Gross Spread is the compensation an underwriting syndicate receives for selling a new issue of securities. Think of it as the commission an Investment Bank earns for taking a company public or helping it issue new stocks or bonds. When a company decides to raise capital through an Initial Public Offering (IPO) or a Secondary Offering, it hires underwriters to manage the sale. These underwriters don't work for free. They buy the securities from the company at a discount to the public offering price and then sell them to investors at the full price. The difference, or “spread,” is their gross profit for the services rendered and the risks undertaken. For instance, if an underwriter buys shares from XYZ Corp. at $18.60 and sells them to the public at $20.00, the Gross Spread is $1.40 per share. On a large offering, this can add up to millions of dollars.
The Gross Spread isn't a single fee paid to one entity. Instead, it's a pie carefully sliced into three distinct pieces, each rewarding a different function performed by the underwriting Syndicate—the group of investment banks working together on the deal.
This is the slice that goes to the lead underwriter(s), also known as the bookrunners. Think of them as the architects and general contractors of the offering. They earn this fee for structuring the deal, preparing the prospectus, conducting due diligence, and coordinating the entire syndicate. This is typically the smallest portion of the spread, often accounting for about 20% of the total.
This portion is pure risk compensation. In a common “firm commitment” underwriting, the syndicate guarantees the company its capital by agreeing to buy all the shares being offered. If they can't find enough public buyers, they are stuck holding the unsold shares. The underwriting fee, typically around 20% of the spread, is their pay for taking on this significant financial risk.
This is the lion's share of the pie, often making up the remaining 60%. The selling concession is a direct commission paid to the brokerage firms and their salespeople within the syndicate who actually find investors and place the securities. It's the primary incentive for the sales force to hit the phones and generate demand, ensuring the offering is a success.
While it may seem like Wall Street inside baseball, the Gross Spread is a crucial number that every thoughtful investor should scrutinize. It provides valuable insights into a company's health, its management's competence, and the overall deal quality.