Equity Markets and Alternative Investments Teaching Program 2017-2018 Week 1 – September 12, 2017

Equity Markets: Public Side vs Private Side; the Role of Investment Banks

Marco Morelli – Chief Executive Officer – Banca Monte dei Paschi di Siena SpA - Italy

Introduction

1

Equity Markets and Alternative Investment

Course Program – (M. Morelli)

12th September

19th September

26th September

3th October

10th October

17th October

7th November

24th October

31th October

Equity Markets: public side vs. private side; the role of investment banks

IPO: general overview and process

IPO: case study

Straight equity follow-on: rights issue, accelerated book fully marketed offerings

Universe of equity markets investors: long-only, hedge funds, sovereign/wealth funds, retail

Rights issue: case study

Equity-linked: overview and rationale

The role of equity research: evolution, past issues, regulation

Private equity and financial sponsors: investment cycle, domestic vs. international

14th November

21th November

Hedge fund testimonial

Wrap-up Q&A

2

Equity Markets: What Are They?

The Role of Equity Markets

Equity markets are the meeting point for buyers and sellers of capital, typically in the form of shares

They cover a set of functions which are pivotal for the development of a market economy and include:

o bringing companies and investors together

o enabling issuers (i.e. companies) to raise new capital

o facilitating the process of investors trading in shares, providing liquidity

Stock exchange and private platforms facilitate this process creating a liquid marketplace; private equity deals are, instead, typically one-to-one transactions

The movements of the prices in a public market are captured by price indices called stock market indices

Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index

Many equity indices exist across the globe, which can be either national, regional or representative of a specific sector (e.g. Italian FTSE MIB, S&P Global 100, NASDAQ)

Key Players

Buy Side

Banks, Brokers and Advisors

Equity Markets Allow Companies to Raise Funds By Providing Them With Access to A Pool Of Private and Institutional Investors

The buy side consists of those who buy equity stakes, such as:

o individuals (retail investors)

o funds

o firms

o governments and SWFs

o private equity investors

Issuers

On public markets, they sell the liquidity of the order book to the buy side; they include:

o brokers and dealers (independent boutiques or investment banks)

o market makers / specialists (committed to provide liquidity to the marketplace)

On the private market, they facilitate the meeting of buyers and sellers, typically via advisory

Issuers are legal entities that develop, register and sell securities for the purpose of financing their operations; they include, among others:

o corporations

o financial institutions

o investment trusts

3

How A Global Bank Interacts with The Equity Market

Funding of Own Capital Needs

Funding for Third Parties

(Corporates and Banks)

Hedging of Own Positions on Public

Markets

Hedging for Third Parties on Public

Markets

Trading/Exchange Services

Sales, Research, and Advisory to Public

Equity Buy Side

An Universal Bank Has a Multi-dimensional Interaction with the Equity Market

Broker of Private Equity Capital

Structuring of Equity Linked Products

UNIVERSAL

BANK

The Role of Securities Commissions in Equity Markets

Securities commission is a general term used for a government department or agency responsible for financial regulation of securities products within a particular country

Its powers and responsibilities vary greatly from country to country, but generally cover the setting of rules as well as their enforcement for financial intermediaries and stock exchanges

In this respect, the objectives of financial regulators usually include:

4

Equity Markets and Financial Regulation

Financial Regulation in Italy

The Commissione Nazionale per le Società e la Borsa (CONSOB) is the public authority responsible for regulating the Italian financial markets

Its activity is aimed at the protection of the investing public

The CONSOB is therefore the competent authority for ensuring:

o transparency and correct behaviour of financial market participants

o disclosure by listed companies of complete and accurate information to the investing public

o accuracy of the facts represented in the prospectuses related to offerings of transferable securities to the investing public

o compliance with regulations by auditors entered in the Special Register

It also conducts investigations with respect to potential infringements of insider dealing and market manipulation law

Other Examples Throughout the World

Market Confidence

Financial Stability

Consumer Protection

Reduction of Financial Crime

o to maintain confidence in the financial system avoiding precipitous and rapid decline in the prices of shares

o contributing to the protection and enhancement of stability of the financial system

o securing the appropriate degree of disclosure and protection for consumers

o reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime

Equity Markets: Public Side vs Private Side;

the Role of Investment Banks

Investment Banking Universe

Global Investment Banks (No retail capabilities)

Pure Advisory Firms (Limited product range, focused on M&A/Advisory)

European Investment Banks (wide product range, lacking size or geographical diversification)

Retail and Commercial Banks (Significant retail business, less relevant IB divisions)

