Capital markets are one of the most crucial divisions of investment banking. Companies require their services when they are going public, or simply when raising additional debt or equity capital. These are critical moments in the lifespan of any company or organization.
There are two types of Capital Markets that are commonly discussed : Equity Capital Markets (ECM) and Debt Capital Markets (DCM). When a company is looking to raise equity through an IPO or rights issuance, investment banks would rope in the ECM department. When a company wants to launch a bond program or place debt with investors, the DCM team is involved.
In this article, we will discuss the differences between the two capital markets team and share some insight into what the role of an ECM / DCM analyst entail. If you are interested in a career in investment banking outside of M&A, this article aims to provide you with the right information to supplement your eventual decision!
Key Differences Between ECM and DCM
The goals for both the ECM and DCM teams are very similar – to help corporates raise funding via the capital market. The key differences that separate the two are the product, market breadth and market frequency.
The simplest distinction between ECM and DCM. ECM focuses on equity i.e. shares and DCM on debt, creating nuances within approaches and structures towards the capital market.
While not as commonly understood, the global bond market is multiple times bigger than the global equity market. While the ECM is primarily gear towards public and private shares for corporates; DCM extends beyond corporates and also involve sovereigns, agencies, supranaturals and municipal borrowings
Frequent borrowers lean towards the bond market to refinance existing debt, as bonds are more available and easily attainable. DCM generally sees more deal flow compared to ECM, directly affecting the pace and intensity of work as a DCM analyst.
A typical day for ECM/DCM Analysts
A typical day begins with understanding the market complexities for that particular day or week. The day starts early with a lot of reading and information gathering from news sources, global team conference calls and research briefings – all of which may take up an entire morning but is core to the ECM/DCM role. Ultimately, market knowledge is the value-add which bankers bring to their clients.
It is common that your starting point in investment banking would be as an analyst. An ECM and DCM analyst’s main job is to tell stories about a companies’ growth potential. This involves keeping logs on all equity deals (IPO’s and follow-on offerings) and compiling the information for bankers to use in their pitchbooks. It also means putting together league tables and finding a way to make your bank look like it is at the top of the table.
Most investment banking divisions will initially ‘pool’ juniors together as they compete for promotions and better job positions. Most of your day as a junior analyst will revolve around developing your perception for numbers and details. As ECM bankers require extreme attention towards the stock market, ECM analysts are usually assigned tasks that revolve around providing the relevant material and information to their superiors.
As an analyst for Equity and Debt Capital Markets, you will be responsible for four main tasks which include:
- Pitching clients on potential fund raising deals
- Updating market slides for other groups
- Researching case studies on recent deals
- Preparing lengthy documents known as prospectus
- Coordinating across teams and banks to execute debt and equity deals for clients
While this gives you a general overview of tasks required by an ECM and DCM analyst, let’s take a look at the two capital markets as separate entities.
Equity Capital Markets (ECM)
Like other capital market teams, ECM divisions can be classified as a hybrid between investment bankers and sales & trading divisions. Being involved in ECM divisions requires a lot of back-and-forth communication with companies that are interested in raising equity capital.
The ECM divisions are broader than the stock market divisions, because they cover a wider range of financial instruments and activities. The main participants in ECM are investment bankers, broker-dealers, retail investors, venture capitalists, private equity firms, sovereign wealth funds, family offices and securities firms.
The Equity Capital Market groups can be broken down into three subgroups:
- Equity Origination – This group pitches companies on raising capital and financing deals like IPO’s.
- Syndicate – This group works with other banks to execute deals. This is crucial as most equity deals involve several banks.
- Convertible Bonds – Convertible bonds are debt issuances that equity when a company’s stock price reaches a threshold. This group works with companies to raise capital using convertible bonds.
Generally, ECM groups can be staffed on IPO’s and private investment in public equity deals (PIPE deals). ECM groups typically receive specialized support from ECM divisions – this involves being provided data on IPO’s in targeted industries, capital raised per product and market stability.
Debt Capital Markets (DCM)
DCM is a low-risk capital market where companies and governments raise funds through debt securities. These include corporate bonds, government bonds and Credit Default Swaps for risk hedging.
Like ECM, DCM is a cross between investment banking and the sales & trading divisions. However, debt is considered lower profile than equity, and there is much less information covering debt markets than there is about equity markets due to their low-risk factors.
There are two other groups at investment banks that focus on debt issuances: Leveraged Finance and Corporate Banking.
Leveraged Finance focuses on high-yield bonds that can be used for fund acquisition, leveraged buyouts and other transactions. The high-yield bonds are generally high-risk, thus why it is important to have a separate group to focus on them. This group typically serves private equity firms looking for execute Leveraged Buyouts.
Corporate Banking groups focus on Revolvers and Term Loans, or in more general terms, “bank debt”. They keep track of the bank debt that is not syndicated to external institutes. Contrarily, DCM focuses on investment-grade bonds that are syndicated and sold externally.
A career in the capital market can be very rewarding, as you are given the chance to interact with clients from the get-go. It can, however, be tough initially. You will have to sift through lots of information and work out issues with clients. Generally, you would be looking at 60 to 70-hour work weeks in your first year as an analyst. The hours lessen as you progress up the corporate ladder. Although the learning curve may be steep, the results and satisfaction of working in such an environment can be inspiring to the right candidates!
For ECM/DCM teams in particular, there is also a meaningful difference between banks with “Balance Sheet” (i.e. capital which they can offer to corporates to underwrite a deal) and banks that are capital constrained and purely playing an advisory role. Japanese banks for example are well known for having strong balance sheets and are therefore both capital providers and advisors on a given deal. The difference, as some analyst recall can make a huge difference to the bank-client relationship. When a client asks for a proposal, most US and European banks will rush to serve and attempt to “turn around” work in a day. This is because service quality is what differentiates one bank from the other. For the teams in the Japanese banks? – “We will come back to you with a proposal next week”