bookbuilding

Bookbuilding is a method used to price and allocate shares in an initial public offering (IPO) or other primary market issue. Underwriters solicit indications of interest from potential investors to gauge demand and then construct an order book that guides pricing and allocation. The approach emphasizes price discovery based on investor demand rather than fixing a price in advance.

Typically, an issuer hires investment banks to lead the offering. The banks perform due diligence and prepare a prospectus, then launch a marketing phase often called a roadshow in which company executives present the business to institutional investors. During this period, the book is built by collecting indications of interest, target lot sizes, and a proposed price range. The indications are non-binding in many markets, but they create a transparent picture of demand.

After reviewing the book, the underwriters set a final offer price within or close to the indicated range and determine how the shares will be allocated. Allocation generally favors institutional investors and other strategic buyers, with some shares reserved for employees and retail clients where permitted. If demand exceeds supply (oversubscription), the price may be raised and more shares allocated to investors; if demand is weak, the price may be lowered. The issuer or underwriters may also exercise a greenshoe option to stabilize the price after listing.

Bookbuilding aims to improve price discovery, manage risk, and allocate shares efficiently. It can reduce the risk of mispricing relative to fixed-price offerings, but it may raise concerns about fairness and access, especially if allocation favors certain clients or if information asymmetries influence demand signals.

It is widely used for equity offerings in many markets, notably in the United States and Europe. While primarily associated with IPOs, bookbuilding is also employed for follow-on offerings and certain bond issues, where investor demand helps determine pricing and allotment.