In this article, we’ll learn four main areas of investment banking activity.
We will describe underwriting services, often called capital markets advisory services, including M&A restructuring trading and brokerage and asset management. Capital markets are one of the most fascinating investment banking activities. Companies need these services when they’re about to go public or want to issue debt sold to the public. In the case of equity, we speak about equity, capital markets, ECM, and when an investment bank helps a company sell the debt to the public.
We talk about debt, capital markets, DXM. Going public is a critical moment in the life of any business. It has grown from a small venture to a large entity ready to take retail and institutional investors on board. The firm’s shares will be sold to many investors, which often means founders lose ownership control, and a board of directors is appointed to decide who runs the business. An IPO is a complex transaction that must be carried out at the right time. The company’s founders want to sell at a fair price and monetize their hard work. At the same time, public investors are interested in companies with excellent management and strong growth potential.
The IPO business must be ready regarding size, profitability, administrative capacity, and growth potential. Being a public entity adds a significant administration burden that must be assessed carefully and adequately prepared for.
What is the investment banker’s role in this process?
Historically, investment bankers have been the trusted advisors of companies who ensure that the whole process goes smoothly. Their job is to advise when the right time is to go public, and how the company can position itself to attract investors’ interest. Organise meetings between the company’s management and investors and present the opportunity to investors. In addition, investment bankers build lists of investors’ intentions and determine the price at which the company will sell its shares. After the IPO, investment bankers will ultimately exercise specific instruments to stabilize the stock’s price in the first few days after it starts trading.
This is a brief description of the IPO process. But what if a company already listed wants to issue additional shares? Is that possible?
Yes, it sure is.
It’s a much easier process called seasoned equity offering. So given that this is an already public entity, there’s a significantly lower amount of prep work that needs to be done. The firm’s shares have a market price, The organization has worked on and submitted all necessary filings required by authorities at the time of its listing. So the role of investment bankers is limited to finding investors who will buy additional shares and participate in the company’s capital increase in a much narrower time frame.
Bankers conduct several meetings, creating a list of interested buyers once sufficient demand has been established, they’ll underwrite the shares and sell them to investors. Capital markets are the second central pillar of underwriting services. Besides equity, a company can 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 sovereign countries and municipalities can also issue bonds. 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 government can borrow money from public investors, too. Public debt markets work efficiently, especially when the amount to be borrowed is substantial. Many investors buy these securities and expect to be paid an interest rate throughout the bond duration. Like the issuance of equity investment bankers, advising the issuer, preparing company presentations, finding potential investors, and pricing the loan.
Typically, bonds are much easier to price than equity, mainly because every company that issues a bond acquires a credit rating and opinion about its creditworthiness expressed by independent credit agencies. Market participants also have a much easier time making comparisons than other businesses that have borrowed funds and always take into consideration the central bank’s interest rates.
Another form of DXM service that has been very popular recently is loan syndication loans granted by a pool of banks. The idea behind this type of financing is that each bank provides a portion of the loan. Such a group of banks is called the Syndicate. Syndicated loans are a hybrid between bonds and commercial banking loans. There are several reasons why banks could be interested in loan syndications, including diversification, fee generation, and importantly, lending opportunities in geographic areas where they have no presence and expertise.
