerings.
On the Equity Origination side, you can expect tasks such as the following:
- Market Slides: An industry group that is pitching for a potential client’s business might request a few slides on equity markets activity, including the performances of stock before and after issuance. You can see a few examples below:
- Case Studies: You’ll also draft slides based on previous clients that have hired your bank to raise capital. To complete this task, you’ll look up information such as the amount of proceeds raised, the pricing premium or discount, and how the company’s shares performed after the issuance. You’ll try to argue that your bank’s clients have raised the capital they wanted without giving up too much ownership and that their share prices have risen afterward. As part of this process, you’ll also update your bank’s database of equity offerings.
- Sales Force or Sales Team Memorandum: We have a detailed article on this one; this memo outlines why investors would want to buy your client’s offering. Along with it, you might also write an internal document (“Equity Commitment Memorandum”) that explains why your bank should take on the risk of the client’s assignment.
- Shareholder Analysis: With this one, you analyze a company’s current shareholders, the percentages they hold, and the types of investors they are. Here are a few examples:
- Crossholdings Analysis: With this one, you compare the shareholders across different companies. Often, you do this so you can tell a potential client, “Hey, Similar Company X has these shareholders – you share some, but not all, of them, so we should target the new ones when you raise capital.” Here’s an example:
- Shareholder Momentum Analysis: Here, you analyze a company’s shareholders over time to explain which investors are increasing or decreasing their stakes in the company. You often use this information for targeting purposes, and you aim for investors that seem more interested in the company. Here are a few examples:
- Trading Flow Analysis: You analyze the trading volume of an equity security across different price points and time periods, and you use it to advise a company on an appropriate range of issuance prices:
- Investor Targeting: You might write some commentary that confirms investor demand for your client’s equity:
- Financial Modeling: And yes, you do some financial modeling as well… but there’s a reason it’s the last item on this list: It’s much simpler than modeling M&A deals or leveraged buyouts. You might value potential clients via comparable companies or analyze how a company’s ownership and capital structure change after an offering. You can see an example of an IPO model below:
With convertible bonds, you’ll complete similar tasks, but for the convertible market instead. Plus:
- Convertible Bond Valuation: There are a few ways to do this, but one simple method is to separate the bond into its traditional bond and equity option, value each one separately, and then add them together. Key inputs to the option valuation include the cost of debt for the company, the option’s time to expiration, the stock-price volatility, and the dividend yield of the stock.
This analysis helps you answer questions about demand for possible issuances – for example, if interest rates rise by 2%, how would demand for a convertible bond change? Should the company offer a higher or lower conversion price if that happens?
- Term Sheet Creation/Analysis: This document gives the key features of the bond, such as the conversion price, maturity, interest rate, optional redemption terms, covenants, and anti-dilution provisions. Sometimes you’ll create these, and sometimes you’ll have to read and interpret them. Here’s an example:
- Payoff Diagram: You create diagrams that show the convertible bond’s value at different share prices, which helps the company assess the trade-offs of a convertible bond vs. equity vs. traditional debt.
Deals, Deals, Deals, and More Deals
Everyone knows about the initial public offering (IPO), but you could work on plenty of other deals in ECM:
- Follow-On (FO) Offering: With this one, the company is already public and simply wants to raise additional equity capital. FOs are faster and easier to execute than IPOs, and the key questions are the pricing discount to offer and the appropriate offering size. You can divide FOs into a few categories:
- Fully Marketed: Includes an “investor roadshow,” a presentation to potential investors by the investment banking team and the client’s management.
- Confidentially Marketed / Registered Direct: The bank targets only selected investors over a few days with the offering.
- Accelerated Bookbuild: This one happens even more quickly (24 hours to 3 days), and companies often do it when they need capital ASAP and cannot wait for better pricing or terms.
- Secondary Offering: The company does not raise capital at all – instead, one group of investors sells its shares to another group of investors.
- Concurrent Offering: The company might raise equity and another form of capital, such as traditional or convertible bonds, term loans, or a revolver, at the same time.
- At-the-Market: The company issues shares gradually over days or weeks, and it does so at prevailing market prices; the company avoids an intensive roadshow, but it’s a bad choice if the company needs cash ASAP.
- Block Trade: The investment bank buys shares directly from the client and then resells them to investors. The bank takes on far more risk in this deal, so the issuance price also tends to be lower. This type of transaction is also known as a “bought deal” in some areas.
- Rights Offering: The company sells additional shares to its existing investors, and the shares are allocated according to each investor’s “subscription rights” – this deal allows investors to maintain their ownership stakes as the company raises capital.
