Understand the Role of Investment Banks in an IPO

Introduction

When a company announces that it is "going public," headlines often focus on the company's founders, investors, or the stock exchange where the shares will be listed. However, behind every successful Initial Public Offering (IPO) is an investment bank working behind the scenes.

Investment banks are the architects, advisors, marketers, financial analysts, negotiators, and risk managers that guide companies through one of the most important milestones in their corporate journey. Without them, launching an IPO would be significantly more difficult, risky, and expensive.

This article explores the complete role of investment banks in an IPO—from the earliest planning stages to post-listing stabilization—and explains why they are indispensable partners in the public offering process.

What Is an Investment Bank?

An investment bank is a financial institution that helps corporations, governments, and other organizations raise capital, execute mergers and acquisitions (M&A), restructure businesses, and provide financial advisory services.

Unlike commercial banks that accept deposits and make loans to individuals, investment banks primarily work with businesses and institutional investors.

Some of the world's largest investment banks include:

• Goldman Sachs

• Morgan Stanley

• JPMorgan

• Bank of America Securities

• Citigroup

• Barclays

• UBS

• Deutsche Bank

• Jefferies

• Evercore (advisory)

Why Does a Company Need an Investment Bank?

Going public is much more than selling shares.

An IPO involves:

• Regulatory compliance

• Financial reporting

• Company valuation

• Investor marketing

• Share pricing

• Legal documentation

• Institutional investor relationships

• Stock market expertise

Most companies simply do not possess these capabilities internally.

Investment banks provide specialized expertise accumulated through hundreds of IPO transactions.

The Investment Bank's Responsibilities Throughout an IPO

The IPO process can be divided into several phases.

IPO Planning

↓

Company Due Diligence

↓

Valuation

↓

IPO Structure

↓

Prospectus Preparation

↓

Regulatory Approval

↓

Roadshow

↓

Book Building

↓

Pricing

↓

Listing

↓

Post-IPO Stabilization

Let's examine each stage.

Phase 1: IPO Readiness Assessment

Before agreeing to underwrite an IPO, the investment bank evaluates whether the company is actually ready.

Areas reviewed include:

Financial Performance

• Revenue growth

• Profitability

• Cash flow

• Debt level

• Working capital

Business Model

• Competitive advantage

• Market size

• Scalability

• Industry outlook

Corporate Governance

Investment banks review:

• Board independence

• Audit committee

• Internal controls

• Risk management

• Executive leadership

Financial Reporting

The company must usually have:

• Audited financial statements

• IFRS or US GAAP compliance

• Strong accounting systems

• Reliable financial controls

Phase 2: Advising on IPO Strategy

The investment bank helps answer major strategic questions.

Examples include:

Should the company go public now?

Timing depends on:

• Market conditions

• Industry performance

• Interest rates

• Investor sentiment

• Competitor valuations

Sometimes delaying six months can significantly improve valuation.

Which Stock Exchange?

Possible choices:

• NYSE

• NASDAQ

• London Stock Exchange

• Hong Kong Stock Exchange

• Singapore Exchange

Each market offers different:

• Investor bases

• Listing requirements

• Liquidity

• Valuation multiples

Primary vs Secondary Shares

Investment banks advise how many shares should be:

Primary shares:

• Newly issued

• Company receives cash

Secondary shares:

• Existing shareholders sell

• Company receives no proceeds

Phase 3: Company Valuation

One of the investment bank's most important responsibilities is determining what the company is worth.

Several valuation methods are used simultaneously.

Discounted Cash Flow (DCF)

Projects future cash flows.

Discounts them back to present value.

Useful for mature businesses.

Comparable Company Analysis

Compare valuation multiples such as:

• P/E

• EV/EBITDA

• EV/Sales

Against similar public companies.

Precedent Transactions

Analyzes recent acquisitions of similar companies.

Shows what strategic buyers have paid.

Market Demand

Sometimes valuation depends less on financial models and more on investor appetite.

Example:

Two identical companies may receive very different valuations depending on market sentiment.

Phase 4: Underwriting the IPO

This is where investment banks earn much of their reputation.

What Is Underwriting?

Underwriting means the investment bank agrees to sell the company's shares to investors.

Depending on the agreement, they may even purchase the shares first.

Firm Commitment

Most common for large IPOs.

Investment bank purchases all shares.

Company

↓

Investment Bank

↓

Public Investors

Risk:

If investors don't buy all shares...

The investment bank owns the remaining shares.

Best Efforts

Investment bank only agrees to use its best efforts to sell shares.

Unsold shares remain with the company.

Lower risk for the bank.

Higher risk for the issuer.

Phase 5: Due Diligence

Investment banks perform extensive due diligence.

Purpose:

Verify that every material statement in the prospectus is accurate.

They review:

• Financial statements

• Contracts

• Customers

• Suppliers

• Litigation

• Intellectual property

• Tax compliance

• Employment agreements

• Regulatory issues

• Environmental risks

This protects both investors and the bank.

Phase 6: Preparing the Prospectus

The prospectus is the official IPO document.

Investment banks work closely with:

• Lawyers

• Auditors

• Company management

The prospectus contains:

• Company overview

• Industry analysis

• Risk factors

• Historical financial statements

• Management discussion

• Future strategy

• Share offering details

• Use of IPO proceeds

Phase 7: Regulatory Coordination

Investment banks coordinate submissions with regulators.

