Equity Capital Markets

4 calculators on this page

Reach for this firstWhere the IPO money actually goes

Going deeperThe over-allotment, and how the short gets closed What one right is worth, and the cost of ignoring it The block discount against the cost of patience

This deskWhat it does, who is in the room, and how the transactions relate.

The desk at a glance

Equity capital markets is the business of selling shares to investors in one organised transaction. Sometimes the shares are new and the money goes to the company; sometimes they already exist and the money goes to whoever owned them. That single distinction — primary or secondary — changes what the transaction means more than any other fact about it, and it is the first thing to look for in any announcement.

The desk sits between two parties who want opposite things at the same moment. The issuer wants the highest price it can get; the investors want a discount for taking a position that has no trading history and cannot be sold back the next morning without moving the price. The transaction is an agreement about how large that discount should be, negotiated in the open over about ten days.

What makes it unlike an auction, and what surprises everybody the first time: the highest bidder does not automatically win. The issuer chooses who gets shares, deliberately favouring investors it expects to hold rather than sell into the first strong day. Allocation is a judgement about future behaviour, and it is where most of the desk's actual skill sits.

Who does what

• The global coordinator runs the transaction, owns the timetable, and is accountable for the price. On a large deal there are two or three, which is a governance arrangement as much as a distribution one.
• The bookrunners take orders from investors and build the book. Whose orders count, and how they are read, is the raw material of the pricing decision — see the IPO.
• The syndicate — everybody else in the underwriting group. They distribute, they take a share of the fee, and they take a share of the risk if the deal is underwritten rather than best-efforts.
• The stabilising manager — one named bank permitted, for a defined period and within published limits, to buy in the market after listing. Disclosed, time-limited and regulated: it is not a rescue. See the greenshoe.
• The reporting accountants produce the historical financial information and the comfort letters the banks rely on. Most of the months before a listing are their work, not the bankers'.
• The regulator approves the prospectus. It checks disclosure, not merit: approval says the document says enough, never that the shares are worth the price.

What decides whether this desk is busy

Six mechanisms, each with the direction it pushes in and the thing to watch. None of them is a forecast, and none is a number that goes out of date.

The calendar this business keeps

Every desk has a rhythm its regulars plan around and a newcomer discovers by being surprised by it.

How this desk reaches the rest of the site

The deals and the instruments are one subject. These are the corridors — each one a mechanism, not a resemblance.

How the work is actually doneWhat the client pays for, the documents in order, and the arithmetic.

What the client is actually paying for

The fee on an equity offering is a gross spread: a percentage of the money raised, deducted from the proceeds rather than invoiced. It is traditionally divided three ways, and the division says what the banks are actually being paid for:

• The management fee — for running the transaction: structuring it, preparing the documents, deciding the timetable.
• The underwriting fee — for the risk of being obliged to take shares nobody else wanted. On a firm-underwritten deal this is real; on a best-efforts one there is nothing to pay for.
• The selling concession — the largest piece, paid to whoever actually placed the shares with an investor.

Increasingly a further slice is discretionary: the issuer decides after the event how much of the pool each bank receives. That is a genuine change in the incentive — it pays for aftermarket support and research rather than only for orders on the day — and, like the M&A step-up, it is a structure to look for rather than a judgement about anybody's conduct.

The fee is not the whole cost and it is usually not the largest part of it. The discount is. Shares sold below where they trade a week later are a transfer from the seller to the buyers, and it dwarfs the spread on almost every deal. Which is why "the deal traded up sharply" is not straightforwardly good news for the issuer.

Which blocker decides across this desk

• Price6 of 10The two sides cannot agree what it is worth.Decides: Accelerated bookbuild, Block trade, Convertible bond issue, Follow-on offering, Initial public offering, PIPE. Matters on 3 more.
• Financing1 of 10The money is not there, or its cost moved under the deal.Decides: De-SPAC merger. Matters on 3 more.
• Approval2 of 10A regulator, a court, a board or a shareholder vote says no.Decides: De-SPAC merger, Rights issue. Matters on 5 more.
• Diligence1 of 10What was found when the buyer actually looked.Decides: De-SPAC merger. Matters on 3 more.
• Execution6 of 10Documents, disclosure, timetable, and the people running it.Decides: Accelerated bookbuild, Convertible bond issue, Direct listing, Greenshoe and stabilisation, Initial public offering, Rights issue. Matters on 4 more.

