What Is the Pot?
The pot—as in, "what's left in the pot"—is the portion of a stock or bond issue that investment bankers return to the managing or lead underwriter after an issue such as an initial public offering (IPO). The underwriter then sells the portion to institutional investors.
- The pot is the portion of a stock or bond issue that investment bankers return to the leader underwriter to be protected and then sold to institutional investors.
- A pot is often what's left of an issue after an initial public offering (IPO).
- The pot is a way to protect stock for institutional clients.
Understanding Pot and Its Role in Initial Public Offerings (IPOs)
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. These players have the financial capital to buy large amounts of stock after an issue such as an IPO. Underwriters follow specific steps when undertaking an IPO.
Steps of an Initial Public Offering (IPO)
First, an external IPO team is formed comprised 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 potential investors. Financial statements are submitted for an official audit. The issuing company finally files its prospectus with the SEC and sets a date for the offering.
Institutions can designate the sales credits attached to portions of their total order to any underwriter or selected dealer and can thus be lucrative to be the underwriter of a successful IPO.
As potential institutional investors look through the company prospectus, book building occurs. Book building is the process by which an underwriter attempts to determine at what price to offer new shares, based on demand. An underwriter may build their book by accepting orders from fund managers, who will indicate the number of shares they would 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 the issue that investment banks return to the lead underwriter following the deal.
Typically, the lead manager of an IPO obtains the greatest share of the pot.
Pot and the Lead Underwriter
In the case of an IPO, the lead underwriter will typically assemble and collaborate with other investment banks to establish an underwriting syndicate or group of investment banks. The lead underwriter will take charge of 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 successful.