Introduction to Equity Capital Markets
If you hear the term Equity Capital Markets (ECM), you may instantly think of Initial Public Offerings (IPOs) and companies raising billions of dollars on massive debuts on the stock market. Equity Capital Markets (or ECM) is the finance team within an investment bank focused on equity capital raises, from the initiation, through structuring, to the distribution. An IPO is an initial public offering, where an equity capital markets group helps a firm to release stock on a public exchange for the general public to invest in.
Role of ECM Investment Banking
A private placement is where the ECM investment banking team helps a company issue stock to an acquirer that is not trading on an exchange or helps a current investor sell shares to another private entity. Some banks also have private placement teams that help companies raise money by selling shares to a smaller group of larger investors (rather than an over-the-counter offer). In the Private Placement Market, companies raise private equity via non-publicly traded shares sold to investors directly. The primary stock market, in which companies issue new securities, is divided between a private placement market and a public primary market.
Secondary stock markets include exchanges and are the main place where the public invests in a firm’s equity. In a primary stock market, private companies may be taken public via an initial public offering, while listed companies may issue new shares via staggering issues. Private equity is different than public stock, with the former being issued via the primary markets, while the latter is issued through secondary markets. Private equity is raised from limited liability companies and private partnerships since they cannot publicly exchange their shares.
They have limited access to public equity because they do not have large, active shareholder bases. Similar to an initial public offering, it is when the company issues new shares from its coffers–as such, it dilutes existing shareholders’ holdings. The investment bank that underwrites it buys shares from the firm at a fixed price, then markets the shares on the market.
The company does not really raise money — rather, a group of investors sells their shares to another group of investors. Financial capital is raised via the capital markets in one of two ways: either through selling bonds, which are similar to loans the company would pay back with interest later or by selling shares, which are sold in return for a portion of ownership of the company. Companies also face reduced risks and costs when raising finance because they have dependable markets in which to get financing. In certain cases, particularly private placements, capital markets also help entrepreneurs and founders of companies to gain expertise and supervision from more senior colleagues.
The originating efforts involve tight coordination with multiple other teams, including customer outreach, M&A, leverage financing, debt capital markets, derivatives, sales, and trading, among others. Origination is certainly a business finance work, typically performed by coverage officers or bankers in M&A while putting together an equity syndicate is more in-market. The equity capital markets are a subset of broader capital markets, in which financial institutions and companies engage in transactions for the trading of financial instruments and raising capital for companies.
The Equity Capital Market (ECM) refers to an arena in which financial institutions assist companies in raising equity capital, and in which stocks are traded. Investment banks, retail investors, venture capitalists, angel investors, and securities firms are the predominant traders in the stock capital markets. ECMs are best known for helping companies to issue stock/equity — either via a primary offering (an initial public offering, or IPO, for companies looking to go public) or through secondary-market issues. The Capital Markets practice group helps companies and investors engage in a comprehensive plan for the preparation of a successful initial public offering, with an emphasis on key preparations like registration rights, shareholder agreements, disclosure controls, and executive compensation.
How ECM Investment banking navigates market conditions
We combine industry expertise with in-depth technical expertise to help clients navigate the capital markets, structure offerings of securities for both equity and debt, and satisfy securities and regulatory requirements. Located in major financial markets around the world, Dentons provides counsel to global and domestic banks, insurers, securities dealers, shareholders, venture capitalists, and private equity firms. Located in key financial markets across the globe, Dentons advise global and domestic banks, insurance companies, securities dealers, shareholders, and venture capitalists, as well as private equity. KPMG as partnerships also extends to business and investment banks, private equity firms, institutional investors, and legal counsel, to deliver optimum results for our clients. We also represent several leading investment banks as underwriters and early acquirers of securities and debt offerings.
Venture capital funds, leveraged buyouts, and private equity funds are the largest sources of private equity (click for private equity careers). Elite boutiques like Evercore or Lazard will provide independent capital markets advice on equity — banks like Klein & Co. have been a part of some of the biggest IPOs in history, like Saudi Aramco.
It is not impossible to get roles in private equity or corporate development, but it is extraordinarily hard, and if you are coming from a market, it is going to be hard to interest headhunters. At the tail end of the new stock issuance, it may be tempting to shut down once the book building is done, leaving actual stock distributions solely to your investment bank teams. Recognizing that shares are a permanent capital source, stock repurchases are nonetheless a well-recognized way of providing shareholder value and shifting the balance of capital between equity and debt, even for companies who raised equity in their first needs.
Companies looking to go public will sell shares that they wish to sell at a discount from current market prices to investment banks, at a cost. Without markets for stocks and bonds, entrepreneurs would have fewer options for making their ideas come true or expanding their businesses; they would need to hoard enough capital for repeat investments. It might be surprising to learn that the U.S., long considered the most active and liquid equity market of them all, has seen its stock list nearly cut in half over the last 20 years.