5

Universal Banks

2.5 2.4

2.2 2.2

1.9 1.8 1.7

1.5

0.9 0.9 0.9 0.8 0.8 0.8

JPM HSBC BNP BofA WELLS CITI DB BARCLAYS UBS Unicredit GS CS MS ISP

Investment Banking Universe (Cont’d)

6

Total Assets (USD trillion)

Definition of “universal bank” is not strictly related to the size only but also to the range of geographies served / services and products offered

Universal Bank

_______________ Source: Factset, Total Assets as reported in FY2016

Picture

Embed ____

How a Universal Bank is Organized

7

Typical Structure – BofAML Example

Consumer (US centric)

Consumer Banking

Preferred & Small Business Banking

Consumer Real Estate

Card Services

Retail

Global Wealth & Investment Management (US Centric)

Global Banking and Markets (Global)

Global Markets Global Banking

Global Employees c. 265,000

Clients in > 150 countries

175 Offices in > 40 countries

Access to > 105 exchanges

Trades > 63,000 companies

Trades > 150 currencies

Key Financial Metrics:

Market Capitalization: ~US$240bn

Total Assets: ~US$2.2 trillion

Total Deposits: ~US$1.3 trillion

Global Excess Liquidity Sources: c.US$500bn

Tier 1 Ratio: c.13%

Global Commercial Banking

(US Only) Research

Equity Markets

Fixed Income Markets

Global Corporate Banking

Investment Banking

Consumer Real Estate (US centric)

Legacy Assets And Services

Mortgage Loan

Owned Home Equity Loan

Chinese Wall

1

2

3

Works with non-public information

Global Banking: “Private” Side Global Markets: “Public” Side

8

The Role of Global Investment Banking and Markets Matching Different Clients’ Nature and Needs

Chinese Wall

Works with public information

The Same Client can be on one Side or on the Other Depending on its Role on the Transaction

Usually involved in helping clients raising new funds and providing advisory services

Level playing field among all players and clients

Usually involved in supporting clients’ investments, providing related advices, services and products

Privacy is key for the successful execution of the transactions and to create value for the clients

Global Markets Structure On the Public Side: Global Markets

Global Markets

Sales, Trading, Structuring

FICC Equity

Sales

9

Research

Equity research

Investment strategy

Economics and global foreign exchange

Global fixed-income and equity-linked research

Activities

Fixed Income

Corporate Bonds Government Bonds Interest Rates Derivatives FX and Currencies Credit Derivatives Structured Credit Asset Backed Securities

Commodities

Energy (Oil, Gas, etc.) Raw materials (Copper, etc.) Precious Metals Agricultural commodities Commodity Financing Both in physical and

derivatives format

Managing client relationship

Meeting Clients Educating Clients Cross-Product expertise Taking orders

Executing trades Managing risk Market Making Product specific

Technical expertise Tailoring products Pricing and Scenario

analysis

Cash Equity (Stocks) and Indices Equity Derivatives Funds Prime Brokerage Convertibles Equity Loans Equity Financing

Asset Class of Expertise

Trading

Structuring

Different in the Asset Class Managed, not in the Activities Executed

1

On the Private Side: Global Investment Banking

Investment Banking Equity Capital Markets Debt Capital Markets

Mergers & Acquisitions

Corporate Finance

Equity Capital Markets Origination

Equity Linked Capital Markets Liability Management

Leveraged Finance (1) Strategic Equity Solutions / Derivatives

Country

Industry Co

vera

ge

____________________ (1) Also Part of Capital Markets.

10

2

Bond Capital Markets

Debt and Rating Advisory

a b c

11

Global Investment Banking Overview Investment Banking Division

2

Asset Disposals

Joint-Venture

Acquisition Financing

Term Loan

Revolving Credit Facility

Bridge Facility

High Yield Issuance (i.e. Companies ranked below the investment grade)

Sell-side advisory

Buy-side advisory

Fairness opinion

Hostile transactions advisory

Mergers & Acquisitions

Company Restructuring and Re-organization

Leveraged Finance

Sell-side advisory under restructuring/reorganization contest

Support on the structuring of the transaction and on the valuation of all the assets contributed/acquired

Dedicated to sub investment grade issuers

Provide financing for complex transactions (e.g. LBOs, acquisitions)

Broad range of products, spanning from usage of the capital markets to usage of the bank’s balance sheet

Provide support to the clients in all phases of an M&A process, spanning across structuring of the transaction, due diligence, preparation of all the related documents, valuation of the company/synergies, tactics and negotiations, governance discussions, etc.

