What Is Co-Manager?
A co-manager, in the realm of investment banking and capital markets, refers to one of several underwriters who participate in a securities offering but are not the primary, overall managing firm. This role is integral to the structure of an underwriting syndicate, where multiple financial institutions collaborate to distribute a new issue of equity securities or debt securities to investors. Co-managers play a supportive role to the lead manager, contributing to the distribution network and lending credibility to the offering.
History and Origin
The concept of an underwriting syndicate, including the role of co-managers, evolved to manage the substantial financial risks and distribution efforts associated with large-scale securities offerings. Historically, underwriting began with individuals "writing their names under" risks in the insurance market, a practice that expanded into financial markets.14 As companies grew and sought to raise larger amounts of capital, particularly through initial public offerings (IPOs), the scope of offerings often exceeded the capacity of a single firm. This led to the formation of syndicates, allowing investment banks to pool resources, share risk, and broaden their distribution reach. The formalization of roles like the co-manager became more pronounced as the complexity and scale of capital markets increased, particularly through the 20th century. Major shifts in investment banking over the past few decades, driven by technology and regulatory changes, have continued to refine the roles within these syndicates.13
Key Takeaways
- A co-manager is a participant in an underwriting syndicate for a securities offering, distinct from the lead manager.
- Co-managers contribute to the distribution and selling efforts of new stock or bond issues.
- They typically have less responsibility and receive a smaller allocation of the offering compared to the lead manager.
- Their inclusion helps broaden the reach of the offering and distribute risk among multiple firms.
- The role of co-manager is common in large public offerings, such as IPOs and secondary offerings.
Interpreting the Co-Manager Role
The presence and number of co-managers in a securities offering can provide insights into several aspects of the transaction. A larger number of co-managers often indicates a broad distribution strategy, aiming to reach a diverse investor base across various regions or investor types. Their involvement also demonstrates the collective confidence of multiple financial institutions in the issuer and the offering. While the lead manager steers the overall process, co-managers contribute their own client networks and often provide additional research and distribution potential.12 Their position on the prospectus typically reflects their level of involvement, with lead managers listed prominently and co-managers appearing further down, often in order of their commitment or prestige.11
Hypothetical Example
Consider a technology startup, "InnovateTech," planning an initial public offering (IPO) to raise capital. Due to the anticipated size of the offering (say, $500 million), InnovateTech appoints "Global Capital Bank" as the lead manager because of its extensive experience in tech IPOs and its strong institutional investor network. To ensure wider distribution and share the risk, Global Capital Bank invites "Regional Equities Inc." and "Local Wealth Advisors" to act as co-managers.
In this scenario, Global Capital Bank undertakes the primary responsibilities, including conducting thorough due diligence, preparing the registration statement, and setting the pricing. Regional Equities Inc., as a co-manager, leverages its relationships with mid-sized institutional investors and provides additional analytical coverage for InnovateTech. Local Wealth Advisors, another co-manager, focuses on distributing a portion of the shares to its high-net-worth individual clients and regional mutual funds. Each co-manager is allocated a specific portion of the securities to sell, and they earn a percentage of the underwriting spread on the shares they place.
Practical Applications
Co-managers are primarily seen in public securities offerings, particularly:
- Initial Public Offerings (IPOs): When a private company goes public, an underwriting syndicate is formed, with co-managers assisting in the distribution of newly issued shares. For example, in a recent U.S. IPO, several major banks were named as lead joint bookrunning managers, implicitly alongside a larger group of co-managers.10
- Secondary Offerings: When an already public company issues new shares or existing shareholders sell large blocks of shares, co-managers help facilitate the sale to the market.
- Debt Offerings: In large corporate bond issuances, co-managers play a similar role in distributing the debt securities to institutional and retail investors.
- Syndicated Loans: Although slightly different, the concept of multiple lenders participating in a large loan facility, with some taking a more prominent role and others acting as co-managers, mirrors the structure of an underwriting syndicate in capital markets.
The involvement of co-managers enhances the market reach and efficiency of capital raising. They are bound by regulatory frameworks like Regulation M of the Securities and Exchange Commission (SEC), which aims to prevent market manipulation during offerings.9
Limitations and Criticisms
While co-managers play a vital role, their position also comes with certain limitations and potential criticisms. Co-managers typically have less influence on the overall pricing and allocation strategy compared to the lead manager. Their compensation, derived from the underwriting spread, is generally lower per share than that of the lead firm.
A historical area of concern in underwriting, which would involve co-managers, has been potential conflicts of interest, particularly concerning research analysts. Historically, investment banks might offer favorable analyst coverage in exchange for underwriting business, raising questions about the objectivity of such research.8 Regulations like Regulation M by the SEC were implemented to curb manipulative practices by all participants in a securities distribution, including co-managers.5, 6, 7 While co-managers contribute to the breadth of an offering, their smaller allocation means they may have less incentive to exert significant effort in areas like comprehensive due diligence compared to the lead bookrunner, though they are still legally responsible for their part of the offering.
Co-Manager vs. Lead Manager
The distinction between a co-manager and a lead manager (also known as a bookrunner or lead underwriter) is crucial in an underwriting syndicate. The lead manager is the primary firm responsible for orchestrating the entire securities offering. This includes advising the issuer, setting the offering price, structuring the deal, leading the due diligence process, preparing the prospectus and registration statement, and managing the overall marketing and sales efforts. The lead manager typically takes on the largest portion of the underwriting risk and receives the largest share of the underwriting fees.4
A co-manager, on the other hand, is one of several other investment banking firms that join the syndicate. Co-managers have less responsibility in the overall management of the offering. Their primary function is to assist in the distribution of the securities to their own client base, thereby expanding the reach of the offering.2, 3 While they participate in the selling group and share in the underwriting risk and fees, their role is supportive, and their allocation of shares is generally smaller than that of the lead manager. The lead manager ultimately makes the chief decisions regarding the offering's structure, allocation, timing, and pricing.1
FAQs
What is the primary role of a co-manager in an IPO?
In an IPO, the primary role of a co-manager is to help distribute and sell a portion of the newly issued securities to investors, expanding the overall reach of the offering beyond what the lead manager could achieve alone.
How do co-managers get compensated?
Co-managers are compensated through a portion of the "underwriting spread" or "underwriting discount." This is the difference between the price at which they purchase the securities from the issuer and the price at which they sell them to the public. Their share of the spread is typically smaller than that of the lead manager.
Are co-managers responsible for due diligence?
While the lead manager has the primary responsibility for comprehensive due diligence in a securities offering, co-managers also have a responsibility to conduct their own reasonable investigation into the issuer and the offering. This is part of their legal obligation as an underwriter to ensure accurate disclosure in the prospectus.
Can there be multiple co-managers?
Yes, it is common to have multiple co-managers in an underwriting syndicate, especially for large and complex offerings. The number of co-managers can vary depending on the size and nature of the offering and the desired breadth of distribution.