How to Write the Equity Sales Team Memo: The Best Part of Working in ECM?
If you work in an equity capital markets team, one thing’s for certain: you will know how to raise capital like nobody else can.
Writing memos, one might say, will be the ace up your sleeve.
The good news is that these “equity sales team memos” are shorter than many of the documents you write for M&A deals, like CIMs (confidential information memorandums) and OMs (offering memorandums).
The bad news is that while there are some interesting parts, it’s still not exactly rocket science…
But hey, you need to do them if you’re a junior banker in capital markets.
We’ll walk through why and when you would write these, how to set them up and structure them, and the differences for different types of equity offerings in this tutorial:
Equity: When to Issue, and How to Issue It
Equity issuances can be divided into initial public offerings (IPO), secondary offerings, and follow-on offerings (the company is already public and needs to raise more funding) – and they’re all motivated by different factors:
- IPOs: Investors are looking for an exit, and they think an IPO will produce a higher ROI or IRR than an outright sale.
- IPOs: Employees or the management team are looking to “cash in their chips” (see: all tech IPOs).
- Both IPOs and Follow-On Offerings: Companies need the funds for expansion, working capital, acquisitions, debt repayment, and so on.
- Secondary Offerings: One group sells its shares to another group… so the first group simply wants an exit.
But one factor motivates equity issuances above all else: the direction of equity markets.
There are definite “windows,” and no company wants to raise capital when the window is closed or when the markets are facing serious headwinds.
Issuing equity is almost always viewed as a sign that the company is confident about its future prospects – unlike an outright sale via an M&A deal, which could sometimes be interpreted as “giving up” or “yielding to competitive pressure.”
And that highlights the most important difference between marketing a buy-side or sell-side M&A deal vs. an equity deal: the equity deal is more about the story behind the company and its future potential, whereas an M&A deal is more focused on the operations – or what the company is doing now.
Raising Equity: Deciding on an Offering Type
While anyone outside of equity capital markets will tell you that an equity raise is just an equity raise, there are definitely differences depending on how it’s marketed to the investment community:
- Fully Marketed: This one is publicly marketed over a period of 2-4 days, and it allows the issuing company to reach the broadest investor audience. With a discount to the last sale price, this process offers the upper ceiling of issue size and provides a platform for the company to tell its story and its approach to doing business. This one’s more like a company announcing a new product (think: lots of fanfare) instead of just opening a new store (think: a new banner).
- Accelerated Bookbuild: This offering is marketed (in limited quantities) over a period that ranges from 24 hours to up to 3 days. With a discount to the pre-announcement trading price, this approach offers flexible access to capital and limits market risk. It’s also much faster than the fully marketed method, and is often used when a company needs financing ASAP for an M&A deal that came together at the last minute.
- Registered Direct or Confidentially Marketed: The marketing for this process is quite varied, but the time frame itself can be as short as overnight. It offers the sale of securities to a select group of investors. With a negotiated discount to the current stock price, this approach offers quick access to capital and no market risk.
- Rights Offering: This is a sale of equity securities to the company’s existing investors, allocated according to their subscription rights. Subscription rights give the existing shareholders a chance to buy more shares at a discount to the current market price; the point is to help these investors maintain their share of a company relative to other investors. A rights offering process may be backstopped by “anchor investors,” which are typically some of the most loyal institutional investors (ex: Fidelity, BlackRock, etc.) that participate in almost every capital raise for the company in question.
- At-the-Money or At-the-Market Offering: In this process, the securities are sold for a succession of days or even weeks. On each day the securities are sold, the issuer’s treasury department or finance team has a call with the hired investment banks to provide a quick due diligence update. The main question asked is: “Is there anything material that we should know about?” Other questions include: “Do you want to issue securities today?” and “At what price?” Usually the issue is done at the prevailing market price. The issue size depends on how frequently the stock trades hands in the market (the faster it trades hands, the more liquid the stock and the bigger the issue size). With this method, the company can raise financing very selectively and avoid all the work required for an intense road show – but it’s a bad choice for a company in dire need of immediate financing.
- Block Trade or Bought Deal: The investment bank buys all the shares issued by the client, eliminating any risk related to the financing (since the demand for the security issue is provided entirely by the investment bank). The bank is then responsible for reselling the securities almost immediately, if not at a later date. Compared to the other methods, a block trade or bought deal involves a lower issue price – so it’s easier to sell, but it also results in lower proceeds. If the deal is sizable, other investment banks may join the transaction to spread out the financing risk.
Which marketing process is the right one to run with?
The decision depends on equity performance and liquidity.
