What it means
The group is usually split by instrument, with an equity capital markets desk and a debt capital markets desk. Equity teams handle flotations, follow-on share sales and convertible issues, while debt teams handle bonds, private placements and syndicated loans.
Both act as translators between what the issuer wants and what investors will accept. Their main value to a client is market intelligence rather than paperwork.
They know what investors bought last week, what yield or valuation is currently achievable, and how a deal should be structured so that it sells out. A board can get that nowhere else at the moment it has to commit to a price.
Fees are quoted as a gross spread on equity deals or as underwriting and arrangement fees on debt. On top of the bank's fee sit legal, audit, listing and marketing costs, all of which the issuer pays whether or not the deal completes.
Net proceeds, not headline size, is the number the finance director should plan around. Conflicts of interest are built into the model and worth naming out loud.
The same institution advises the issuer on price while distributing the paper to investors it also serves, which creates pressure to price in a way that makes the book easy to fill. Appointing an independent adviser alongside the bank is a common and sensible counterweight.
For a mid-sized company the practical question is whether it is large enough to interest such a group at all. Banks apply minimum deal sizes because the work involved does not shrink with the size of the raise, so smaller issuers often use boutique advisers or the private placement route.
Knowing which door you qualify for saves months.
In practice
Real-world examples.
Example
A family-owned drinks business decides to float 30% of its shares. The bank's equity capital markets desk runs investor meetings, gathers indications of demand, and advises a price range, then sets the final price where the book is covered several times over so the shares trade up on day one.
Example
A utility needs $300,000,000 of long-term funding and asks two banks to pitch. The debt capital markets teams propose different maturities and structures, and the utility chooses a ten-year bond over a syndicated loan because the fixed coupon removes refinancing risk during a heavy capital spending programme.
Example
A technology company with no profits wants money without setting a valuation today. Its adviser's capital markets group structures a convertible bond, so investors receive a modest coupon now and the right to convert into shares later at a premium to the current price.
Formula
Calculation
Net proceeds to the issuer = gross amount raised - (gross amount x gross spread) - other issue costs
Suppose a manufacturer raises an $80,000,000 equity placement and the capital markets group charges a gross spread of 5%. The bank's fee is 80,000,000 x 0.05 = $4,000,000, which leaves $76,000,000. Legal, audit, listing and marketing costs add a further $1,200,000, so net proceeds are 76,000,000 - 1,200,000 = $74,800,000. The all-in cost of the raise is 80,000,000 - 74,800,000 = $5,200,000, or 5,200,000 / 80,000,000 = 6.5% of the gross amount, and that is the figure that belongs in the board paper rather than the 5% headline.Case study
Seen in the real world.
Pellworth Castings is an illustrative, fictional metal components maker that needed $60,000,000 to buy a competitor. Its board assumed the cheapest route was a share issue because no interest would be payable.
The capital markets group it appointed modelled three options and showed that a share issue at the then-current valuation would hand roughly 28% of the company to new investors, while a seven-year bond would cost about $3,600,000 a year in interest against earnings of $14,000,000. Pellworth chose a bond with a partial equity sweetener, keeping control in family hands.
The illustrative point is that the group's contribution was not execution but comparison. The board had only considered one structure, and seeing three priced side by side changed the decision entirely.
Watch out
Common mistakes.
- Assuming the bank's quoted fee is the whole cost of a raise, when legal, audit, listing and marketing costs often add one to two percentage points more.
- Treating the capital markets group as the company's independent adviser, when it also serves the investors buying the issue and has an interest in a price that clears the book easily.
- Choosing a structure because it avoids interest, without pricing the permanent dilution that issuing shares creates.
Questions
People also ask.
What is the difference between a capital markets group and corporate finance?
Capital markets specialises in raising money from investors through share and debt issues, while corporate finance advises on mergers, disposals and valuations.
Does appointing a bank guarantee the money arrives?
Only on a fully underwritten deal, where the bank commits to buy any unsold paper, and on a best-efforts mandate the issuer carries the risk that demand falls short.
Can a small company use one?
Usually not directly, because most groups set minimum deal sizes, so smaller issuers work with boutique advisers or regional banks that cover the same instruments on a smaller scale.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related