Thank you! Just got an email this morning saying that it'll be competency/ motivation & commercial awareness based, so hopefully not too wildly different from anything I've done before.
I'm not too familiar with capital markets and find it quite confusing - is there any way you could simplify the concept and the type of work they do? That would be extremely helpful. And with the commercial awareness, would I benefit from talking about something more finance-based/ a particular M&A deal for instance, or could I speak about something broader like the current tariff war & its implications on PH's clients? If the former is preferred, what kind of things can I speak about that won't just sound like I'm regurgitating knowledge on how a deal is funded/ operates? Thanks so much!
Just to add to the great response from
@Ram Sabaratnam to understand capital markets I think
you need to understand how it contrasts to banking. Both capital markets and banking are fundamentally about the same same things: one party will provide capital to another party that needs it, expecting to obtain some sort of return in exchange. However, in general banking and finance, that comes in the form of loans, which you will already be quite familiar with: you will borrow money from a creditor (normally a bank; or, more recently, private credit funds) who will in return be entitled to periodic payments representing a percentage of the total borrowed sum plus an interest payment. Unless you become default and the loan is also unsecured (ie you have provided no asset as collateral), the creditor should recover the initial sum and obtain a return on it.
Capital markets is also about bringing together parties with lots of capital seeking to generate a return on it (however, here we have a way wider set of investor, from pension funds, hedge funds, and PE firms to retail investors) and parties who are in need of said capital. The basic distinction here is between debt capital markets (DCM) and equity capital markets (ECM). The difference is what is being given in exchange for the capital: either debt most often in the form of bonds for ECM (a promise to give a certain sum of money in return for the supplied capital) - or equity for ECM (a part of the shareholding of a given company).
DCM's bonds might seem at first virtually indistinguishable from loans finance and banking - both involve a party with capital giving it to another in exchange for a legal entitlement to be paid back the initial sum + interest. However, there are a number of crucial differences you should understand:
- Bonds are (to introduce another bit of jargon) classified as securities, which essentially just means that they are tradable financial instruments. If you have purchased a bond from a company X, you own an entitlement to certain payments from X and you can easily sell that entitlement to other investors. Thus, I could purchase that bond from you and now company X owes me the payment instead. This is a significant advantage for many investors, as it makes bonds highly liquid assets (which is another term of jargon just referring to the fact that they can be easily turned into cash if need be). Loans, on the other hand, are not by themselves tradeable; they have to first undergo a process called 'securitization' - which just refers to their repackaging into securities that can be similarly traded. Following the 2008 crisis, this is a highly regulated are of finance, which means that the trading of debt in the form of loans involves a more difficult process.
- Bonds take a different form to loans: imagine company A needs 1 million dollars to fund a project and wants to pay the debt to a creditor B over a period of 1 year and pay an interest of 5%. Now, if the money is provided in the form of a loan, supposing A agrees on monthly payments, A will need to pay every month 1/12 of the borrowed sum of 1 million (around 83,000 dollars) + the 5% interest of that 1 million (around 4000 dollars). If the capital is provided via the purchase of a bond instead, A will only need to pay back the interest monthly (the 4000 dollars) and then will pay the initial lump sum of 1 million (for which the jargon term is 'the principal') at the end of the year (the jargon for which is 'the maturity date'). While in this scenario the total sum paid back would be 1,050,000 dollars irrespective whether this is a loan or a bond, for many companies the details of when exactly they have to make large payments by matters a lot. In particular, if they expect large increases in revenues at a later date, a company can prefer the later payment of the principal required by a bond.
- Commercial loans are more often than not secured over assets, while bonds are more often than not unsecured, making the latter prima facie riskier.
Turning to ECM, I think Ram has already explained well how an initial public offering (IPO) works. The only thing I wanted to add here is that another major part of ECM is
secondary offerings: when a company that is already publicly listed wants to issue additional shares to the market - a move that will once again dilute current shareholding in exchange for capital. This can sometimes result in very significant transactions. For instance, Boeing recently raised around $21 billion from a secondary offering.
Finally, as for the work done by the lawyers in both ECM and DCM, it essentially involves
the legal work necessary to set up an offering of shares/bonds/other securities in compliance with regulations and on advantageous terms for their clients. To get a clearer picture as to the actual tasks this involves, I would advise you to read
this Chambers Article on work in capital markets.