A company with fewer shareholders may benefit from a more focused marketing campaign in order to ensure that all the shares it’s selling are actually purchased.
On the other hand, a hyped company that appears to be in great financial shape may opt for a fully marketed offering to get the maximum price and raise as much capital as possible.
As a banker, you’re not responsible for making the call: you just present the alternatives to your client, show the trade-offs of each one, and let them make the final decision.
Once the offering type is set, you need to understand the differences outlined above, plus the company’s story and supporting information so you can write the sales team memo successfully.
Why Write an Equity Sales Team Memorandum?
To understand each part of the sales team memo and to see the entire process in more detail, take a look at this case study on the Citi-led IPO of SITC, a Chinese shipping and logistics firm.
This was an IPO with a complete road show included, so it’s an example of a “fully marketed process.”
The purpose of the sales team memo is to educate the sales team on the company and the marketing process the company is using, and to get the sales force to sell more shares.
A sales team that consistently generates higher-than-expected orders will get more deals and better deals in the future… higher commissions beget higher future commissions.
Sales teams also use these memos to assess potential demand for an equity capital raise – once they know about the company, they can look at comparable firms and see which institutional investors might be interested.
To do this, they might look at the AUM for an institutional investor, multiply by a small percentage (5-10% or less) based on the # of comparable firms the institutional investor has a position in, and then aggregate the results over a region to figure out the best spots for a road show.
For example, let’s say the team determines there’s a higher concentration of investors with holdings in transportation and logistics companies in San Francisco and New York.
If that’s the case, they might spend more time in those locations and then pick other locations based on other investors that might be interested in increasing their sector exposure in the future – even if they aren’t familiar with the issuing company.
What Goes Into the Sales Team Memo?
The sales team memo can run from 2 to 16 pages in length, and it discusses not only the company and its story, but also the context surrounding the capital raise – including a capitalization table and how the company will be using the proceeds.
Besides the information on the marketing process, the memo also has to specify the offering type:
- Initial Public Offering (IPO): The first time a company sells capital in the public markets.
- Secondary Offering: Any time a group of shareholders sells its ownership in a company to another group.
- Follow-On Offering: Any time after the IPO, when a company sells capital in the public markets once again. You can see an example of this kind of equity offering with this Alliance Oil case study.
Within the memo, the main sections are the Offering Summary, Company Overview, Investment Highlights, Summary Financials, Summary Valuation, Sources & Uses, and Risk Factors.
For a good example of this, take a look at page 1 of the SITI case study above (not an actual memo, but it has similar information).
It’s a short description of the transaction, which includes:
- Issuer Name
- Ticker / Stock Exchange
- Type of Offering: Initial Public Offering, Secondary Offering, or Follow-On Offering
- Shares Offered
- Deal Size
- Over-Allotment Provision: Typically around 15% of the capital raise, the underwriter effectively sells the stock in advance without owning the stock. If the shares perform well, the underwriter buys shares from the issuer. If the shares do poorly, the underwriter buys shares from the market.
- Fully Diluted Shares Outstanding: Pre-offering and post-offering figures
- Underwriters: What other banks are working on this deal?
- Bookrunners: Oversee investor education, the roadshow process, pricing, and sizing
- Co-Managers: Add visibility via research or additional equity sales channels
- Use of Proceeds: General corporate purposes? Working capital requirements? Acquisitions? Debt repayment?
Unlike the company overview prepared in other contexts, a company overview prepared for a sales team memo is short and to the point:
- What the company sells to its customer base
- What applications exist for the company’s products
- Sales composition by business unit, and a sentence about what each business unit sells to the customer
- Recent acquisitions, their transaction values, and what the acquired companies sell to customers
- Financial metrics of the issuer: Sales, EBITDA, Net Income, etc. For more on these, see our EBIT vs. EBITDA vs. Net Income tutorial.
This one’s in pages 3 – 8 of the case study above: the parts that explain how Citi positioned SITC to receive a premium valuation (P/E rather than P/BV, highly integrated platform, network-driven model, intra-Asia market growth, management team, and cost advantages).
This section answers the big question: “Why would an equity investor be interested in buying shares in the issuer?”
It also links the company’s appealing characteristics to cash flow generation, and therefore to an increased valuation:
- Any unique characteristic relative to the issuer’s competitors, such as a product or geographical strength
- Product presence or diversity of customer base
- Macroeconomic details that support sales growth
- Management team’s track record for improving the company’s value (e.g., through sales of business units, or margin improvements)
You see examples of all these points in pages 3 – 8 of that case study.
