Equity Capital Markets (ECM) teams advise clients looking to issue equity in the form of initial public offerings (IPOs) and rights issues (follow-on or secondary issues). For an IPO, the ECM (and/or M&A team) works closely with colleagues from the Equities Trading and Sales desks (on the markets side of the investment bank). Investment banks can help companies to pitch themselves to potential investors at a ‘roadshow’; help to structure the issue (including advising on the optimal amount of equity that should be sold); price the shares; underwrite an issue; and perhaps assist the client in the aftermarket, for instance through pursuing a ‘Greenshoe’ or ‘over-allotment’ option.
- Initial Public Offering (IPO): this is where a company lists on a stock exchange for the first time and sells shares to investors through the equity capital markets. Investors provide money in exchange for shares representing an ownership stake in the business. They then reap returns in the form of capital returns (if shares are sold at a profit) and dividends (if the company elects to pay dividends). Share prices are linked to a firm’s market value and thus fluctuate according to company performance and investor speculation. Shares are typically listed on a stock exchange to facilitate trading, thus ensuring there exists a (potentially) liquid market for the shares after the offering.
- Greenshoe Option / Over-allotment Option: a provision that may be incorporated into an Underwriting Agreement that affords the underwriter the option to sell a greater number of shares to investors than had originally been planned (in case demand exceeds expectations once the issue is made).
By Jake Schogger - City Career Series