The documents, in the order they appear

• The engagement letter — who is mandated, in what role, and how the pool is divided.
• The prospectus or registration statement — the document. Business description, risk factors, historical financial information, use of proceeds, and the terms. The playbook reads one in the order that works.
• The comfort letter — the accountants confirming to the banks that the numbers in the prospectus tie back to the accounts.
• The intention-to-float announcement — the point at which the transaction becomes public and the company's speech becomes regulated.
• The price range announcement — the range, the size, and the timetable. What the range implies about valuation is the most-read number of the whole process.
• The underwriting agreement — signed at pricing, containing the conditions on which the banks may still walk away.
• The pricing statement and allocation — one price for everybody in the book, and a list of who got what.
• The stabilisation notice — published when the period ends, saying what was done.

Run the numbers

Interactive: where the IPO money actually goesEasy

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Primary shares raise money for the company and dilute; secondary shares raise money for the seller and do not. Prospectuses print both as one offer size.

Offer price Primary shares (m) Secondary shares (m) Shares before the offer (m) Underwriting fee %

Gross raised

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Net to the company

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Net to selling holders

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Market capitalisation at the offer

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Dilution to existing holders

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Free float

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Reading

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One fee rate on both legs, which is the usual arrangement but not the only one. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: the over-allotment, and how the short gets closedMedium

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The bank sells more than the deal and is short from the first day. There are exactly two ways that short ends, and the market price picks which.

Base offer (m shares) Over-allotment % Offer price Market price now

Over-allotment shares

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Total if exercised in full

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Extra proceeds on exercise

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What happens

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Stabilisation result

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Reading

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Stabilisation is a regulated activity with its own disclosure and time limits in most markets. This computes the arithmetic, not the permission. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: what one right is worth, and the cost of ignoring itMedium

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A rights issue offers new shares below the market price. Three things can happen to a holder, and only one of them is free.

Share price before the issue Subscription price New shares offered For every existing shares Shares you hold

Theoretical price after

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Value in each existing share

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Your entitlement

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Cash to take it up

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If you do nothing

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If you sell the rights

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Reading

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Theoretical throughout: the price after the issue is where arbitrage says it should be, not where it will be. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: the block discount against the cost of patienceEasy

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A block is a discount paid for getting out at once. The only honest comparison is with how long the same size would take in the market.

Shares to sell (m) Screen price Block discount % Average daily volume (m shares) Participation you could take %

Clearing price

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Proceeds

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Given up against the screen

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Days to do it in the market

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Size against a day's volume

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Reading

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The market alternative assumes the price does not move while you work the order, which is the assumption that makes patience look free. Information and education only. Not advice, not a valuation, and not a quote for anything.

Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.

Go deeper

How a deal dies here

• The window shuts. Volatility rises, two comparable deals trade badly, and a book that would have filled last month does not fill this one. Nothing about the company changed.
• The range is refused. Investors bid, but below the bottom of the range. The issuer can cut the price, cut the size, or pull the deal — and pulling it is a decision about the next attempt, not only this one.
• The book is the wrong shape. Full, but of fast money that will sell on day one. A deal can be covered and still not be worth pricing.
• Disclosure stops it. Something surfaces that has to go in the prospectus and cannot be settled in time.
• The seller will not accept the discount a first sale requires, and waits — which is a legitimate answer and the most common one.

Test yourself: equity capital markets

Quick questions on this desk — four options each, checked entirely on your device, nothing stored or sent. Wrong answers come with explanations, and the deep dives above hold every one of them. For education only.

What an interview asks here

ECM questions test whether you understand that a price is being discovered rather than calculated — and that who gets the shares matters as much as what they pay.

Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.

Q1Why is an IPO deliberately priced below where it is expected to trade?

What it is checking. The single most common ECM question, and the one most often answered as though the discount were a mistake.

A complete answer contains:

• It buys an aftermarket. Investors who bought in the deal have to be able to hold it without a loss, because the issuer will come back for a follow-on or a convertible.
• It pays for information. Investors reveal what they would pay only if they expect to be allocated at a price they like; a book priced to the last cent teaches them not to.
• It is compensation for taking size in one day on a company with no trading history.
• The issuer is buying it consciously — the alternative is a deal that breaks and a register full of people holding a loss.
• A direct listing declines the whole bargain, which is the cleanest way to see what the discount was actually purchasing.

Read it properly: IPO · Three routes to a listing

Q2A deal is five times covered. Should the price go up?

What it is checking. Whether you know that a book is not a demand curve, and that coverage without price sensitivity says almost nothing.

A complete answer contains:

• Not on that number alone. Coverage says how much size is in the book, not at what price it survives.
• What matters is how much of it stays as guidance tightens — orders that fall away at the top of the range were never demand at that price.
• The composition matters as much: an order from an account that will hold and an order from one that will sell into the break are both size and are worth different amounts.
• Inflated orders are a known feature of the process; syndicate desks discount them, and everybody knows they are being discounted.
• And raising both the price and the size removes the aftermarket cushion twice, which is exactly what a well-documented 2012 listing did.

Read it properly: IPO · A listing that broke on day one

Q3What is a greenshoe and who benefits from it?

What it is checking. A mechanics question with a trap: the stabilisation gain does not belong to the bank.

A complete answer contains:

• The syndicate sells more shares than the deal size, so it is short from the first day, and holds an option to buy that extra amount from the issuer at the offer price.
• If the shares trade below the offer, the syndicate buys in the market to cover the short — that buying supports the price, and the shoe lapses.
• If the shares trade above, the option is exercised, the shares are delivered, and the issuer receives extra proceeds.
• So it is a bounded, disclosed, time-limited support mechanism. It cannot support a repricing, only an opening.
• The economics of the stabilisation belong to the issue rather than to the bank, and the conventional ceiling is fifteen per cent of the base deal.

Read it properly: Greenshoe and stabilisation · The greenshoe calculator

Q4A company needs money and its shares have halved. Rights issue or placing?

What it is checking. A judgement question testing whether you know that pre-emption is a legal constraint and not a preference.

A complete answer contains:

• In much of Europe, issuing new shares requires offering them to existing holders first, in proportion. So a placing needs an authority with a limit.
• A rights issue protects existing holders: they can pay to avoid dilution, or sell the right and be compensated for it. Doing nothing is the outcome nobody chooses on purpose.
• The cost is time and certainty — a rights issue takes weeks and is exposed to the market for all of them, which is why it is underwritten.
• A placing is fast and dilutes existing holders who are not in it, which is why the authority is capped.
• At a halved share price the discount required is large, which makes the rights issue deeply discounted — and that is precisely when doing nothing costs the most.

Read it properly: Rights issue · What a right is worth

Q5Why does a share price often drift down in the months after a listing?

What it is checking. Whether you can name mechanical supply rather than reaching for a story about the business.

A complete answer contains:

• The stabilisation period ends, so a buyer that was permitted to support the price stops.
• The lock-up expires on a date everybody knows, and shares that could not be sold can be.
• The register has not settled: allocations go partly to accounts that intended to sell into strength.
• The first published results are measured against a forecast the company itself set during the roadshow.
• Pulling the other way, index inclusion is a rule with thresholds, and passing one turns a block of buying into something that has to happen on a date.

Read it properly: Why IPO shares fall · Block trade

Q6What is free float and why does anybody care?

What it is checking. It sounds like a definition question and it is a governance question.

A complete answer contains:

• The proportion of shares genuinely available to trade, excluding strategic, founder and locked-up holdings.
• Listing rules set a minimum, because a market in a handful of shares is not a market.
• Index rules set a higher and different one, and index eligibility is usually the bigger prize — it converts a rule into a large block of mandatory buying.
• It also decides how much of a takeover or a placing the market can absorb without moving the price.
• So a tightly held listing can satisfy the exchange and still fail the index, and the second is the one that moves the shares.

