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.
- Just eight companies listed in London in the first half of 2020, five on the LSE and three on AIM. This significant drop was a direct result of the Covid-19 crisis, the concomitant oil price fall and worldwide lockdowns. In the same period last year, 21 companies listed in London. It is worth nothing that last year’s numbers were in their own right the worst since 2009: the result of Brexit uncertainty, which may have continued to have an impact on 2020's numbers too.
- Investors have experienced a turbulent 2020 due to Covid-19 with stock markets crashing on a global scale before recovering somewhat once infection and death rates stabilised or restrictions were eased. The UK experienced a double whammy of a lack of investor confidence as a result of the yet-to-be-resolved Brexit. Investment Association figures show that £1.2 billion were pulled from UK-focused investment funds in July 2019 alone, with a further £700 million pulled in August. There is hope that once Brexit is resolved and Covid-19 is brought under control, investors may return to the UK stock market in greater numbers.
- Despite market volatility, experts are hopeful that housing is a sector that will thrive thanks to discounts for first-time buyers and changes to planning permissions. Companies providing online services are also expected to do well even in the wake of lockdown conditions.
- The increasing awareness and subsequent behavioural change around climate change means more and more people are recycling, reusing and reselling consumer goods; clothes have seen a particularly large uptick. The US second-hand clothing group ThredUp predicts this market to reach $64 billion in five years. On the other hand, investment funds that rely heavily on fossil fuels are likely to suffer, while those focused on green initiatives are expected to boom.
- The wellness industry is going from strength to strength and the sector is expected to continue to perform well. The Times suggests that mindfulness tech “may be the next fintech boom.”
- On the subject of fintech, the intersection between a host of new regulatory measures and the innovation and growth of 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.
- Any further trade wars between two of the world’s biggest economies, China and the US, are likely to have widespread impact on capital markets. The initial skirmishes depressed several markets worldwide: the FTSE 100 went down by more than 2%, Germany’s DAX dropped by more than 3%, France’s CAC 40 index by 3.6%, the Dow Jones dipped by 98 points, and Japan’s Nikkei closed 2.1% down. The rise of protectionist policies in the US and elsewhere has led some to consider it an existential threat to the trend of globalisation.