What Is a Book Runner?
A book runner, or bookrunner, is the primary underwriter or lead coordinator when an investment bank issues new equity, debt, or securities instruments.
The book runner is the lead underwriting firm that runs or is in charge ofthe books in investment banking. Book runners may also coordinate with others in order to mitigate their risk such as those that represent companies in large, leveraged buyouts (LBOs).
Key Takeaways
- A book runner is the primary underwriter or lead coordinator in the issuance of new equity, debt, or securities instruments.
- In investment banking, the book runner is the lead underwriting firm that runs or is in charge ofthe books during the issuance of new equity of a client firm.
- The book runner serves as lead underwriter and usually works with other investment banks to establish an underwriter syndicate, thereby creating the initial sales force for shares.
- In leveraged buyouts, a book runner represents one of the participating companies and works with other participating firms.
Understanding Book Runners
Book runners are the lead underwriters involved in different parts of the financial industry including initial public offerings (IPOs) and LBOs. As such, they're also known in the industry as lead arrangers or lead managers. With IPOs, the book runner assesses a company's financials and current market conditions to arrive at the initial value and quantity of shares to be sold to private parties. While most often done during an IPO, book runners may also do this through a secondary offering.
To reduce its risk, the book runner syndicates with other underwriting firms for the issuance of the new equity, debt, or security. This is fairly common in the investment banking industry and is a temporary arrangement between entities. The book runner serves as leadunderwriter, working with other investment banks to establish anunderwritersyndicate, thereby creating the initial sales force for the shares. These shares are then sold to institutional and retail clients.These new shares carry a hefty commission—as much as 6% to8%—for the underwritersyndicate, with the majority of shares held by the lead underwriter.
A book runner often syndicates with other underwriting firms to reduce their risk.
The lead-left book runner, also called managing underwriter or syndicate manager, is listed first among the other underwriters participating in the issuance. The lead-left book runnerplays the most important rolein the transaction and will typically assign parts of the new issue to other underwriting firms for placement while retaining the most significant portion forthemselves. This book runner's name is also the first bank to be listed on the prospectus, in the upper left-hand corner.
Book runners also work with large, leveraged buyouts, which often involve multiple businesses. LBOs take place when a company makes an acquisition using borrowed capital. In these cases, the book runner represents one of the participating companies and coordinates with the other participating firms. One company generally takes the responsibility of running or managing the books, though more than one book runner—also called a joint book runner—can control a security issuance.
Special Considerations
In the securities industry, an underwriter represents a particular business entity, most often an investment bank. The underwriter guarantees that all documentation and reporting requirements are met. They also work with potential investors to market the upcoming offering and gauge public interest. An underwriting institution may offer guarantees regarding the amount of stock to be purchased. They may also buy securities to meet the minimum guarantee.
A book runner performs the same duties as an underwriter while also coordinating the efforts of multiple involved parties and information sources. In this regard, the book runner functions as a central point for all information regarding the potential offering or issue. Thispivotalposition may allow the book runner and his associated firm to knownew information before it is widely known.
Responsibilities of Book Runners
Determining the finaloffering priceis one of the biggest responsibilities ofan underwriter. First, the price determines the size of the proceeds to the issuer. Second, it determines how easily the underwriter can sell the securities to buyers.
The issuer and lead book runner usually work together to determine the price. Once they agree on a price forthe securities and the Securities and Exchange Commission (SEC) makes the registration statement effective, the underwriterscallthe subscribers to confirm their orders. If demand is particularly high, theunderwriters and the issuer may raise the price and reconfirm the sale withsubscribers.
One responsibility of the book runner is to create a book containinga working list. This is useful in tracking information about parties interested in participating in the new offering or issue. This information is used to help determine an opening pricefor aninitial public offering as well as to gain insight into the level of interest expressed by potential investors.
Being the lead underwriter for a stock offering, especially an IPO,can bring a large payday if the market shows a high demand for the shares. The stock issuer will often allow the lead underwriter to create an over-allotment of shares if demand is high which can bring in even more money to the underwriting firm. This is called agreenshoe option.
There are substantial risks involved in underwriting stock offerings. For instance, any company could plummet in the open market once public trading begins. This is why large investment banks look to conduct many diverse offerings in the course of a year. The more transactions and offerings take place, the more the risk is spread out between them instead of concentrated on the outcomes of a single company's offering.
What Is a Leveraged Buyout?
A leveraged buyout is when one company buys another using a large amount of borrowed money to fund the purchase. Often, the assets of the company being purchased are used as collateral for the loans taken out by the buyer.
What Is the Difference Between a Book Runner and a Lead Manager?
A book runner is responsible for the entire underwriting process during the an IPO or a leveraged buyout. A lead manager is responsible for finding buyers for an IPO and ensure there are no barriers to the sale. These roles are often filled by the same firm.
Do Underwriters Always Work for Investment Banks?
Underwriters are responsible for assessing risk during financial transactions and deciding whether they or the company they work for will assume that risk. Investment banks are one type of company that employs underwriters. Insurers and other financial institutions also employ underwriters. The entire underwriting department of an investment bank can serve as book runner.
The Bottom Line
A book runner is the primary underwriter when an investment bank issues new equity, debt, or securities instruments.They are the lead underwriting firm that runs or is in charge ofthe books, for example during an IPO.
The book runner usually works with other investment banks to establish an underwriter syndicate, thereby creating the initial sales force for shares. This reduces risk but also decreases the share of profit that each part of the syndicate makes. However, because the book runner takes on the most responsibility during the offering, they also usually get the highest commission from the transaction.
