As anticipated earlier, in this section of the course, we will talk about the four main areas of investment banking activities. The four lessons you we will see here will provide a detailed description of Underwriting services (often called Capital Markets), Advisory services (including M&A and Restructuring), Trading and Brokerage, and Asset Management. Then, from the next chapter onwards, we’ll dedicate significant time to provide you with an inside-look of each of these investment banking divisions. Capital markets are one of the most fascinating areas of investment banking. Companies need these services when they are about to go public or want to issue debt sold to the public. When a company wants to raise equity, we talk about ECM, standing for Equity Capital Markets, and when it wants to raise debt, we talk about DCM, standing for Debt Capital Markets. Going public is a critical moment in the life of any company. This means it has grown from a small business to a large entity, ready to get public investors on board. The company’s shares will be sold to public investors, and they can determine who will run the business and who will sit on the Board of Directors. This is a very complex process that must be carried out at the right time. The founders of the company want to sell at the right price and monetize their hard work. At the same time, public investors are interested in making an investment in a company with great management and a great growth potential. The company going public must increase its administrative and finance staff significantly. It will have to prepare several documents and financial reports not required for private firms. This is a cost it will have to bear. Timing plays a critical role in an Initial Public Offering. The IPO must be carried out at the right moment – the company must be ready in terms of size, profitability, administrative capacity, growth potential, and investors must be convinced that their money is in good hands. What is the investment bankers’ role in this process? Historically, investment bankers have been the trusted advisors of companies who ensure that the whole process goes smoothly. It is their job to provide guidance as to when is the right time to go public, how the company can position itself to attract investor’s interest, to organize meetings between the company’s management and investors, and to present to investors the investment opportunity. In addition, investment bankers build lists of investor’s intentions and determine what will be the price at which the company will sell its shares. Ultimately, after the IPO has taken place, investment bankers will exercise certain instruments at their disposal to stabilize the price of the stock in the first few days of its trading on the market. Ok. Perfect. This is an IPO. But what if a company already listed wants to issue some additional shares? Is that possible? Yes, sure. It is.
It is a much easier process, called SEO. Seasoned Equity Offerings. It is a much easier process, because everything is already in place. The company is already listed on the Stock Exchange. Its shares have a price; it has already created all documents necessary to be in compliance with financial regulations. So, the role of investment bankers is limited to finding investors who will buy additional shares and participate in the company’s increase of capital. There will be several meetings; investment banks will create a list with potential buyers of the securities and will underwrite the stock, once sufficient demand has been established. Debt Capital Markets are the second main pillar of underwriting services. Besides equity, a company could be interested in issuing debt securities, called bonds. A bond offering is not different from an equity offering. The players involved are almost the same. The main difference is that bonds can be issued by sovereign countries. Most people think of debt in its traditional form, borrowing money from a commercial bank, but that’s not necessarily the case. A company or a government can borrow from public investors too. Public debt markets work efficiently, especially when the amount to be borrowed is substantial. Several investors buy these securities and expect to be paid an interest rate throughout the duration of the bond. Similar to the issuance of equity, investment bankers advise the loan, prepare company presentations, find potential investors, and price the loan. On average, bonds are much easier to price compared to equity, mainly because every company that issues a bond has a credit rating – an opinion about its creditworthiness expressed by independent credit agencies. Another form of DCM services that has been very popular in recent years are the loan syndications. These are loans granted by a pool of banks. Usually, several banks get portions of a loan. Such group of banks is called ‘’the syndicate’.’ Syndicated loans are a hybrid between bonds and commercial banking loans. There are several reasons banks can be interested in loan syndications – diversification, fee generation, and importantly, lending opportunities in geographic areas in which they have no presence and expertise. So, these are the main types of equity and debt offerings in which a bank’s Capital Markets division is involved. In our next lesson, we will talk about the Advisory services provided by investment banks.
