Underwriters play an important role in the initial public offering (IPO) process, helping companies go public and raise capital. They act as intermediaries between the company conducting the IPO and investors. In this article, we will look at who underwriters are, what functions they perform in the IPO process, how their choice can affect the success of the offering, and what to pay attention to when choosing an underwriter.
Who are underwriters?
Underwriters are investment banks, brokerage firms, or consortiums of financial institutions that help companies list their shares on the stock exchange. They are responsible for preparing the company for the IPO, including conducting a marketing campaign, setting the offering price, and selling shares to investors.
Underwriters play a key role in organizing an IPO, as they provide a link between the company and investors, help minimize risks, and maximize the capital raised. Underwriters are usually paid a commission, which is a certain percentage of the amount of funds raised.
Key Functions of Underwriters in an IPO
1. Valuing the Company and Setting the Share Price
Underwriters conduct a thorough valuation of the company to determine its market value and set the initial share price for the IPO. This includes analyzing the company's financials, growth prospects, market conditions, and competitors. Underwriters must set a price that will be attractive to investors, but will also provide the company with the maximum amount of capital.
2. Conducting a "road show" and marketing support For a successful IPO, it is important to conduct a marketing campaign that will attract investor interest in the shares being offered. Underwriters organize "road shows" - a series of meetings with potential investors, during which the company's management talks about its business, prospects, and development plans. This helps create demand for shares and attract attention to the company.
3. Underwriting Underwriters can provide the company with a placement guarantee, which means an obligation to buy back some of the shares if they are not sold to investors. This reduces the risks for the company, as it allows raising the planned amount of funds even in the case of low demand for shares. In such cases, underwriters can resell the repurchased shares on the market, but at a different price.
4. Determining the volume of shares to be placed and the structure of the transaction Underwriters help the company determine how many shares should be placed on the stock exchange and in what format. For example, this could be an issue of new shares to raise capital or a sale of shares of existing shareholders. They also develop the structure of the transaction and offer optimal conditions for attracting investors.
5. Legal and regulatory support Underwriters help the company prepare the necessary documents and interact with regulatory authorities. This includes preparing a prospectus, which contains information about the company, its financial performance and risks. Underwriters ensure that all procedures comply with legal requirements, which is important for a successful IPO.
6. Post-IPO share support
After the start of trading, underwriters can provide support for the share price on the market to avoid sharp fluctuations and volatility. This is especially important in the first days after the offering, when the share price may be volatile. Underwriters can buy up shares on the open market to maintain the price at a given level.
How do underwriters affect the success of an IPO?
The choice of underwriters can significantly affect the results of an IPO, since the success of the offering depends on their experience and capabilities. Here are some factors to consider:
1. Reputation of the underwriter Investment banks and brokers with a high reputation and many years of experience in conducting IPOs can attract more investors and offer more favorable terms of the offering. Companies that choose well-known underwriters often receive a better valuation in the market and a higher share price.
2. Network and access to investors Underwriters with a wide network of contacts among institutional and private investors can ensure high demand for the company's shares. This is especially important for large IPOs, which require a significant amount of funds raised.
3. Experience in certain sectors Some underwriters specialize in certain industries, such as technology, energy or pharmaceuticals. Companies in these sectors may benefit from working with underwriters who understand the specifics of the business and can offer a more accurate valuation.
4. Underwriting Terms
If a company wants to minimize risks, it should pay attention to the underwriting terms offered by underwriters. Some underwriters are willing to take on more share buyback obligations, which can increase the company's confidence in the success of the placement.
Types of Underwriters
1. Investment banks and brokers in Russia
Large Russian brokers such as FINAM, BCS and Alfa-Bank often act as underwriters in local markets. These companies have significant experience with IPOs on the Russian stock exchange and provide a wide range of services, including marketing support, company valuation and placement guarantee. They are actively involved in organizing IPOs of both large and medium-sized companies, providing capital raising and assistance in entering the stock exchange.
2. Smaller brokerage companies Smaller brokers can also act as underwriters, especially in local markets or when conducting IPOs of smaller companies. They often offer more flexible terms and can work with companies that are not suitable for large investment banks.
3. Consortiums of underwriters
For large IPOs, companies can use consortiums of underwriters, including several investment banks and brokers. This allows them to attract more investors and ensure wide market coverage.
