intro to ECM Flashcards
recent trends in the ECM
-size 1 trillion up 6% in the last year.
-US outperforms Europe thanks to the defense business
-in Europe large activity of financial sponsors and governments (privatization)
-activity has been driving by simplification (selling divisions) and jumbo deals (up of 1B in size)
what is the indicative size limit of an issue?
25% of the daily trading volume to avoid disrupting supply/demand and share trading patterns, creating artificial volatility.
what are expected trends in 2025?
large IPO activity, with governments as buyers in countries such as north africa and middle east. equity derivatives will consequently sell a lot. Simplification will drive a lot of sales as well as risk management (rebuys in the second market to adjust leverage).
what are league tables? who is the market leader in ECM? why?
league tables are classifications of investment banks based on the number/volume of mandates won, the point is assigned based on obtaining the “book runner status” in the deal. (volume league tables are considered more important), they are used for selection as the business is extremely competitive. the market leader in ECM is Goldman Sachs and the market is extremely concentrated as it requires hefty upfront investments and business perpetuates itself. (as you work more you are more eligible for selection)
terminal value is better estimated in the _____ Market. why?
US market. it is highly liquid and more active, allowing better estimates through sheer comparable data amounts availability.
why do large qualified investors buy big chunks of equity offerings?
to stabilize the offering, signalling security in the instrument and facilitating the bookbuilding process.
why do companies go public? (6 points)
-finance growth (need to issue new shares for the proceeds to go to the company thus a capital increase)
-to give liquidity to existing shareholders (sell secondary shares belonging to previous investors “secondary issue”)
-obtain an acquisition currency (through an equity swap you can purchase shares of other companies)
-Crystalize an objective valuation (linked to the previous point, by having quoted shares you immediately know the value of the trading currency without going through complex valuation)
-align management’s interests with those of shareholders (through stock options)
-visibility (as well as proximity to target investors ex luxottica offering in NYSE)
what are the types of issue which are contemplated in an IPO?
primary: newly issued shares
secondary: existing shares
what is the usual floating % of shares a company can achieve through an IPO?
between 20% to 50% (conditional to volume satisfaction, at least 100M upwards to 500M)
What do investors look for in an IPO? (7 points)
MAIN ESSENTIAL POINTS
-market leadership
-strong management
-solid financial position (excessively leveraged company are not appetizeable to investors who don’t want their money spent on debt repayments)
OTHER POINTS
-corporate governance (to foster trust from investors)
-high level of visibility and disclosure
-potential liquidity
-interesting valuation (NO MATTER THE TYPE OF DEAL, INVESTOR WANTS A DISCOUNT TO SWITCH FROM EXISTING TO NEW SHARES. IN CASE OF IPO THIS IS CALLED “DISCOUNT TO PEERS” MEANING WITH RESPECT TO PEER COMPANIES. eg if offering new Maserati shares you are gonna discount them wrt other luxury car producers)
what are the 4 macro investors constituencies?
-domestic institutional investors.
-foreign institutional investors.
-retail investors.
-hedge funds.
right now the difference between domestic and institutional is slowly fading due to globalization of capital markets. usually institutional investors are “long money” meaning they buy and hold. Hedge funds do not classify as such as they dip into arbitrage. (long short and spread trading)
what are the 3 main phases of an IPO? how much does it last?
preparation (4-5 months before IPO)
pre-launch (2-3 months before IPO)
execution (1 month before)
what does preparation consist of?
—Selection of Advisors
—production of Financials
—Internal Readiness Assessment
—Key issues to be addressed
—Prospectus Drafting
what does pre launch consist of?
—Early Look Meetings / Deep Dives
—Analyst Presentation and
interaction with Research Analysts
—Legal documentation and
interaction with Authorities
—Offering structure
–BP and equity story preparation
what does execution consist of?
PDIE
Management roadshow and bookbuilding
price discovery and setting
How was the syndicate structured in the prysmian case? why were competitors included among joint global coordinators?
-Joint global coordinators: GS, JP and mediobanca
-Bookrunners medio banca and GS responsible for underwriting 80% of the issue and placing it among international institutional investors
-mediobanca responsible for placing 20% of the equity in a retail offering.
JP included to avoid COI issues as the seller was the private equity division of GS.
what do the different roles require?
What are the Roles?
Coordinator/s
— Oversees the entire process, from Kick-off to closing. Co-ordinates the various workstreams (documentation, marketing etc.)
— Often (but not always) active as bookrunner in the offering
Bookrunners:
— Actively involved in the preparation of the documentation and responsible for the entire marketing effort (analyst press, roadshow, management of the syndicate)
— Control the order book, gather feedback from investors, give recommendations on final price, size of the offering, and allocations
Lead manager:
— Complement the research coverage and overall marketing effort in the transaction
what is the average % fee on an IPO? what is the main determinant?
from 1 to 5% with avg 3,5%. mostly depends on the size of the offering.
how are fees calculated and allocated?
on total offering including greenshoe
20% underwriting commitment pro rata based on underwritten amount
60% selling concession: Performance based
on actual allocations/designations received
20% management fee
lately GCs have started taking 10% of the pool as a fee.
definito, period and objectives of PDIE
definition: Standard practise in European IPOs,Meetings between the Research Analysts of the Syndicate Banks and institutional investors where Research Reports drafted and published by the Research Analysts are showcased.
Period:Official period typically lasts for 7 to 10 business days prior to announcement of price range and offering size.
Objective:
Familiarise investors with equity story
Preliminary demand assessment may be used to fix initial offering size
Investors’ views on valuation may be used to determine initial price range
Identify issues to better position story during roadshow
Identify investors whom management should see on roadshows