You could even help a company to repurchase its shares via an Accelerated Share Repurchase (ASR) deal.
It’s the reverse of an equity offering, and companies often do it when they have excess cash but no plans for how to use it, or when they believe their shares are undervalued, or a combination of both.
Finally, there are different roles for banks in all these deals.
For example, in an IPO, an investment bank could be either a bookrunner or a co-manager – bookrunners do most of the work, get most of the investors, and collect the highest fees, while the co-managers are less involved and earn lower fees.
Most bulge-bracket banks act as bookrunners, while boutique and middle-market banks tend to act as co-managers. On the biggest deals, though, even the bulge-bracket banks could be assigned to act as co-managers.
In ECM, you’ll almost always work with other teams as you execute deals. Here’s an example of the workflow for different tasks in a healthcare IPO:
- Valuation and IPO Model: The healthcare team will build a 3-statement model and value the company, but they’ll use the ECM team’s assumptions for the proper offering size and discount.
- Customer Due Diligence Calls: The healthcare team will conduct these calls and speak with customers to better assess the company’s growth prospects and risk factors.
- Sales Force Memo: ECM will write this memo and summarize the key points for the sales force so they can pitch the company to investors more effectively.
- S-1 Registration Statement: The lawyers will draft/copy the initial template, the healthcare team will make its additions, and then ECM and the lawyers will review it and make more additions. Rinse, wash, and repeat dozens of times.
- Road Show: The healthcare team will prepare the management team and conduct the event, but ECM may see the sales force presentation and answer their questions.
Culture, Lifestyle, Hours, and Pay
We mentioned earlier that some industry bankers move to ECM if they want a better lifestyle.
In many cases, that happens: An average day might be 7 AM – 7 PM, which may seem like long hours, but which is quite mild compared with other groups in banking.
If you’re done with your work, you can just go home; there’s far less “face time,” and all-nighters and weekend sessions are rare.
Much of your day will be taken up with “Please take 15-30 minutes to do this task” requests because you work with many different industry groups.
The hours in the convertible team can be longer because the work is more quantitative and deals can be more complex, but even there, you’ll probably work less than you would in an M&A or industry group.
At the Analyst level, compensation is similar to compensation in any other group.
The pay ceiling for Managing Directors and other senior bankers is lower than in other groups because the fees are split more ways, but high-six-figure to low-seven-figure compensation is still possible.
The Exit Opportunities: ECM Forever?
And now we reach the major downside of ECM teams: The exit opportunities.
The most common exits are moving to an industry group (healthcare, technology, consumer/retail, etc.), going into investor relations (IR) at a normal company, or joining a hedge fund or other buy-side firm in an IR or fundraising role.
Outside of those, it would be tough to win roles such as equity research or investment analysis at hedge funds because of the types of projects you work on as an ECM professional.
It’s not impossible to win roles in private equity or corporate development, but it is extremely difficult, and you’ll have trouble getting headhunters interested if you’re coming from capital markets.
You do work on deals, but much of your work is different and doesn’t apply to acquisitions of entire companies.
So, if you want to go that route, you’ll have to do much of the legwork yourself or move to a different group first.
If you want to make a long-term career out of banking, you could argue that ECM is a fine group since you’ll have a better lifestyle and you’ll still earn a lot.
But if you’re laser-focused on private equity exits, this is not the group for you.
Trade-Offs and Final Thoughts
Equity Capital Markets gets a lot of hate online, primarily because most commenters assume that if you don’t make it into PE, then you are a failure as a person.
But the truth is, even if you end up in ECM, you are still working in investment banking, which is better than what ~95%+ of university graduates will be doing.
The trade-offs are as described above: Somewhat better hours and solid compensation, but more specialized work and limited exit opportunities unless you transfer to a different group.
Some people claim that the work is “more boring” because you spend so much time updating slides and doing administrative tasks.
That’s true to some extent, but they fail to realize that most junior-level work in most groups is boring: Updating data rooms, creating lists of buyers and sellers, and editing documents.
The difference is that in non-capital-markets teams, you have a higher chance of exposure to deals that make for better talking points in interviews (even though you’ll still spend most of your time on grunt work).
So… to ECM or not to ECM?
If you don’t know what you want to do and you want to keep your options as open as possible, it’s not necessarily the best choice. And if you’re laser-focused on PE, it’s also not ideal.
But if your best internship or job offer is in ECM, accept it.
If you’re interested in banking for the long term and you don’t necessarily want a quick exit, ECM could also work.
And if you start out in the group and then realize it’s not for you, just switch teams – just like everyone else.
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