Example of an underwriter: FINAM and Open Oil Market
When entering the pre-IPO of Open Oil Market, FINAM was the underwriter, which assessed the company and organized the process of attracting investments. FINAM used its experience in conducting placements and provided the necessary consultations and services for a successful pre-IPO. This allowed the company to better prepare for entering the stock exchange and attract the interest of investors.
How to choose an underwriter for an IPO?
1. Assess the reputation and experience of the underwriter
It is important to choose an underwriter with a good reputation and experience in your industry. This can help you get more favorable terms for the placement and attract more investors.
2. Compare terms and fees Underwriter fees may vary depending on the volume of shares being placed and the level of guarantee. Compare the terms to choose the most suitable option.
3. Study the network of contacts and capabilities of the underwriter The wider the network of contacts of the underwriter among institutional and private investors, the higher the chances of a successful placement.
4. Consider using a consortium of underwriters
If your IPO is large, working with a consortium of underwriters can provide better market coverage and increase demand for shares. There are also such examples in the Russian market. For example, in 2020, consortiums were used for the IPOs of Sberbank and Yandex, including several large Russian and international investment banks and brokers, such as FINAM, VTB Capital, Alfa-Bank, and Renaissance Capital. This allowed them to attract a wide range of investors and ensure a successful placement of shares on the stock exchange.
Another example is the placement of shares of Sovcomflot in 2020, where a consortium of underwriters also participated, including both international and Russian players, such as Gazprombank, Sberbank CIB, and VTB Capital. Thanks to working with the consortium, it was possible to secure significant interest from institutional and private investors, which contributed to the success of the IPO.
Underwriters play a key role in organizing an IPO, ensuring a successful placement of shares, establishing a fair price and attracting investors. Companies planning to go public must carefully select underwriters, taking into account their reputation, experience, terms of the placement and opportunities in the market. The right choice of underwriter can significantly affect the success of the IPO and help the company raise the maximum amount of capital.
Types of underwriters
1. Investment banks and brokers in Russia
Large Russian brokers, such as FINAM, BCS and Alfa-Bank, often act as underwriters in local markets. These companies have significant experience working with IPOs on the Russian stock exchange and provide a wide range of services, including marketing support, company valuation and placement guarantee. They are actively involved in organizing IPOs of both large and medium-sized companies, providing capital raising and assistance in entering the stock exchange.
2. Smaller Brokerages Smaller brokerages can also act as underwriters, especially in local markets or when conducting IPOs of smaller companies. They often offer more flexible terms and can work with companies that are not suitable for large investment banks.
3. Underwriter Consortiums
For large IPOs, companies can use underwriter consortiums that include several investment banks and brokers. This allows them to attract more investors and ensure broad market coverage.
Example of an underwriter: FINAM and Open Oil Market
When entering the pre-IPO of the Open Oil Market, FINAM acted as an underwriter, conducting a valuation of the company and organizing the process of attracting investment. FINAM used its experience in conducting placements and provided the necessary advice and services for a successful pre-IPO. This allowed the company to better prepare for entering the stock exchange and attract investor interest.
How to choose an underwriter for an IPO?
1. Evaluate the underwriter’s reputation and experience
It is important to choose an underwriter with a good reputation and experience in your industry. This can help you get better terms for the placement and attract more investors.
2. Compare terms and fees Underwriter fees may vary depending on the volume of shares being placed and the level of guarantee. Compare the terms to choose the most suitable option.
3. Study the underwriter’s network of contacts and capabilities The wider the underwriter’s network of contacts among institutional and private investors, the higher the chances of a successful placement.
4. Consider using a consortium of underwriters
If your IPO is large, working with a consortium of underwriters can provide better market coverage and increase demand for shares. There are also such examples on the Russian market. For example, in 2020, the Sberbank and Yandex IPOs used consortiums that included several large Russian and international investment banks and brokers, such as FINAM, VTB Capital, Alfa-Bank, and Renaissance Capital. This allowed them to attract a wide range of investors and ensure a successful placement of shares on the stock exchange.
Another example is the placement of shares of Sovcomflot in 2020, which also involved a consortium of underwriters, including both international and Russian players, such as Gazprombank, Sberbank CIB, and VTB Capital. Thanks to working with the consortium, it was possible to secure significant interest from institutional and private investors, which contributed to the success of the IPO.
Underwriters play a key role in organizing an IPO, ensuring a successful placement of shares, setting a fair price, and attracting investors. Companies planning to go public must carefully select underwriters, taking into account their reputation, experience, placement terms, and market opportunities. Choosing the right underwriter can significantly impact the success of an IPO and help a company raise the maximum amount of capital.
