What does “book building” refer to in an ECM context?

In the context of Equity Capital Markets, "book building" specifically refers to the process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO). This is a critical step in the IPO process that allows underwriters to gauge interest from potential investors, determining how many shares they are willing to buy at varying price levels.

During book building, underwriters collect indications of interest from institutional and retail investors, which helps in setting the final offering price and the allocation of shares. This process not only assists in understanding overall market appetite but also ensures that the offering is priced appropriately to balance supply and demand.

By effectively capturing investor demand, book building enhances the likelihood of a successful IPO by aligning the interests of the issuing company with those of potential investors, ultimately contributing to a well-received market debut. This nuanced understanding of investor sentiment can profoundly impact the financial success of the offering.