7. Raising Capital - How Investment Bankers Help Raise Capital?

Summary

This investment banking tutorial from WallStreetMojo explores how investment banks help companies raise capital through various means, such as equity dilution and loans. The video covers key functions of investment banks, including matching investors with companies, advising on valuations and negotiations, and ensuring regulatory compliance. It discusses IPOs, follow-on IPOs, and private placements, highlighting the roles investment banks play in each process. The tutorial emphasizes the expertise and global network of investment banks, making them crucial intermediaries in raising capital for corporate growth and expansion.

Takeaways

• 💼 Investment banks help companies raise capital through equity dilution and loans.
• 💸 Raising capital is essential for companies to grow, undertake new projects, or expand internationally.
• 🔗 Investment banks act as intermediaries between companies needing funds and investors.
• 💰 Investment banks earn advisory fees and commissions for their services, which can be substantial.
• 🌍 Investment banks have global access to institutional investors in various financial hubs.
• 📈 Investment banks assist in valuing companies and negotiating deals, ensuring fair pricing and successful transactions.
• 📝 Investment banks handle regulatory aspects, helping companies navigate the complex process of going public.
• 📊 Companies can raise capital by issuing new securities, such as IPOs, or by issuing bonds.
• 📉 Equity dilution occurs during IPOs and follow-on public offerings (FPOs), allowing companies to share ownership with outside investors.
• 🤝 Private placements involve raising capital from a select group of investors rather than the general public, offering a more controlled and less regulated fundraising approach.

Q & A

What is one of the primary functions of an investment bank?

One of the primary functions of an investment bank is helping companies raise capital, which can be done through equity dilution or loans.

Why do companies need to raise capital?

Companies need to raise capital for various reasons such as funding projects, expanding their operations, or moving from a national to a global presence.

What role do investment banks play in raising capital for companies?

Investment banks act as intermediaries, matching investors with companies that need capital, and they charge advisory fees or commissions for their services.

Why are investment banking salaries typically high?

Investment banking salaries are high because they earn significant advisory fees or commissions from large capital-raising deals, which can be a percentage of the raised amount.

What advantages do investment banks offer companies seeking to raise capital?

Investment banks offer access to a network of institutional investors, expertise in valuations, and negotiation skills. They also help companies navigate regulatory requirements and market procedures.

What are IPOs and FPOs in the context of raising capital?

IPOs (Initial Public Offerings) and FPOs (Follow-on Public Offerings) involve the company issuing new securities to the public. An IPO is the first time a private company offers shares to the public, while an FPO is an additional offering by a company that is already public.

Why might a company opt for a private placement instead of an IPO?

A company might opt for a private placement to avoid the extensive regulatory requirements and public scrutiny that come with an IPO. Private placements involve selling securities to a select group of investors rather than the general public.

What is a follow-on IPO (FPO)?

A follow-on IPO (FPO) is a subsequent issuance of shares by a company that is already public. It allows the company to raise additional funds by offering more shares to the public.

How do investment banks assist companies during an IPO?

Investment banks assist companies during an IPO by handling regulatory aspects, preparing prospectuses, valuing the company, organizing roadshows, and ensuring investor interest to make the IPO successful.

What is the significance of private placements for companies?

Private placements allow companies to raise capital by selling securities to a small number of select investors, which can be advantageous for companies that are not large enough or ready for an IPO, or those wanting to avoid the regulatory burdens of being publicly traded.

Outlines

00:00

🏦 Introduction to Investment Banks and Raising Capital

Investment banks help companies raise capital, either through equity dilution or loans. This process involves matching investors with companies needing funds, and investment banks charge advisory fees for these services. They have access to global institutional investors, expertise in valuations, and experience in market regulations. Investment banks assist companies in issuing new securities like IPOs, where companies share equity with the public, and in issuing bonds for expansion or project financing.

