Definition
A bookrunner, in finance, is a lead underwriting firm that handles the task of arranging for the issuance of new securities on behalf of a company. The bookrunner assesses the company’s financial details and determines the appropriate type and amount of security to issue. They also manage the list of investors (known as the book of securities) and often play a significant role in the pricing and sale of the securities.
Key Takeaways
- The term Bookrunner refers to the main underwriter or lead coordinator in the issuance of new equity, debt, or securities instruments. In investment banking, the bookrunner is the investment bank that manages the security issuance process.
- The responsibilities of a Bookrunner include determining the price at which new securities will be offered to the public, based on market demand. They are also in charge of ‘building a book’ or recording orders from institutional investors.
- Usually, large financial institutions act as Bookrunners. However, in the case of large issuances, there may be multiple bookrunners to share the risk. In such cases, the entity with the maximum responsibility is the ‘Lead’ or ‘Global Coordinator’ Bookrunner.
Importance
A bookrunner, in financial terms, plays a crucial role in managing the issuance of new securities to the market during an initial public offering (IPO) or any secondary market offering.
They are usually investment banks or large financial institutions that handle the task of finding potential investors and settling transactions, ensuring success and efficiency in the entire process.
The importance of the bookrunner lies in their ability to determine the initial price range for an offering, control the allocation of shares, and manage the demand for the new security.
Hence, the role of a bookrunner is significant because they contribute significantly to the smooth management and success of capital market transactions.
Explanation
The primary purpose of a bookrunner is pivotal in the financial services sector, particularly in the debt and equity market. This key player, usually an investment bank or a syndicate of banks, is responsible for orchestrating a large-scale transaction, such as an initial public offering (IPO), secondary offerings, or debt issuances.
The bookrunner’s main function is to aid a company in raising capital by selling the securities of the company to investors, through their wide network and knowledge of the market. They play a critical role in gauging investor interest and determining the price at which the securities are initially sold to the public, which then helps the issuing company raise the maximum amount possible.
Additionally, bookrunners have another significant role in managing the book of securities. This means they maintain an order book that records the orders and prices offered by prospective buyers, and use this information to allocate securities in the optimal manner.
In essence, they’re in charge of managing demand for the issuance – identifying interested parties, attracting new investors, and securing the best possible deal for the issuer. Performing such tasks, bookrunners ultimately strive to ensure the venture’s success and its favorable reception in the market.
Examples of Bookrunner
A bookrunner is typically an investment bank or syndicate of banks that administer the issuance and subscription of a public security, such as a bond or share issue. Here are some real-world examples:**Goldman Sachs as Bookrunner:** For example, in 2016, Goldman Sachs (GS) acted as bookrunner for Japan Post’s initial public offering (IPO) of $
5 billion. As the bookrunner, Goldman Sachs managed the bids for the oversubscribed issue and allocated the shares to investors.**JPMorgan as Bookrunner:** JPMorgan Chase was the lead bookrunner in the initial public offering for General Motors in
This was one of the largest IPOs in history, where they helped the auto giant raise more than $20 billion.**Morgan Stanley and Citigroup as Bookrunners:** When Facebook went public in 2012 with a total market value of more than $100 billion, Morgan Stanley was selected as the lead bookrunner, with Citigroup, Barclays, and several other banks also acting as bookrunners. Their role involved collecting bids from potential investors, determining the initial sales price and the amount of shares to be issued, and managing the overall distribution of the shares.In all these instances, the bookrunners used their extensive networks to determine demand for the offerings, priced the securities appropriately, and handled the allocation and distribution of the securities.
FAQs about Bookrunner
1. What is a Bookrunner?
A Bookrunner is a large investment bank or corporate finance company that administers the issuance and distribution of securities from a company or other issuing institution to the market. They play a central role in Initial Public Offerings (IPOs).
2. What does a Bookrunner do?
The main role of a Bookrunner is to bring an IPO to market. This involves setting the initial price of the stock, determining the offering size and managing the overall issuance of the stock. They also play a key role in the underwriting process.
3. How is the Bookrunner different from a Lead Underwriter?
While both terms are used interchangeably in many institutions, a Bookrunner generally has more responsibilities including managing the book (i.e., order book, interests of investors, shares, etc.), while the Lead Underwriter is usually involved in due diligence and preparing the prospectus.
4. How many Bookrunners can an IPO have?
There is typically one lead Bookrunner, however, additional Bookrunners may be employed in case of large offerings known as syndicate of Bookrunners. The lead Bookrunner is often referred to as the “global coordinator.”
5. How are the fees for a Bookrunner calculated?
The fees of the Bookrunner are often a percentage of the gross proceeds of the offering. The specific percentage varies based on the size and complexity of the offering, the reputation and experience of the issuer, and market conditions.
Related Entrepreneurship Terms
- Underwriter
- Syndicate
- Initial Public Offering (IPO)
- Debt Issuance
- Secondary Market
Sources for More Information
- Investopedia: A comprehensive online resource dedicated to empowering consumers with knowledge, resources and tools to make smart financial decisions.
- Corporate Finance Institute (CFI): Offers a wealth of free resources and online finance courses for understanding corporate finance, accounting, investing, and other areas of finance.
- J.P. Morgan: As a leading global financial institution, J.P. Morgan provides great insights on bookrunners within their guides on capital markets and investment banking operations.
- Financial Times: An international daily newspaper with a special emphasis on business and economic news, providing useful articles and insights about the topic of bookrunners.
