Book Runner

What Is a Book Runner?

The term book runner or a bookrunner refers to the primary underwriter or lead coordinator in the issuance of 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).

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 lead underwriter, working with other investment banks to establish an underwriter syndicate, 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% to 8% — for the underwriter syndicate, 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 runner plays the most important role in the transaction and will typically assign parts of the new issue to other underwriting firms for placement while retaining the most significant portion for themselves. 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. This pivotal position may allow the book runner and his associated firm to know new information before it is widely known.

Requirements of Book Runners

Determining the final offering price is one of the biggest responsibilities of an 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 for the securities and the Securities and Exchange Commission (SEC) makes the registration statement effective, the underwriters call the subscribers to confirm their orders. If demand is particularly high, the underwriters and the issuer may raise the price and reconfirm the sale with subscribers.

One responsibility of the book runner is to create a book containing a 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 price for an initial 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 a greenshoe 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 the large investment banks, such as Merrill Lynch, Morgan Stanley, Goldman Sachs, Lehman Brothers, and others look to conduct many diverse offerings in the course of a year.