05:03

📈 The Process and Importance of IPOs and FPOs

IPOs (Initial Public Offerings) allow private companies to raise funds by sharing their equity with the public, transforming them into public companies. Investment banks play a critical role in managing IPOs by handling regulatory aspects, valuations, and organizing investor roadshows. A successful IPO requires significant investor interest. FPOs (Follow-on Public Offerings) occur when a public company issues additional shares to raise further capital, leveraging the established market price of their shares.

10:07

🔒 Understanding Private Placements

Private placements involve companies raising capital by selling securities to a select group of investors, such as banks, mutual funds, or insurance companies, rather than the general public. This method is chosen by companies that may not be ready for an IPO or prefer fewer regulatory obligations. Investment banks facilitate these transactions by connecting companies with suitable institutional investors. Private placements allow companies to raise significant funds without the extensive requirements of going public.

Keywords

💡Investment Banking

Investment banking refers to a specialized segment of banking that helps companies and governments raise capital. This is done through underwriting or acting as an agent in the issuance of securities. The video discusses how investment banks assist in raising capital through equity dilution and loans, emphasizing their role in facilitating major financial transactions.

💡Raising Capital

Raising capital involves obtaining funds to finance business activities, projects, or expansion. In the video, it is mentioned that companies might need cash for growth, such as expanding their operations internationally. Investment banks help these companies by matching them with investors or by issuing new securities.

💡Equity Dilution

Equity dilution occurs when a company issues new shares, thereby reducing the ownership percentage of existing shareholders. The video explains that investment banks help companies raise capital by issuing new shares through IPOs or follow-on offerings, which is a common form of equity dilution.

💡Loans

Loans are borrowed sums of money that companies must repay with interest. The video mentions that companies may approach investment banks to secure loans for special needs, differentiating this from traditional bank loans due to the tailored services investment banks offer.

💡Institutional Investors

Institutional investors are large organizations, such as banks, insurance companies, and mutual funds, that invest substantial amounts of money. The video highlights that investment banks have extensive networks of institutional investors globally, making them crucial in connecting companies with these investors to raise capital.

💡Valuations

Valuations refer to the process of determining the present value of a company or its assets. The video notes that investment banks have expertise in valuations, helping companies set the right price for their equity when issuing new shares to ensure they raise the desired amount of capital.

💡IPO (Initial Public Offering)

An IPO is the process by which a private company offers its shares to the public for the first time. The video explains that investment banks play a key role in managing IPOs, handling regulatory requirements, preparing prospectuses, and ensuring the success of the offering by generating investor interest.

💡FPO (Follow-on Public Offering)

An FPO is a subsequent issuance of shares by a company that is already publicly listed. The video describes how companies use FPOs to raise additional funds without resorting to debt, with investment banks aiding in the valuation and marketing of these new shares.

💡Private Placements

Private placements involve selling securities to a small, select group of investors rather than the general public. The video discusses how investment banks facilitate private placements, allowing companies to raise capital without the complexities and regulatory burdens of a public offering.

💡Advisory Fees

Advisory fees are the payments made to investment banks for their services in facilitating transactions such as capital raising, mergers, and acquisitions. The video mentions that these fees can be substantial, particularly for large deals, reflecting the value of the expertise and networks investment banks provide.

Highlights

Investment banks help companies raise capital through equity dilution or loans.

Investment banks match investors with companies needing capital and earn advisory fees for this service.

Investment banks have a global network of institutional investors.

They provide expertise in valuations and negotiation for both buyers and sellers.

Investment banks help companies navigate regulatory procedures and market requirements.

Raising capital can be done through issuing new securities or bonds.

Investment banks play a critical role in IPOs and FPOs, helping companies go public and raise funds.

IPOs involve private companies sharing their equity with public investors to raise capital.

Investment banks ensure the IPO is successful by generating investor interest and handling regulatory aspects.

FPOs involve companies already public issuing additional shares to raise more capital.

Investment banks assist with FPOs by evaluating and valuing the new shares.

Private placements involve raising capital from a small number of selected investors, not the general public.

