What is the Role of an Investment Banking Firm During an IPO Launch?

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Equirus Wealth

23 Dec 2022 3 min read

Stock Market#Investment#Stock Market#Finance

What is the role of an investment banking firm during an IPO launch?

Investment banking is among the most esteemed occupations on Dalal Street. Investment bankers have one of the toughest and most arduous jobs, marked by long working hours and high levels of stress but offering some of the most wanted and financially rewarding positions in the banking business. The investment banker comes into the limelight during the IPO fundraising phase. Their role and responsibility are often not very apparent to the general public. Here, we demystify their role during an IPO launch.

Roles and responsibilities of investment bankers during an IPO launch:

Here is a list of roles and responsibilities carried out by investment bankers:

  1. Underwriting:

When a corporation employs an investment bank, that company then serves as the IPO underwriter for the corporation. Underwriting is assigning a general value to a company and purchasing shares at a discount in order to distribute them in the open markets eventually. It is not unusual for many investment banks to underwrite a new offering, with one company acting as the main underwriter, depending on the size of an IPO.

  1. Pricing and valuation:

Pricing and valuation are one of the most critical tasks carried out by investment bankers. Choosing the right price for an IPO share may be difficult since the investment bank must strike a careful balance between providing the most cash for their client company and luring the most investors. If the stock is priced too high, it might not draw enough investors, and if it is priced too low, it might not raise enough money. Investment bankers help corporate executives set a fair price for a new issue, but their valuation may not always be accurate. These mistakes in pricing new shares often do not come to the fore until after listing in the secondary market. Typical examples the recent IPOs are LIC and Paytm.

  1. Roadshow:

This is an integral part of marketing the IPO and getting a sense of investor interest in the company proposing to go public. They create awareness about the company’s upcoming IPO and interact with investors to get a sense of the company's perception. By seeing the demand for shares at a road show, bankers may assist firms that want to go public. In order to present the possibilities and try to spark interest in the IPO, they physically go meet possible investors in big cities. During road presentations, bankers normally take the lead, but Internet firm Facebook defied this convention during its 2012 IPO.  Facebook executives promoted the impending IPO throughout the roadshow unusually casually, which started a new trend among technology companies.

  1. Lock-up period:

Investment bankers start selling shares to the general public on the day of the IPO in an effort to make a profit and raise the company's market value. Additionally, banks impose lock-up periods for brand-new equities, which typically last for six months and prohibit early IPO investors from liquidating their shares. This is to increase demand for the stock and ensure that the sell volumes do not indicate heavy offloading in the counter, which could lead to a severe fall in the prices of the corporation.

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Having understood the role of investment bankers during the launch of an IPO, it is apparent that they are critical for the success of the IPO. Hence, it is important for the corporate to choose the right investment bank to represent its IPO.

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