Capital Markets - Equity Capital Market Flashcards
Why would a company need to go public?
Short answer is they need money (financial resources) for their growth
What a listing does for a company?
It brings reputation and visibility
Who are the investors in an IPO
Retail Investors, Institutional Investors and Hedge Funds
Who are institutional investors?
Entities like mutual and pension funds and insurance companies
How do the different type of investors differ?
They differ in investment horizon, return expectations, risk profile
What are general characteristics of a company that the investors look for in an IPO?
strong company with market leadership, strong management, solid financial position and high level of visibility and disclosure
what’s the investment horizon for a hedge fund company?
It’s very short and they will dump the stock as soon as they can
How long does a typical IPO process last?
It lasts between 4 and 6 months
What’s the goal of a price setting in an IPO
Key goal is to provide a slight discount to the value of the company
What’s the main technique used to determine the company’s price
DCF - Discounted Cash Flow technique
What’s DCF
It’s calculating the present value of all cash flows that the company will deliver to its owner
What’s the basis for DCF
Historical results and the business plan prepared by the management team of the company
What’s book building?
Book building is the process of identifying the right price point for the shares. The investment banks receives feedback from the investors of their willingness to pay for the shares at different price points. Institutional investors can tell the Investment Bank, how many IPO-ed shares that they will buy and at what price point.
What’s a roadshow?
Investment Bank and Company’s top management meet with the key investors and institutions and try to win their support for the listing
Steps involved in an IPO?
a) Company hires an investment bank and advisors b) Investment bank applies various models and techniques to derive the pricing c) Investment bank starts the book building process which also includes the roadshows d) Comply with all regulatory requirements e) Listing of the company shares in the exchange f) Trading of the shares in the exchange
