In a nutshell
The world's capital markets are trading floors (either real or virtual) on which cash-hungry businesses obtain funding by selling a share of their business (equity) or receiving a loan (debt) from lenders. Capital markets lawyers advise companies ('issuers') and investment banks ('underwriters') on these complex transactions. Here are some of the terms you'll encounter.
Equity capital markets: where a private company raises capital by making its shares available to the public by listing itself on a stock exchange and executing an initial public offering (IPO), as a result of which it becomes a public company (or plc). The London Stock Exchange (LSE) and New York Stock Exchange (NYSE) are the most prestigious exchanges, but companies may list on many other exchanges worldwide. Once listed, a company's shares can be bought and sold by investors at a price determined by the market.
Debt capital markets: where borrowers raise capital by selling tradable bonds to investors, who expect the full amount lent to be paid back to them with interest. Structured finance: this area can get gloriously complicated, but its aims are simple – to increase liquidity and limit or trade on risk, which in turn offers up extra funding for borrowers.
Derivatives: financial instruments used by banks and businesses to hedge risks to which they are exposed due to factors outside of their control. The value of a derivative at any given time is derived from the value of an underlying asset, security, index or interest rate.
What lawyers do
- Carry out due diligence on issuers and draft prospectuses which provide information about the company and its finances, as well as past financial statements. Under current rules, a prospectus must comply with the requirements of the EU's prospectus and transparency directives.
- Negotiate approval of a listing on the stock exchange. This involves the submission of documentation, certifications and letters that prove the client satisfies the listing requirements. As soon as a company undergoes an IPO, it will be subject to all the rules and requirements of a public company, so the necessary organisational structure must be in place before then.
- Work with underwriters and issuers to draw up the structure of a security and help the parties negotiate the terms of the structure. The underwriter's lawyers draft most documents related to a bond issue. An issuer's lawyers will comment on them and negotiate changes.
- With derivatives, lawyers communicate back and forth with the client discussing legal issues and risks related to various possible structures for the product, as well as suggesting ways to resolve or mitigate those problems and issues.
- Issuer's and underwriter's counsel work together with a team of bankers, accountants, insurers and an issuer's management to get securities issued.
Realities of the job
- Capital markets lawyers are mostly based in the City of London. The biggest firms have specialist departments focused on capital markets or one of its sub-groups, while mid-size firms may lump capital markets work in with corporate.
- Clients can be very demanding and lawyers work very long hours. On the plus side, large law firms usually have strong and close relationships with investment bank clients and financial institutions, meaning that trainees and NQs can get frequent client contact.
- Lawyers have to gauge the needs and personality of the company they're working with and require an aptitude for responding to and resolving issues as they arise.
- Capital markets lawyers feel all the highs and lows of market forces – if you're trying to get a deal done market conditions often matter more than the willingness of the parties involved. Even if a deal has been organised, unpredictable market conditions can mean it falls through.
- Investment activity declined across 2022, though forecasters predict an uptick throughout 2023, prompted by regulatory reforms proposed by the UK government.
- Despite economic uncertainty, tech investment is likely to remain consistent. So too will ESG. Throughout 2023, Environmental, Social & Governance (ESG) has remained one of the driving forces behind developments in the financial sector. As the framework for assessing the environmental sustainability, social conscience and ethical governance of companies, ESG is increasingly important to investors in deciding where to invest their capital. Lawyers with expertise in the space are in demand as companies seek to bring their practices and supply chains in line with ESG-related concerns such as net-zero targets.
- Data released by Statista covering the period since 2015 revealed that, as of June 2022, the total number of companies trading on the London Stock Exchange had fallen to 1,900. The number represented one of the lowest numbers listed for the period under study.
- The impact of developments in fintech on institutional capital markets is still unfolding. According to research published by the World Economic Forum, blockchain – an encrypted database that keeps a decentralised digital record of cryptocurrency transactions – has the potential to have a disruptive impact on several core functions within capital markets, including trading processes, payments and the raising of capital. The increasing digitisation of capital markets processes will inevitably come with related cybersecurity and data protection concerns.
- The intersection between a host of new regulatory measures and the innovation within the industry is likely to keep law firms that specialise in capital markets busy. Reports by capital market commentators described AI, tech, automation and data mining as integral to the future of capital markets but noted that security concerns have prompted regulations requiring stricter standards of data use including GDPR.