Underwriter
An underwriter is the investment bank that guarantees a company's share issue: it agrees to buy the shares at an agreed price and resells them to investors, so the company gets its money whatever the market does. In an IPO the underwriters also run the book-building that sets the price, allocate the shares and support the price in the first weeks — for a few per cent of the proceeds and the risk of being left holding the shares.
- Also known as
- Underwriting bank, Lead underwriter, Bookrunner
- Used at
- IPOs, secondary offerings, rights issues and bond issues; the term is also used, differently, for the insurance and lending professionals who assess risk — a merchant "underwriter" at an acquirer assesses merchants, not shares
- Binding
- yes — an underwriting agreement signed at pricing, under which the banks commit to take the shares; before that, the engagement is on a "best efforts" or "firm commitment" basis as negotiated
- Typical fee
- 5–7% of the proceeds for a US IPO (3–4% for the largest), 2–3% in Europe, plus expenses; a syndicate of banks shares it by role — global coordinators, bookrunners, co-managers
- Typical process
- the banks prepare the prospectus with the company and its lawyers, run investor education and a roadshow, build the book of orders, set the price with the company the night before listing, allocate, and stabilise the price for up to 30 days using an over-allotment ("greenshoe") option of typically 15%
- Parties
- the issuer, the underwriting syndicate, the institutional investors who fill the book, the exchange and the regulator that approves the prospectus
How an underwriter works in practice
A fintech decides to list. It appoints two or three banks as global coordinators, who bring co-managers into a syndicate. The banks and the company's lawyers write the prospectus — the business, the risks, the financials, the offer — for the regulator's approval. The banks' analysts publish research (in the windows the rules allow), the company presents to investors, and the bookrunners collect indications: which funds will buy how many shares at what price. From that book the price is set — the banks recommend, the company decides — at a level that fills the book with the investors the company wants and leaves room for the shares to trade up. On pricing night the underwriting agreement is signed; on listing day the shares trade; for a month the stabilising bank may buy shares to hold the price near the offer price, using the greenshoe.
The underwriter's guarantee is real but narrow. Between signing and settlement — a day or two — the banks are on risk; before signing they are advisers, and an IPO that the book will not support is pulled, not underwritten at a loss. The fee pays for distribution, judgement and the bank's name on the prospectus as much as for the guarantee.
The other meaning matters in this glossary: at a payments company the "underwriter" is the risk analyst who approves merchants, and a term sheet that says "subject to underwriting" means credit review, not a share issue.
Example
A payments fintech lists to raise €300m, selling 15m new shares. Its three bookrunners run a two-week roadshow and build a book of €1.4bn of demand across a €18–22 range; the company prices at €20, at the banks' recommendation, leaving the book four times covered and allocating to 90 institutions with the long-only funds favoured. The underwriting agreement is signed at 21:00; the fee is 3.5% — €10.5m — plus €3m of expenses. The shares open at €23 and close the first day at €22.40; the greenshoe of 2.25m shares is exercised in week three, raising a further €45m. The company received €289.5m net for shares now worth €336m — the "money left on the table" that a 12% first-day rise represents, and that the banks call a successful IPO.
Common mistakes
- Choosing underwriters on the valuation in the pitch rather than on distribution and the analyst. - Pricing at the top of the range to maximise proceeds and watching the shares fall below the offer price, which the stabilisation cannot hold for long. - A syndicate too large to manage or too small to distribute. - Confusing "firm commitment" with a guarantee that the IPO will happen; it guarantees the price once signed, not the signing. - Reading "subject to underwriting" in a fintech term sheet as an IPO term.