DEFINITION of Pot
Depending upon the issue and the size of the pot, it may be very lucrative for the underwriter to sell inventory to institutional investors. An institutional investor is a non-bank person or organization who trades securities in large enough share quantities and/or has a net worth high enough to qualify for preferential treatment and lower commissions. Examples of institutional investors include hedge funds, high net worth individuals, pension funds, and endowments.
Pot and an Initial Public Offering (IPO)
Preceding the division of the pot, underwriters will facilitate an issue. A common type of issue is an initial public offering or IPO. Underwriters follow specific steps when undertaking an IPO:
First, an external IPO team is formed, consisting of an underwriter, lawyers, certified public accountants (CPAs) and Securities and Exchange Commission (SEC) experts. Next, information regarding the company is amassed, including financial performance and expected future operations. These records become part of the company prospectus, which is circulated for review among many potential investors. Financial statements are submitted for official audit. The issuing company finally files its prospectus with the SEC and sets a date for the offering.
As potential institutional investors look through the company prospectus, book building occurs. This is the process by which an underwriter attempts to determine at what price to offer new shares, based on demand. An underwriter may build her book by accepting orders from fund managers, who will indicate the number of shares they’d like to purchase and the price they will pay.
Once investment bankers or IPO underwriters determine the price, the company markets the IPO before its first day of trading. As stated above, the pot is the portion of a the issue that investment banks return to the lead underwriter following the deal.
Pot and Lead Underwriter
In an IPO the lead underwriter will generally assemble and collaborate with other investment banks to establish an underwriting syndicate or group of investment banks, which will create an initial public offering or secondary offering. The lead underwriter will take charge in assessing company financials and current market conditions to arrive at the initial value and quantity of shares to be sold. Being the lead underwriter can be highly lucrative – if a deal is a success.