Investment banks connect companies with institutional investors for private placements.

Private placements are preferred by companies that may not be ready for an IPO.

Private placements avoid the extensive regulatory requirements and public disclosures of an IPO.

Transcripts

hello friends welcome to this investment-banking tutorial from wallstreetmojo

let us now move forward and look at another important function

of an investment bank that is helping companies raise capital and capital

could be different formats it could be through an equity dilution or it could

be through loans so investment banks actually do both let's look at first

what is raising capital and how invest in banks actually helped them help the

companies raise capital now let us understand another important function of

an investment bank that is raising capital as you can see that there would

be various companies who would be in need of cash in order to grow it could

be related to certain set of projects or may be you know they want to kind of

expand their base from national to kind of international or global presence so

raising capital by corporates is one of the key activities that the corporates

may do so the approach bank up the regular banks for different credit based

loans but they may approach investment banks for a special set of needs so what

are those set of needs let's kind of understand and how it functions so when

we talk about you know companies wanting to raise funds from the market you know

there would be an intermediary that will call that as investment bank so what an

investment bank does is that they match the investors on one side with the

companies and you know basically what happens is that once they match the

advisory fee or the Commission's are actually taken by the investment bank

that's why you know the Investment Banking our salaries are really high

because let's say if you have done a deal of raising capital to an extent of

let's say $100 million you know the advisory fee can be 2% 3% 4% and

that could really mean a big number so profitable business to be in for the

investment bank as an advisory feet they earn a lot so what happens regularly is

that as I said these firms actually hire in investment bank

and investment banks have certain advantages associated with it a reason

why they are kind of hired because they have access to investors so we are

talking about institutional investors not only sitting in let's say in New

York but let's say Singapore you know globally across Hong Kong or Sydney or

maybe London the investment banks have key network access to investors who may

be interested in certain set of securities or investments in certain

companies second is that they have an expertise in valuations so let's say if

a company wants to raise capital you know they may want to share their own

set of equity so what is the price at which they should share the equity so

that's what they essentially do and they're essentially expert

negotiators so they negotiate on both the sides as well as buyers on as well

as on the seller side so they also bring experience you know or to companies for

the companies to come to the market just to give an example when a company would

like to raise funds from public there would be a certain set of procedures

that needs to be followed or regulatory aspects that needs to be looked at will

the company be able to do it on their own with the limited staff it will be

kind of very difficult number one second they may not be equipped with the right

skill sets to actually go to market or buy alone so in most cases in fact in

almost every case you'll find an investment bank representing the company

to kind of go to the market so in order to go to the market you know and raise

capital it can be done by using I mean can be done in many ways say the first

one which is again very important is issuing of new securities so one example

could be that you know Facebook issued its IPO so they wanted to raise capital

for growth and and they did that likewise Twitter so Twitter is also

coming up with its IPO so that's what you know issuing of new securities

would mean and these issuing or securities will be represented by

various investment banks so it could be JP Morgan Morgan Stanley just to name

a few second could be that issuing capital I'm

in raising capital by issuing bonds that can also be one of the features so the

reason could be a very set of expansion with the companies may be doing or to

finance certain set of projects you know the reasons could be many and investment

