Learn about the detailed roles and functions within an underwriting syndicate, and understand the process of setting an offering price for an IPO. Discover how the fees are distributed within the syndicate, and the factors affecting the profit or loss for the syndicate.
Key Insights
- An underwriting syndicate is composed of banks with differing roles and statuses, including book runners and co-managers.
- Book runners play a crucial role in marketing the issuer through the roadshow, while co-managers extend the marketing reach to investors during the offering.
- The lead left book runner, chosen via a 'bake off' process, manages the syndicate and decides the timing and offering price of the IPO, along with handling regulatory requirements with the SEC and FINRA.
- To determine the offering price, the underwriter syndicate considers the firm's financial data and growth prospects, often through a closed bidding process amongst syndicate members.
- Fees within the syndicate are typically charged as a spread, varying by deal size and generally higher in the US. These fees are distributed as commission (60%), management fee (20%), and underwriting fee (20%).
- The syndicate's profit or loss is determined by how the new stock performs on the market after its IPO.
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The underwriting syndicate consists of banks with different roles and statuses.
The lead banks on the top line are referred to as the book runners.
Book runners are heavily involved in marketing the issuer through the roadshow.
Co-managers provide further marketing reach to investors during the offering.
The top left underwriter is referred to as the lead left book runner. The lead underwriter runs the syndicate and allocates shares to each member of the syndicate, which may not be equal among the syndicate members. The lead underwriter also determines the timing of the offering, as well as the offering price, and fulfilling any requirements with regulatory issues with the Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA). The lead left book runner generates the highest fees in the offering.
The issuer selects the lead left book runner via a process referred to as a ‘bake off’, when the banks attempt to win the issuers in advance of the offering to win lead left.
In determining the offering price, the underwriter syndicate must obtain all the necessary financial information as well as determining the growth prospects of the firm. Typically, a closed bidding process amongst the syndicate members is held to arrive at the price of the initial public offering (IPO).
Fees are typically charged as a spread. Shares are purchased from the company at a cheaper price than they are sold onto investors. They vary according to deal size but a typical range will be 4.0% to 7.0%. Fees are generally higher in the US.
Commission – 60.0%
Fee for selling shares, better distribution equals higher fees
Management fee – 20.0%
Paid for managing the transaction, received by senior underwriters
Underwriting fee – 20.0%
Fee for the risk taken for guaranteeing proceeds to the issuer
The profit or loss for the syndicate is determined by how the new stock performs on the market.
