http://www.pwc.co.uk/eng/publications/Listing_on_UK_capital_markets.htmlUK capital market structure

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Debt and Equity Capital MarketsMay 30, 2007Traded financial products are born in the capital markets divisions of investment banks. Bankers there produce the securities used by companies and institutions who want to raise money on the public markets. Their two main products are stocks, traded on the equity capital markets, and bonds, traded on the debt capital markets.

Stocks, also known as shares or equities, are bought by investors who want to share in the profits of a company through dividends or the appreciation of the stock's value. If the share price rises, investors can sell stock to other investors at a profit. If it falls, they might sell them at a loss. This trading occurs in the secondary markets, and the company itself doesn't directly benefit. It's raised the capital it needs through the shares' initial public offering, or "IPO."

Investment banks act as "underwriters" on behalf of the company issuing stock. They assume the risk of issuing the stock, and do the work necessary to bring it to market, in return for a fee known as the underwriting spread. The underwriting spread represents the difference between the price the issuing company receives for the stock and the price at which it's offered to shareholders. In order to spread the risk, particularly for large IPOs, investment banks typically pool their resources, with one acting as the lead underwriter, which manages the deal. The fees charged from the offering are shared proportionately between the underwriting banks based on a written agreement between them.

Bonds are a form of debt. Like equities, they're issued by a company or government in order to raise money. At some designated point in the future, the issuer has promised to pay the bondholders back. In the meantime, bonds can be sold to other investors in the secondary bond markets. So, the bondholder who is eventually reimbursed is likely to be different from the original buyer. As with equities, investment banks act as the underwriters to create bonds and bring them to market.

Until the redemption date, the bondholder receives interest payments in return for the service of lending the issuer money. Because these payments take the form of a fixed cash sum paid at regular intervals, bonds are known as fixed income products. Similarly, the bond markets can be known as the fixed income markets.

Capital markets divisions also issue more complex products, such as equity-linked securities - or bonds that can be converted into equities at a pre-arranged price - and derivatives.

ECM divisions and DCM divisions have traditionally been separate businesses. Recent years, however, have been a trend toward combining them into a single division.

IPO activity grew strongly in 2006 and shows little sign of abating this year. According to the accounting firm PricewaterhouseCoopers, proceeds to issuing companies increased by 28 percent compared to 2005. The size of deals also increased dramatically, with proceeds from the year's top 10 IPOs increasing 58 percent in 2006. Eight of the top 10 deals exceeded the $1 billion mark. The number of IPOs rose from 221 in 2005 to 236 last year in the U.S. alone. At the same time, markets have become increasingly global, with more total capital being raised in Europe than in the U.S. The 236 IPOs in the U.S. during 2006 generated $50 billion. On average, each of those deals was bigger than the IPOs in Europe, where 653 new stock listings generated $82 billion.

One of the trends driving the IPO market recently is the increased buy-out activity from private equity firms. These firms typically buy public companies using leverage - otherwise known as debt - and take them private. After a period of restructuring them outside of the glare of public-company disclosure rules, they often return them to the public sector through an IPO, reaping a profit as they do. Such activity is expected to continue to drive IPOs for the foreseeable future. In such cases, capital markets divisions handle the underwriting, just as they assisted in the creation of the bonds needed to take the target company private to begin with.

Roles and Career Paths

If you work in the capital markets division of an investment bank you could do anything from originating, to structuring, to syndicating. You could also work for a law firm that specializes in securities law and handles the legal aspects of submitting registration paperwork and other tasks.

Origination specialists are usually senior capital markets bankers. Their job involves a lot of travel as they meet clients in an effort to gain insight into their financing needs and persuade them to offer up business to the bank. Essentially, this is a senior level sales position.

By comparison, structurers are desk-bound. They spend their time creating complex financial products to suit a company's financing needs as communicated by the originators.

It's up to the people on the syndication desk to ready the market for the sale. They calculate the best price range for the product concerned, assess demand, and make sure the correct documents are in place.

Skills and Qualities

- Analytical ability and statistical aptitude- Strong communication skills- Ability to manage multiple projects- Perseverance