 What is an IPO? As part of our series on banking, we have looked at the different divisions within a full-service bank. In this video, we are going to look at the role of equity capital markets in the successful launch of an initial public offering. An initial public offering, or IPO, is when a private company decides to sell a proportion of its total share capital to investors who buy and sell public company shares listed on stock exchanges. The upsides for a company contemplating an IPO are clear. An IPO gives the company access to significant pools of capital to execute growth plans, whilst also providing an exit event for founders and early investors. However, the road to a successful IPO is long and winding. This is why equity capital markets teams within the investment bank are appointed. The first stage in an IPO process is to ensure that the company is IPO ready. Regulatory bodies and market participants require a level of organisational and reported sophistication for all listed companies. Banks will carry out due diligence to ensure that the company is an eligible and attractive IPO target. Once due diligence has been completed and marketing materials prepared, the company and its lead bank, also known as the lead underwriter, conduct a roadshow, presenting to prospective investors around the world. The goal of a roadshow is to succinctly explain a compelling investment case, wetting the appetites of IPO investors. Next, the lead underwriter sets a share price floor and ceiling along with a target share issuance volume. As part of this stage, the bank might appoint other banks to market a slice of the overall book to their investors. Once everything is in place, the pre-IPO book building process starts. Here, banks get in touch with investors who bid for a varying volume of shares depending on the price level. Once all commitments are received, the lead underwriter can set an IPO price and finalise the size of the offering. Now a successful process will see significant oversubscription, meaning that the IPO price can be raised or more shares can be offered. If all goes well, the IPO launches and is well priced, with the company's share price increasing slightly in its first day of trading. A successful IPO also means a healthy payday for the underwriting banks who can pocket up to 7% of all of the proceeds of the IPO. The main risk for the underwriting banks is that after the book building process has been completed, the IPO is undersubscribed. In this instance, the underwriting bank might take a loss selling its allocation at a discount in the secondary market.