How to Choose the Right Underwriter for an IPO

Achieving an Initial Public Offering (IPO) is a major achievement for any company - and the rewards can be substantial. This is because gaining access to the public capital markets unlocks unlimited opportunities to grow your company and achieve your long-term strategic goals. However, to achieve the highest IPO price and a smooth integration into public life, choosing the right underwriter during the preparatory stages is essential.

In fact, the right underwriter can be the difference between a successful IPO and a failed IPO.

Firstly, let’s define what an underwriter is:

An underwriter is a team, typically from an investment bank, that will take on a company's risk in exchange for a fee. They must determine and evaluate the risk of a company through extensive due diligence, which is one of the most rigorous stages of preparing for an IPO.

The role of underwriters in IPOs

Underwriters assess the value of the company, determine the initial offering price, buy the shares from the company at the offering price, and then resell them to investors.

Why is the role of underwriters so important for the IPO process in 2024?

Getting the valuation you deserve

Underwriters play a key role in valuing the company and setting the IPO price, which can significantly impact the success of the IPO and the company’s future in the public market. After the IPO roadshow, the underwriter will confirm the IPO price before allocating a portion of shares to institutional investors, very shortly before the IPO launch date. 

Effective market making

Post-IPO, underwriters often provide market-making services, helping to ensure liquidity and stabilise share prices. Market-making is when the underwriter buys and sells shares to try and stabilise the market and minimise the risk of volatile price movements. 

Sound risk management

Underwriters assume the risk of selling the shares at the agreed-upon price, providing a degree of financial certainty to the company going public.To achieve an accurate valuation, they must analyse your competition, the market outlook and any other threats and opportunities which could influence investors' demand for your company shares.

Ensuring full regulatory compliance

Underwriters guide the company through the complex regulatory landscape of going public, ensuring you stay compliant with relevant laws and regulations. Any mistakes in your IPO application could put you at risk of incurring hefty fines and lengthy delays.

What to look out for when choosing an underwriter for your IPO:

Firstly, what is their experience and track record?

Look for an underwriter with a strong track record in your sector or industry. Their experience in handling similar IPOs can provide invaluable insights and strategies tailored to your market.

A good way to lay the groundwork is to initiate what’s known as a 'bake-off' period, where you evaluate various underwriters' presentations as they compete to convince you they're the right fit.

In this meeting, you can learn about the underwriter's research analysts. Do they have experience working with similar companies in your industry? Can you find evidence of any failed deals that were under this underwriter's watch? If so, find out why these deals didn't succeed. 

Do they have a good reputation?

The reputation of an underwriter in the market, along with their relationships with investors, can influence the success of your IPO. A well-respected underwriter with strong investor networks can significantly enhance the market reception of your IPO.

For example, if you are intending to use a small accounting firm to conduct your independent audit, a reputable underwriter may suggest that you use a larger, nationally recognised accountancy firm. 

Do they really understand your business?

Choose an underwriter that understands your business and its unique value proposition. This alignment is crucial for accurately presenting your company to investors.

Do they have the right distribution network for your company’s needs?

The ability of the underwriter to distribute your shares effectively to the right mix of institutional and retail investors is also important.. Assess their distribution networks and strategies to ensure they have a broad and effective reach.

Are their terms and fees clear?

Consider the terms and fees proposed by the underwriter. While fees are an important consideration, they should be weighed against the value and services the underwriter brings to your IPO. Again, this is why it’s essential to work with an underwriter that has the relevant expertise and knowledge of your industry and target investors. 

Do they offer support and advice too?

An underwriter should offer more than just financial services. Look for those who can provide strategic advisory services throughout the IPO process and beyond. For example, underwriters should provide marketing materials for your IPO roadshow to help you promote your company to prospective investors. 

Conclusion

If you’re preparing for an IPO launch, hiring the right underwriter can help you achieve an accurate valuation, a successful IPO, and a smoother post-IPO integration process. Before you make any decisions, you should consider an underwriter's expertise, market experience, reputation, terms and fees. This can take some time, so start preparing for this IPO stage as early as possible.