Equity Capital Markets vs. Debt Capital Markets
Within Investment Banking, there are a variety of product and industry groups that one has the opportunity to focus on. Some summer internships offer generalist analyst programs, where one has the opportunity to explore different groups within the bank. However, other programs require analysts to be product or industry specific. Thus, it is important that one researches the different groups. Equity Capital Markets and Debt Capital Markets are examples of product groups. Both of these groups help their clients raise funds but in different ways. As implied by the name, in the Equity Capital Markets group, bankers focus on raising equity for clients. Debt Capital Markets group raise debt for clients. “Raising Equity”? “Raising Debt”? In the following paragraphs, I will discuss what those phrases mean and what makes these product groups unique.
Equity Capital Markets
The Equity Capital Markets group is a cross between sales & trading and investment banking. Being a member of this group means that one will be spending most of their time giving advice to clients about raising equity capital. Raising equity means that a company sells a certain amount of ownership in the company in exchange for cash.
The Equity Capital Market group can be broken down into three subgroups:
- Equity Origination: This group pitches companies on raising capital and financing deals such as IPOs.
- Syndicate: This team works with other banks to execute the deal. This is necessary as most of the equity deals involve multiple banks.
- Convertible Bonds: Convertible bonds are debt issuances that convert into equity once a company’s stock price reaches a certain number. So, this group works with companies to raise capital using convertible bonds.
As an analyst in the Equity Capital Markets group, one has the opportunity to perform a variety of tasks. One task involves the creation of market slides for an industry group that is pitching a client’s business. In addition, an analyst will also create slides based on previous clients that hired the bank to raise capital. An analyst can show these slides to potential clients as a way to show how their bank helped a previous client raise desired capital without giving away too much ownership. Also, one executes shareholder analysis, which entails analyzing a company’s current shareholders and the percentages the shareholders own in the company. Equity Capital Markets entails some financial modeling through valuing potential clients by comparable companies or analyzing how a company’s ownership changes after an offering.
Lastly, when working for the Equity Capital Markets, an analyst makes deals such as an initial public offering (IPO). In addition, one executes a follow-on offering, which is when the company is already public and wants to raise additional equity capital. Another type of deal is a secondary offering, where the company does not generate additional capital but rather investors sells their shares to other investors.
Debt Capital Markets
Similar to Equity Capital Markets, Debt Capital Markets is a mix between sales & trading and investment banking. However, that is the only similarity between the two. Debt Capital Markets is a type of market where companies raise funds by trading debt securities. These securities include corporate and government bonds. When a company raises debt, it means that it borrows funds and pays interest on those funds. This is different than equity because there is no decrease in ownership.
As an analyst for Debt Capital Markets, one is responsible for four main tasks:
- Executing debt issuances for clients.
- Pitching clients on debt issuances. Must be able to answer their questions.
- Updating market slides for other groups.
- Create case studies about recent deals.
For the first task, most of the work is made up of creating memos for the sales teams. These memos provide the team with the calculations and analysis that are useful to sell the offerings to investors. When pitching debt issuances, potential clients will come to a bank and ask for advice regarding interest rates and benefits of receiving new debt. For example, a company might say that they have $400 million in debt maturing in 5 years. Since interest rates have fallen, the company believes they can refinance by raising debt at a lower interest rate and use the proceeds to pay back the existing issuance. Is this a good plan? What interest rate is needed so they come out ahead? These are the kinds of questions a Debt Capital Markets analyst needs to be able to answer. Updating market slides and creating case studies require an analyst to spend time performing requests made by other industry and product groups.
Debt Capital Markets has much less financial modeling work than Equity Capital Markets. It is a higher volume business than Equity Capital Markets as the global credit markets are larger than the global equity markets. As a result, the Debt Capital Markets group works in a faster paced environment as deals occur more rapidly. In addition, the Debt Capital Markets group has less risk than the Equity Capital Markets team. Thus, Equity Capital Markets and Debt Capital Markets are two unique product groups that an analyst has the opportunity to work within.