This part gives a quick snapshot of the line items that drive the valuation:
- Net Revenue
- Gross Profit
- Operating Income
- Net Income
This part provides a quick overview of the Comparable Company Analysis and the key metrics and multiples:
- Stock Price
- Equity Value
- Enterprise Value
- Enterprise Value / Sales
- Enterprise Value / EBITDA
- Price / Earnings
You can see some of these metrics on page 12 of the case study.
In the context of an equity offering, a forward Price / Earnings (P / E) multiple is typically used.
However, the bank and the sales force can use any other multiple(s) they want as long as they can justify the asking price per share.
This is one major difference between an equity sales memo and a CIM for an M&A deal: you’ll never see a section on valuation in the CIM.
That’s mostly because the CIM is distributed directly to potential buyers, whereas the sales force memo is for internal use.
You don’t want to negotiate against yourself by proposing a specific valuation upfront when approaching buyers – but you do want the sales team to have a sense of the valuation you’re trying to help the company achieve.
Sources and Uses
This summarizes how the transaction is financed and how the funds will be spent.
For capital raises, these are much simpler than the Sources & Uses schedules seen in M&A deals and LBO deals, so they exist more for process and less for substance:
- Sources = The amount of equity capital raised
- Uses = Use of Proceeds (General Corporate, Working Capital, Debt Repayment, Acquisitions, etc.) + Fees
You focus on items that may reduce demand for a company’s products/services (and which therefore may reduce its valuation):
- Customer preferences and disposable income (consumer retail)
- Government contracts and geopolitical conflict (aerospace and defense manufacturers)
- Season and economy (ground transportation, maritime shipping, and airlines)
- Housing starts (engineering and construction, home builders & aggregates)
These summaries also include an overview of the issuer’s equity investor base, or a “shareholder analysis.” Here is an example of an equity shareholder analysis.
These are typically tables of institutional equity investors, their current share of the company’s equity prior to the capital raise, and sometimes also these investors’ shares in comparable companies.
As you might imagine, the sales team uses this ownership data to help pitch the case for additional investment in the company.
A current majority investor today might lose a portion of its position relative to other institutional investors unless they commit additional funds to the company’s new round of funding.
In follow-on offerings, some investment banks also add a price-volume chart to everything above, covering the past 3 months, past year, or other time frames.
Whither Sales Team Memos?
An equity sales team memo orients the reader, and gives the sales team the major points it needs to work with institutional investors and generate more demand for the equity raise.
The process teaches you a lot about how something is sold, and it incorporates the positioning that is also used to pitch acquisition ideas to potential buyers.
And these memos are short, to the point, and give you a solid idea of what buy-side investors look for when making investment decisions.
Plus, anything beats those 150-page pitch books that get revised 87 times before the final presentation, right?
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Could you kindly allow for access to the link: “ To understand each part of the sales team memo and to see the entire process in more detail, take a look at this case study on the Citi-led IPO of SITC, a Chinese shipping and logistics firm.” Currently it leads you to a google drive document that says we need viewing permission. Thank you so much!
You should be able to view that link as long as you have a Google username/password and are signed in. It’s not our file, so we don’t host it directly here.
Thanks a lot for this very informative post.
I have just applied for an internship position in ECM division at BAML. I have gained more knowledge on the division in the case of being called for an interview and even for the job self.
Nice work! Please keep it up!
Thanks for reading!
Excellent article, Luis. I really like when you guys get granular and dig into the science behind a lot of this.
Thanks for reading!
Even if they needed interns immediately I still have university to go to. This is for a summer internship.
Shall I ask my contact specifically a referral for an interview? Or shall I go on a informational interview with this recruiter?
I would do both and ask the recruiter about recruiting there and then ask your contact the same.
thanks for your reply mate
sorry, one last thing.
I emailed an alumni and asked for a referral. He said that he did not know me well enough to give me one and that all applications are equally looked at etc….
Would it be a good idea to send him my cv and say to be given a fair shot at recruiting I need a referral for an interview?
I don’t think that’s a great idea if he already said he doesn’t know you well enough – that’s a sign he isn’t that interested in the first place. So maybe follow-up with him later and ask for a time to speak or meet in-person.
Really informative thanks.
I contacted an alumni asking if he could refer my application to hr for an intrnship.
He passed me onto the head of recruiting who said to be considered for an application I need to apply online etc..
Where shall I go from here?
Just say yes, thanks, you understand that they have a formal recruiting process but wanted to contact him directly in case his team is experiencing high deal flow / is otherwise in need of interns immediately. There are some good tips here: