eFinancialCareers

The factory floor for shares and bonds.

Before financial products are traded, they must be created. And it’s the pink-collared bankers in the capital markets divisions of investment banks who work on the production line.

Equity capital markets (ECM) bankers help companies raise money by issuing shares and related derivative products, which are sold to investors. They act as ‘underwriters’ in the process. This means that, in exchange for a fee, they guarantee that they will sell the shares the company is issuing for a certain price. If they can’t find enough people to buy the shares at the price they’ve agreed with the client, the bank is obliged to buy the shares itself.

Debt capital markets (DCM), meanwhile, deal with saleable units of debt in the form of bonds. Bonds come in all shapes and sizes, including treasury bonds issued by governments (the least likely to default), investment grade bonds issued by companies (rather less likely to default), and so-called ‘high yield bonds’ (which are more likely to default and therefore pay a higher rate of return).

DCM is also called the fixed-income market. This is because bonds typically pay a fixed amount of money in interest until their redemption date (ie, when the original issuer has to pay back the amount of money on the bond to whoever happens to own it at that time). For example, a bond worth €100 might pay out €10 a year, making the interest rate 10%.

If the interest rate paid on a bond is to fall, the amount the bond is bought and sold for will therefore need to rise – until the redemption date at the end of the bond’s life, when the owner will receive its ‘face value,’ in this case €100. Financial products that have been created by capital markets bankers in the so-called ‘primary markets’ go on to be bought and sold by banks’ salespeople and traders in the secondary markets.

Key players

European banks wear the crown on their own turf in the DCM markets. According to Dealogic, in the year to March 2008, Barclays Capital topped the list with 548 deals worth a total of €104.8bn (8.5% share), followed by Deutsche Bank with 511 deals worth €102.6bn (8.3% share). In the ECM space, however, European banks don’t fare as well and only two, Deutsche Bank and UBS, make it into the top five. In the year to March, Merrill Lynch led the pack with 40 deals worth €25.1bn (11.9%), followed by Deutsche Bank with 61 deals worth €19.1bn (9.1%).

Roles and career paths

As banks are essentially offering similar services to clients, they have to convince them that their firm is the one to use. So before new equity or debt-related products can be created, deal originators are deployed to bring in business.

However, you’re unlikely to become an origination specialist – someone who spends a lot of time travelling to clients to gain an insight into their financing needs – until you reach the senior end.

Other roles within capital markets include structuring (assembling complex derivatives products) and syndicating (preparing for the sale of finished products to investors).

These days, it’s not sufficient simply to be an equity or bond specialist. Banks such as Morgan Stanley, JPMorgan, Citigroup and UBS have combined their equity and debt origination businesses, so it helps to understand both sides of the coin.

Antoine de Guillenchmidt, executive director, equity-linked products – global capital markets, at Morgan Stanley, says: “It’s no longer about originating equity or debt products in silos. Instead, you have to assess the client’s needs and be the representative of the firm to provide the right financing solution, and then pull in the resources needed to execute on that solution within the investment banking and capital markets divisions.”

Pay

As a structurer, you can expect to earn a basic €120k-€200k at the senior end in continental Europe, depending on the complexity of the product, according to the latest Robert Walters salary survey.

In 2007, total compensation for a top-level DCM origination specialist at a bulge-bracket bank in the UK was £685k, according to recruiters Napier Scott. In syndication, this was £540k for the same level.

As an associate (ie, someone with around three to five years’ experience) working in capital markets in the UK, you can earn £110k in origination and £70k in syndication.

Skills

Investment banks’ capital markets departments no longer only offer simple stocks and bonds. The growing importance of derivatives means capital markets bankers need to be numerate and to have a good grasp of technical issues.

“The job involves financial and option modelling, valuation of complex instruments, as well as accounting and tax analysis; the level of attention to detail is as important as running models in other parts of the investment banking division,” says de Guillenschmidt.

Excellent communication skills are also essential as you’ll be dealing with clients early on in your career. However, in spite of the high level of individual responsibility, it’s not like trading where individual excellence is rewarded – you have to be a real team player, says de Guillenschmidt.

And you have to very deal-oriented. Capital markets isn’t like M&A, where you often nurture relationships over a period of time with clients. Often, they can be one-offs and you have to know what it takes to win new business from a variety of clients.

Click here to read the profile of an analyst in equity derivatives.

Click here to find out about global trends in the capital markets sector.