Depending on the situation/regulatory requirements, a fairness opinion may be provided to the Board of Directors/minority shareholders

The bank may also be asked to provide advice to the Board in connection to hostile transactions (e.g. Hostile takeovers)

To further support an M&A transaction, the bank can offer a staple/acquisition financing

Key Products Description

Advisory on deal structuring and implications analysis Corporate Finance

Advisory on the structuring of the transactions with both equity/debt components or deeply impacting the capital structure of the company (e.g. spin-off)

a

12

Global Investment Banking Overview Equity Capital Markets

2

Optional / Mandatory Convertible

Optional / Mandatory Exchangeable

Call Overwriting

Protection / Protection + Loan

Short equity swap

Enhanced on-market disposal

IPO

Rights Issue

Accelerated Bookbuilding (ABB)

At-the-market offer

Equity

Equity Linked

Structured Equity Solution

Advice to the company in rising money through instrument with hybrid characteristics between equity and debt, such as convertible/exchangeable bonds

“Convertible” if the underlying asset is the issuer’s equity, “exchangeable” otherwise

Advisory on the right capital solution to implement, also taking into consideration rating agencies treatment, accounting and tax implications and targeted investors

Provide creative tools to sell equity in the market or to monetize a current market over/underperformance

Support to the Company in hedging/monetize price volatility

Usually the client keeps voting rights and dividends

Bank’s balance sheet may be involved

Support to clients in managing their equity shareholding

Raising new money (IPO with a primary component, rights-issue, etc.)

Monetizing an existing shareholding (IPO through a secondary component, ABB, fully marketed sell-down, etc.)

Advisory on the right structure to implement, taking into consideration objective of the company, rights of the existing shareholders, market conditions, timing and documentation requirements

Key Products Description

b

13

Global Investment Banking Overview Debt Capital Markets

2

Capital Products Structuring (Hybrids,

AT1, T2, etc.)

Rating Advisory

Open Market Repurchases

Tender Offer

Exchange Offers

Consent Solicitations

Investment Grade Bond

Private Placement

Green Bond

Commercial Paper

Origination

Liability Management

Structuring of the transaction (maturity/currency/seniority/etc.)

Analysis of the companies’ debt structure (e.g. sources/maturity/etc.)

First rating advisory

Rating impact of transformational corporate transactions or of capital structure

actions

Opportunistic capital markets transactions which allow issuers to modify their

existing debt profile

Remove financial covenants, amend or extend maturities, etc.

Multiple decision making drivers (e.g. NPV, accounting and tax benefits, rating

impact)

Provides access to debt capital markets for investment grade issuers

Issuers may be medium/large corporations, as well as governments/sovereign

entities/ banks/financial institutions

Provides updates on Capital Market situations and trends

Advisory

Key Products Description

c

Key Products

Commercial Cards

Cash Management

eCommerce

Payments & Receipt

Trade Finance

Custody Services

Asset Based Financing

Term loan

Revolving Credit Facility

Bridge Financing

14

On the Private Side: Global Corporate Banking

Lending

Global Treasury Services

Leasing

Description

3

Provides liquidity solutions to optimise balances across regions (e.g. funds flow across subsidiaries/ streamline of the treasury functions)

Provides traditional trade and working capital solutions to clients with (i) supply chain financing and (ii) import / export letters of credit

Provides efficient and secured method of payments

Mitigation risk for the volatility of (i) foreign currency prices and (ii) interest rates

Bank balance sheet is involved

Secured source of financing (fixed assets, receivables, etc.)

Depending on the regulation, there may be potential benefits from the accounting treatment

Creative structure to finance new investments (given the presence of some degree of flexibility in defining the impact on the client’s balance sheet)

Direct usage of the bank balance sheet

Most common source of financing, especially for small/medium size entities

Restricted number of counterparties (Bilateral vs. Syndicated)

Easier to amend terms and refinance ahead of maturity (vs. Capital Market Terms)

Direct usage of the bank balance sheet

Other Function Actively Involved in the Day-to-Day Global Banking and Markets Activities

Charged with identifying relevant laws, rules and regulations in pursuit of the highest ethical standards for customers, associates and shareholders

Actively involved in all lines of business. Key activities include:

Assessing compliance risk and programs at the enterprise and business level

Developing and evaluating policies and procedures

Monitoring and testing the effectiveness of compliance controls

Maintaining clear escalation processes and paths to ensure proper elevation to appropriate levels of management

15

Compliance

Risk Management

An independent enterprise-wide function, guiding and supporting all the Global Markets and Banking activities

Risk management set “the guidelines” of how much exposure the bank can have on a client / transaction

Internally structured as a “rating agency”, providing a risk rate to each client, which impacts bank profitability

Reputational risk may be hedged through the approval of a dedicated committee

“Shadow” Activities, not Delivering Products to the Clients but Supporting the Day-to-Day Business