Activities include:

• Filing registration statements

• Responding to regulator comments

• Revising disclosures

• Coordinating legal advisors

• Managing listing requirements

Phase 8: Marketing the IPO (Roadshow)

This is one of the most visible stages.

Senior executives travel to meet institutional investors.

Typical investors include:

• Mutual funds

• Pension funds

• Sovereign wealth funds

• Insurance companies

• Hedge funds

The investment bank organizes:

• Meeting schedules

• Investor presentations

• Q&A sessions

• Financial models

• Market feedback

Phase 9: Book Building

During the roadshow, investors indicate:

• How many shares they want

• At what price

Example

Investor	Shares Requested	Price
Fund A	5 million	$24
Fund B	10 million	$25
Fund C	3 million	$26

The investment bank builds an "order book."

This information determines:

• Demand

• Optimal price

• Share allocation

Phase 10: IPO Pricing

Pricing is a balancing act.

Too high:

❌ Investors may not buy.

Too low:

❌ Company leaves money on the table.

Investment banks analyze:

• Market demand

• Comparable companies

• Economic conditions

• Investor feedback

• Subscription levels

Phase 11: Share Allocation

Not every investor receives all requested shares.

Investment banks prioritize:

• Long-term investors

• High-quality institutions

• Strategic shareholders

• Geographic diversification

This helps create a stable shareholder base.

Phase 12: Stock Exchange Listing

Once pricing is finalized:

• Shares are issued

• Trading begins

• Investors buy and sell freely

The investment bank coordinates with:

• Stock exchange

• Depositories

• Brokers

• Clearing systems

Phase 13: Price Stabilization

Immediately after listing, share prices can become volatile.

Investment banks often act as stabilization managers.

Greenshoe Option

One common stabilization mechanism is the Greenshoe Option.

Example:

IPO:

100 million shares

Bank receives option to sell:

15 million additional shares

If demand is very high:

Bank exercises the option.

If price falls:

Bank purchases shares in the market to support the price.

Phase 14: Equity Research Coverage

After the quiet period expires, analysts from the investment bank often begin publishing:

• Research reports

• Earnings forecasts

• Industry analysis

• Buy/Hold/Sell recommendations

This improves market visibility and supports investor engagement.

Phase 15: Future Capital Raising

The IPO is often just the beginning.

Investment banks continue advising companies on:

• Secondary offerings

• Convertible bonds

• Corporate bonds

• Mergers & acquisitions

• Share buybacks

• Private placements

Long-term relationships are common.

Revenue Sources for Investment Banks

Investment banks earn income from several IPO-related services.

Service	Revenue Source
Underwriting	Underwriting fee
Financial Advisory	Advisory fee
Valuation	Consulting fee
Book Building	Underwriting spread
Roadshow Management	Included in underwriting
Due Diligence	Advisory fee
Stabilization	Underwriting spread
Research Coverage	Strategic client relationship

How Much Do Investment Banks Charge?

IPO underwriting fees vary by market, company size, and complexity.

Typical ranges include:

IPO Size	Typical Fee
Small IPO	5–8%
Medium IPO	4–6%
Large IPO	2–5%
Mega IPO	Less than 2%

For a US$1 billion IPO with a 5% underwriting fee, total fees could reach approximately US$50 million, shared among the lead underwriters and syndicate members.

Risks Faced by Investment Banks

Investment banks also assume significant risks.

Underwriting Risk

If demand is weak, banks may be left holding unsold shares.

Legal Risk

Inaccurate disclosures can lead to lawsuits and regulatory penalties.

Reputation Risk

A poorly performing IPO can damage the bank's standing and reduce future mandates.

Market Risk

Volatile markets may force the bank to postpone or reprice an offering.

Real-World Example of an IPO Syndicate

Large IPOs are often managed by a syndicate rather than a single bank.

A typical structure includes:

• Lead Left Bookrunner – Coordinates the entire IPO process, manages pricing, and oversees the order book.

• Joint Bookrunners – Share responsibility for marketing, book building, and investor outreach.

• Co-Managers – Support distribution of shares and broaden access to investors.

• Selling Group Members – Help distribute shares without taking on underwriting risk.

This collaborative approach allows the underwriting risk to be shared across multiple institutions while leveraging broader investor networks.

Key Skills Investment Bankers Bring to an IPO

Successful IPO execution requires a combination of technical expertise and market insight.

Core competencies include:

• Financial modeling

• Business valuation

• Capital markets knowledge

• Regulatory compliance

• Investor relations

• Negotiation

• Project management

• Risk assessment

• Marketing to institutional investors

• Transaction execution

The IPO Ecosystem

An IPO is a coordinated effort involving multiple stakeholders.

The investment bank serves as the central coordinator, connecting the company with auditors, legal advisors, regulators, institutional investors, and the stock exchange.

Conclusion

Investment banks are far more than intermediaries that sell shares. They are strategic advisors who guide companies through every stage of the IPO lifecycle—from assessing readiness and determining valuation to marketing the offering, underwriting the shares, coordinating regulatory approvals, and supporting trading after the listing.

Their expertise helps companies maximize the capital raised, reach the right investors, comply with complex regulations, and establish a strong foundation as publicly traded businesses. For many organizations, the choice of investment bank is one of the most important decisions made during the IPO journey, influencing not only the success of the offering but also the company's long-term reputation in the capital markets.

Resources : Internet