Book Runners
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 of the 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).
Definition: An underwriter is an institution that purchases all or part of the securities directly from the issuer during the securities issuance process and assumes the sales risk. The underwriter buys and holds the securities, then sells them to investors, bearing the market risk of unsold securities.
Origin: The concept of underwriters originated in the 19th-century financial markets when financial institutions began to assume the sales risk of securities issuance to help companies raise funds. As financial markets developed, the role of underwriters became more defined and indispensable in the securities issuance process.
Categories and Characteristics: Underwriters are mainly divided into two categories: full underwriting and partial underwriting. Full underwriting means the underwriter purchases all the securities from the issuer and assumes all the sales risk; partial underwriting means the underwriter only purchases part of the securities, and the remaining part is sold by the issuer. The advantage of full underwriting is that the issuer can immediately obtain all the funds, but the underwriter bears a higher risk; partial underwriting has lower risk, but the issuer may not obtain all the funds immediately.
Specific Cases: 1. A tech company plans to issue new shares and hires an investment bank as the underwriter. The investment bank purchases all the new shares and sells them in the market. Due to high market demand, the investment bank successfully sells all the new shares and earns a substantial profit. 2. A real estate company issues bonds and chooses partial underwriting. The underwriter purchases part of the bonds, and the remaining part is sold by the company itself. Due to average market response, the company fails to sell all the bonds, resulting in some funds not being raised in time.
Common Questions: 1. How do underwriters price the securities? Underwriters usually price based on market demand, the issuer's financial status, and market conditions. 2. How do underwriters manage risk? Underwriters manage risk through diversification, hedging transactions, and other methods.
