Business profile: capital markets | Investment banking on The Gateway

Business profile: capital markets

The Gateway gets a briefing from Olof Svensson, Vice President in equity capital markets at J.P. Morgan

What it's all about

Capital markets work means assisting clients who need to raise money and who have decided to do so by selling securities such as shares or bonds (slices of debt) on the financial markets. These clients could be large corporates, other banks, private equity firms, or governments.

I work in equity capital markets, and we help clients raise money by selling shares on one or more exchanges. If our client is a company or a bank, they are often issuing shares themselves to strengthen their balance sheet or to fund an investment or an acquisition. In the case of governments or private equity firms, they often want to convert a large slice of a company that they own into funds by selling shares in that company.

If we're dealing with a company that has never listed its shares for sale on an exchange before, we do an initial public offering (IPO) of their shares. If the company has already been listed on an exchange we might be involved in a rights issues (an offering of additional shares), issue of convertibles (an offering of bonds which can be converted into shares), or an accelerated offering (offerings of additional shares which can be arranged quickly, sometimes even overnight).

How it brings in revenue

We usually charge our clients a percentage of the overall amount raised as a fee, or an amount related to the transaction in more complicated ways. We typically only charge our clients fees for transactions that complete successfully, so if something we're working on doesn't go through, we normally don't make any money from it.

How it works

On a large transaction like a big IPO, a client will request proposals from banks stating how they would structure and execute the transaction. We submit our proposal, and then meet the company and its owners to pitch our ideas to them. They then pick the advisors that they want by considering each bank's proposal and pitch, their track record in executing similar transactions, and the team who will be involved in the deal.

If we are chosen, the next step is due diligence. We carefully go through the company's financial documents and other records with lawyers and accountants. The aim is to ensure we understand the company and its workings well so that when we come to present the shares to the market we can highlight the company's attractions to investors in the best way possible, while also being balanced and informing them of any potential risks associated with the investment.

At the same time, all the necessary transaction documentation is prepared. The main document is the offering circular, which, typically a few hundred pages long, gives details of the company and the industry in which it operates for potential investors. Producing it is a long process, usually lasting a couple of months, which involves us, the company, our lawyers, the company's lawyers, and the auditors. Once it's finished, the offering circular is filed with the relevant authorities (listing authorities or stock exchange) in the country where the company is to be listed. The body reviewing the offering circular might then have feedback, meaning we have to add extra information.

Once the offering circular has been approved and published, the next stage is marketing the offering to investors. Our research analysts write a report on the offering which then gets sent to all our institutional investor clients. On an IPO, research analysts will travel to see a large number of investors across a number of countries to educate them on the company. Then, the company's management team (usually the chief executive and chief financial officer and one or two other representatives) goes on a two-week roadshow to present their company in person and answer investors' questions. Typically, someone in the deal team will join the management team on the roadshow. I always find it exciting to do so as it's the first real test of how investors perceive the company. At the same time, our sales team gets in contact with potential investors to get a sense of how many shares, if any, each investor would like to buy and at what price.

Setting the price at which the shares will be sold at on an IPO is an important and complex task. The decision is based on feedback from potential investors, and also the company's and the seller's expectations. We often have enough demand for the shares to sell them at a higher price than the one we settle on in the end, which is because we don't just want to sell the shares to the highest bidder, but instead aim to ensure that we get the right kind of investors for the client. Generally, we're looking for large institutional investors who will hold onto the shares long-term. We want to avoid investors who expect the price of the shares to rise shortly after they're issued so that they can then sell them to make a quick profit. We're also careful not to set the price too high because we don't want the value of the shares to drop as soon as they're issued because it can disappoint investors, which the company will want to avoid.

The most difficult challenge for us at the moment is the current market volatility. If the market suddenly drops 10 to 15 per cent, then a price we've decided to suggest to investors is no longer going to look attractive because everything has become much cheaper. The best approach to the problem is to prepare a company as early as possible for an offering so that it is in a position to wait for an optimum time to issue its shares.

The information to be provided in the offering circular can also sometimes cause problems. The regulators set very strict rules about what a company can, and can't, say regarding its future prospects. The company often wants to include as many forecasts as possible to guide investors, whereas the lawyers tend to caution that the company shouldn't project too far forward, so there's always some discussion on this point to find the right balance.

Big deal

The 2008/9 financial crisis period was fascinating. During that time we did a lot of rights issues for European banks who wanted to increase their capital cushions. Last year, we saw the IPO market reopen again, although current market conditions have impacted it recently. My team did three large high-profile IPOs in the Nordic region during this period, which were very complex transactions involving a large number of advisors and required effective execution to ensure a successful outcome for the clients.

Hot topics

Until the market stabilises, I expect there to be a relatively low number of IPOs. And if markets continue to deteriorate, we'll probably see more capital increases from European banks, and potentially corporates as well. However, I think that companies are generally in a better shape now than in 2007/2008 and recent market falls mean that valuations of potential targets are low, so we could see more mergers and acquisitions activity, meaning an increased demand for acquisition financing through equity capital markets issues.

Internationalisation is a big current trend in this area. For example, we're seeing some European companies getting interested in listing on Asian exchanges rather than in the US or in Europe to raise their profiles in Asia and target a different investor base.

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