Bookbuilding

Bookbuilding is how a company and its bankers figure out what price to sell shares at in an IPO. Instead of picking a number and hoping for the best, they ask big investors what they’d pay, and write it all down in ‘the book’.

Here’s roughly how it works. This is a bit simplistic and it can vary depending on the market and the way the company has decided to go public.

1. Set a range. The company and its banks, known as bookrunners, suggest a price range, say 250p to 300p a share.
2. Go on a roadshow. Management pitches the business to institutional investors like pension funds and asset managers.
3. Take orders. Investors say how many shares they’d like and the highest price they’d pay.
4. Read the book. The banks look at total demand across the price range. Lots of orders at the top end? The price might land there, or even above the range. Only a handful of orders at the top end of the price range? The bankers and company may decide to price the offering at the low end of the range or even delay listing altogether.
5. Price and allocate. The final price is set and shares are divvied up between investors.

If demand outstrips the shares on offer, the deal is oversubscribed. Investors may get fewer shares than they asked for, which is a nice problem for the company and a mildly annoying one for investors. If an IPO is in demand, institutional investors may overstate how many shares they want to buy in anticipation that they won’t get all they ask for.

Bookbuilding has traditionally been the domain of institutional investors, but with changes to the rules in the UK, it’s becoming more common to see a slice of shares set aside for everyday investors.

Related terms: IPO, Prospectus, Direct listing