Read it properly: IPO · Primary vs. secondary

Q7The headline says the company raised 600 million. What do you want to know?

What it is checking. The single most useful habit on this desk: split the number before discussing it.

A complete answer contains:

• How much is primary and how much is secondary. Primary shares are new, the company gets the money, and existing holders are diluted.
• Secondary shares already exist, a holder is selling their own, the company receives nothing, and nothing is diluted.
• Both count towards free float, which is why announcements print them as one figure.
• A deal that is mostly secondary is holders selling down; a mostly primary deal is a company funding something it can name.
• Then: fees, the greenshoe, and the resulting market capitalisation, because the headline says nothing about any of them.

Read it properly: Primary vs. secondary · Where the money goes

Q8Why would a company choose a de-SPAC over an IPO?

What it is checking. A current-structures question. The honest answer names a real trade-off rather than a fashion.

A complete answer contains:

• Price certainty: the valuation is negotiated with one counterparty rather than discovered in a book.
• Speed and a different disclosure route, with different rules about forward-looking statements — which is what drew regulatory attention.
• The cost is proceeds certainty: shareholders in the shell can redeem, so the cash that actually arrives is unknown when the price is agreed.
• Which is why a PIPE is usually raised alongside it, to underpin the funding.
• And the sponsor's promote is real dilution that an IPO does not have — it has to be in any comparison of the two.

Read it properly: De-SPAC · Three routes

Do these against a clock → — one at a time, ninety seconds each, answer before you look.

Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.

How the transactions fit together

Every transaction here answers one of two questions: how does a company get its shares listed in the first place, and how does anybody sell shares once they are. An initial public offering does both at once — it creates the listing and sells stock into it — which is why it takes months and carries the longest document. A direct listing takes the first half without the second: the shares become tradable and nobody raises money, so there is no book and no bank standing behind a price. A de-SPAC merger reaches a listing through an acquisition instead, which moves the disclosure and the pricing into a different order.

Once a company is listed, the choice is between speed and price discovery. A follow-on offering is marketed; an accelerated bookbuild is the same sale compressed into a night, trading a wider discount for the certainty of being finished before the market reopens. A block trade goes one step further and puts the bank's own balance sheet between the seller and the market. A rights issue is the opposite instinct: slow, heavily discounted, and offered to existing holders first, so nobody is diluted who does not choose to be.

Two transactions sit at the edges. A convertible bond issue is equity sold through the debt desk — a bond today and shares later, at a price agreed now — and a PIPE sells listed stock privately to one or a few buyers, which is faster than any public route and prices like the private transaction it is. Greenshoe and stabilisation is not a transaction at all but the mechanism attached to most of the others: the option that lets the bank support an aftermarket without taking a position it cannot close.

Concepts to master

• Dilution is arithmetic, not opinion. New shares divide the same company into more pieces; whether that is good depends entirely on what the money does. See the rights issue, where the arithmetic is at its clearest.
• Free float decides the buyer base. Index funds must buy what enters the index and cannot buy what does not, so float, domicile and share class change the identity of the natural holder.
• A lock-up expiry is a dated supply event, published in the prospectus, and about as predictable as equity flows get.
• The bookbuild is information, not just demand. Who bid, at what level, and how quickly is what the price is actually set from.
• A convertible is an equity deal that documents like a bond and prices off volatility — the clearest place on the site where the two halves meet. See the issue and the instrument.

Analysis

⬇ The whole desk on one printable page

Who pays whom, drawn

The timetable on a transaction page says what happens and in what order. These say where the money goes — every payment between the parties, and what each one is for. Only the transactions where the cast list alone does not answer that carry one; each diagram sits on its own page.

• Initial public offering — A listing: two sellers, one number
• Rights issue — A rights issue, and the three things a holder can do
• De-SPAC merger — A de-SPAC: the cash that may not arrive

Who does this: Equity Capital Markets is a sell-side seat in Investment Banking, alongside Mergers & Acquisitions, Debt Capital Markets, Leveraged Finance, Restructuring, Structured Finance, Valuation & Deal Analysis. See the industry map.