What is the purpose of the book building process?

The book building process plays a critical role in the initial public offering (IPO) process, specifically in evaluating investor interest. During this process, underwriters solicit indications of interest from potential investors regarding the number of shares they would like to purchase and the price they are willing to pay. This gathering of interest and pricing information allows the underwriters to assess demand for the shares being offered.

By analyzing the responses from investors, the underwriters can make informed decisions regarding the final offering price and allocation of shares. Essentially, the book building process helps to create a market-driven price that reflects genuine demand, making it a vital step in ensuring that the IPO is successfully priced and raised sufficient capital for the company.

While finalizing the share price, estimating the value of the IPO, and distributing shares are all components of the IPO process, they do not capture the core purpose of book building, which is fundamentally about gauging investor enthusiasm and appetite for the offering. Understanding this helps to clarify why the emphasis is on evaluating investor interest as the main purpose of book building.