If book runners didn’t exist, they would have to be invented. They’re a crucial component of initial public offerings, or IPOs — and play an important part of the loan process, reducing risk for the investor. Book runners accept and minimize the financial risk associated with loans, insurance and investments by poring over all of the details and making sure that the financial vehicles being promoted are financially sound. They earn a hefty fee for this. While you don’t need to know what a “book runner” is to make an investment, take out a loan or buy insurance, knowing what one is and how book runners work will make you a more informed investor.
For help managing your own investment portfolio, consider working with a financial advisor.
What Is a Book Runner?
Book runners are the primary underwriters when it comes to issuing new equity, debt or securities instruments. Book running is an extremely complicated process, but the definition is simple: book runners are running the financial books.
You may occasionally meet someone at a cocktail party who describes their profession as a book runner, but just as often a book runner describes an entity or organization, like an investment bank. It is also common for multiple book runners to be involved in underwriting a financial vehicle, especially when encountering extremely complex investments. There are numerous federal, state and local regulations to be cognizant of and not run afoul of when underwriting anything but especially when planning for something where potentially millions or billions of dollars are at stake, such as an IPO. Often in those cases, one financial institution will take the lead as a book runner while the other banks will be described as joint book runners or co-managers.
Book runner is an informal term. People often use the term book runners interchangeably with underwriters and sometimes syndicate managers. Either way, all of these professions work to make everybody’s financial transactions safer.
Examples of Book Running
Some loans to corporations are so big – such as a multi-billon dollar loan — that they can’t be handled by a single bank. (These are often called syndicated loans.) In a case such as that, a book runner or multiple book runners would be called in to examine the financial records of the company requesting the loan.
Here’s another example: if an underwriter is involved with an IPO, an initial public offering, it will buy shares from a company that wants to offer stock and then will resell them to the public. But to first establish the initial price of the stock, the underwriters will pore through the company’s financial records and go through myriad legal and financial responsibilities before setting a price for the new shares that the company will offer once it goes public. As an investor, after all, you wouldn’t want to overpay for a stock.
Book runners also serve another purpose – working with potential investors and making sure there is actually interest in buying a company’s stock. The period where a book runner works out the price at which the IPO will be offered is often called a “book build.” Interestingly enough, sometimes the mere presence of a book runner – if its reputation is stellar – will give investors more confidence in the stock.
Why Are Book Runners Important?
Without book runners, it would be far riskier to invest in anything, whether an IPO, a mortgage or an insurance policy. Nobody, whether an individual or organization, wants to invest their money into something that has a weak financial foundation. While nobody can be guaranteed that an investment will be sound, book runners do everything feasible to make them so. You’ll begin to realize how important book runners are, and that they aren’t always infallible, if you think about some of the corporate financial implosions of the past. For instance, consider the recent bankruptcy of the cryptocurrency platform FTX — or the infamous Enron, an American energy company that declared bankruptcy in 2001.
The Bottom Line
If you ever have a delay on a financial transaction, and somebody says that the transaction can only happen after a verdict or clean bill of health is rendered by the book runner, be glad one is involved. Book runners exist to protect financial institutions, companies and individuals and keep everyone out of financial trouble. They don’t always succeed, but they generally do, and the financial world is much better off with them than without them.
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