Underwriting Spread
Candlefocus EditorThe underwriting spread is typically expressed as a percentage of the amount of the public offering. For example, if an issuer is offering $100 million of securities for sale and the underwriting spreads is two per cent, the underwriting fee would be two per cent of one hundred million or $2 million. After deducting for all applicable expenses, the underwriting firm will be left with a net profit on the transaction.
There are a variety of factors that affect the size of the underwriting spread. These include the issuer’s reputation and the public demand for the offering. If the issuer is viewed favourably by investors and there is a high amount of public interest in the offering, then the underwriting firm can likely charge a lower underwriting spread and still turn a good profit. On the other hand, if the issuer is relatively unknown or there is less public interest in the offering, the underwriting firm will likely need to charge a larger underwriting spread in order to make a profit.
Furthermore, the amount of the underwriting spread is often dependent on the specific segment of the market in which the issuer is operating. For example, the technology sector’s underwriting spreads are typically narrower than the underwriting spreads for biotechnology IPOs. This is because technology firms typically have larger cash flows than biotechnology firms and these cash flows often times allow them to attract more sophisticated underwriting firms on more favourable terms.
Overall, the underwriting spread is an important concept for both issuers and underwriters and is a key factor in determining their respective risks, rewards and profits. An issuer must decide if the amount of the underwriting spread, when combined with all applicable expenses and fees, is worth the gains they will receive from the public offering. And the underwriter, who must decide if they are able to provide a fair and competitive spread while still making a profit on the transaction.