TLDR:
An underwriter is a financial institution (typically an investment bank) that assumes the risk of issuing securities on behalf of a company, evaluating the offering, setting the price, and guaranteeing the sale to investors.
Underwriting Roles in an IPO
In an IPO, underwriters serve as the primary intermediary between the issuing company and public investors. Lead underwriters (also called “bookrunners”) manage the entire process — diligence, drafting the prospectus, organizing the roadshow, building the order book, and pricing the deal. Co-managers provide additional distribution and analyst coverage. The lead-left bookrunner sits in the most prominent position and traditionally receives the largest economic share of the underwriting fees.
Firm Commitment vs. Best Efforts
In a firm commitment underwriting (the standard for large IPOs and follow-ons), the underwriters purchase the entire offering from the issuer at an agreed price and resell to the public, taking on the risk that demand falls short. In a best-efforts underwriting (more common for smaller deals), the underwriters act only as agents and take no inventory risk. The pricing, fees, and risk allocation differ materially between these structures.
Underwriting Fees
The “gross spread” — the difference between the public offering price and the price paid to the issuer — is typically 5–7% for US IPOs, 3–4% for European IPOs, and lower for follow-on offerings. The spread is allocated among management fee, underwriting fee, and selling concession. Additional fees include legal expenses, printing, accounting, and roadshow logistics.
Beyond Equity
Underwriting concepts extend beyond equity issuance: insurance underwriters evaluate and price insurance risks, mortgage underwriters assess loan applications, and debt underwriters manage bond offerings. In each case, the underwriter is taking on or pricing risk in exchange for a fee.