bankers are actually apt to for representing these things to the market

so now that you have understood how investment banks help companies raise

capital as we also looked at that one of the ways of raising capital was through

equity dilution so let's look at IPO’s FPO’s which is means that you know

there would be equity dilution for raising of capital in a bit more detail

so let us now look at the meaning of what exactly the investment banks do

when we talk about IPOs and follow-on IPO so it's called as IPO and FPO when

we talk about IPOs we are essentially saying that you know there's a private

company that means it's a privately held company and let's say there are only

limited number of shareholders who have at least now I started the firm they

will be called as founders now when a private company actually grows big

obviously they would or they may require funds to kind of finance their growth

there can be different routes associated with with financing their growth it

could be that the bank may be ready to kind of lend the appropriate amount of

money if the bank is probably not in a position to lended it because of you know

that company being too risky for the time being private companies can also

evaluate you know going to the market now what it means is that you know the

private companies which is closely held that means one 100% of the

shareholding is between the founders and the initial set of investors now these

founders and initial set of investors are now willing to share their stake in

the company with outside investors so what do we really understand by outside

investors so outside investors are those investors like you and me or maybe

other institutional investors so if that happens we are saying that the private

company has gone public because they have shared their shareholding with with

others it's like you and me so this is where the investment bankers actually

come into picture and the shares of this public company is basically then given

to the public so it can it give me depend on how much dilutions this

companies would be looking at so it could be 25% 30% 35% etc and it will

also depend on the amount of funds that they want to raise and this brings to a

very important question and here that you know when IPO is talked about we

must understand that why an IPO is actually required is it required for

growth is it required for acquisition and what rules do investment banks

actually play here take care of the regulatory aspects they talk about the

evaluations they they help in preparing the prospectuses they know the

procedures how to talk to ACC follow their own rules and regulations and they

kind of ensure that the IPO is successful so what do we mean by IPO

being successful IPO means being successful means that the IPO was fully

subscribed so if there is no investor interest obviously IPO will not be

successful so investment bankers job is also to kind of ensure that the

roadshows are organized investors are made aware of such an IPO and their

interests are generated as such so investment banking guys work a lot on the

IPOs and they charge a percentage of the amount that is raised so it can be

really big at times for these investment banks in terms of commissions or

advisory fees so let's look at what exactly is a follow-on IPO a follow-on

IPO is just another set of you know IPO I mean not an IPO but another set of

stock offerings by the company which is already public so see for example

there's a company who has already gone public and has shared 25% of its equity

with the public now they want to raise further funds and they don't want to do

it through the traditional loan or banking way where you know debt is

raised they want to share the equity with the public so earlier there was 20

25% that was shared now they want to share another 15% so we are

saying that again a follow-on offering may come in the public and that will be

called as FPO so again extra number of shares will be issued and the public

will have at least a benchmark because you know what these shares would have

already been traded so you would also know that at what price these shares

would come and what is the market price and how these following IPOs are are

being evaluated or valued so all these information are critically available and

investment banks actually help a lot again here to make this FPO a success

so with this we have understood that IPO leads to equity dilution which means

that investors are normal retail investors it could be public like you

and me and it could be institutional investors but there is another category

through which you know equity dilution can actually happen but the companies

may not want to actually go through the public for that so there's something

called private placements you are just having diluting your equity and raising

capital through select investors so what do they actually mean called as private

placements so let us look at another important function of an investment bank

that is private placements so what exactly do we understand by private

placements now think about you know raising capital from the the public as

well as from different sources many companies actually you know sell the

securities that means they look forward to diluting their stake but only to a

selected number and a small number of investors not to the general public like

you and me so you know maybe to a bank maybe to

mutual funds or institutional investors or insurance companies so what

essentially this means is that a small number of investors may invest large

amounts to own this company maybe 10%

each and this is called as private placements so what investment

bank actually does here is that they connect these in institutional investors

to companies and help them achieve the goal of raising capital using this

through this private placement opportunity window now you may be

wondering that why a company may actually look at a private placements

there could be certain reasons associated with it the company may not

be very big and you know they may not have an appetite for an IPO so IPO comes

with lot of pros and cons one of them being that let's say the downside could

be that dozens if you're listed then you are sharing your answerable to the more

number of shareholders in terms of at least absolute numbers and you know you

have to regularly file up you you are then in the purview of ACC and then you

may have to file regularly portly filings you know have minimum number of

disclosures and all these regulatory aspects are are to be taken care of when

you are not going through an IPO and your company public but this

may not be true for the private placing company so there could be certain

reasons so as I said the company may not even prefer to actually go to public so

that's about it for you know the reasons of why private

placements with this we have now understood how investment banks actually

help companies raise capital