Bought Deal Offering

A bought deal offering is an equity or debt capital raise in which an investment bank (or syndicate) commits irrevocably to purchase the entire offering at a fixed price before the securities are marketed to investors. The bank absorbs all pricing risk and market risk; if demand disappoints, the bank holds unwanted inventory. In exchange, the issuer gets certainty of proceeds and a faster deal timeline.

The structure: commitment without condition

In a bought deal, the underwriter and issuer agree on:

• The exact number of shares (or dollar amount of debt) to be offered.
• The price per share (or yield on debt).
• The date the underwriter will take ownership of the securities.

At that moment, title passes. The bank now owns all the securities and must distribute them to investors at the agreed-upon price or better. The issuer receives its cash (net of underwriter spread) immediately, with no further exposure to market risk.

This contrasts sharply with a best-efforts offering, in which the underwriter agrees to use reasonable effort to sell the securities but does not commit to purchase unsold inventory. In a best-efforts deal, if demand is weak, the bank can scale back or return unsold shares to the issuer; the issuer bears the risk.

Why the bank takes on the risk

The investment bank enters a bought deal because it has:

1. Pricing confidence. The bank believes it can distribute the shares at or above the agreed price. This comes from investor feedback, market conditions, and the strength of the issuer.

2. Distribution firepower. A large bank with thousands of institutional and retail clients can place a substantial block of shares. A mid-cap public company offering 10 million shares might be easy; a micro-cap with 50 million shares might be daunting.

3. Balance sheet capacity. The bank must hold the inventory briefly (typically days to weeks) until sold. This ties up capital and creates mark-to-market risk. Larger banks with more capital and lower funding costs can absorb this more easily.

4. Fee upside. The underwriter spread provides compensation for the risk. If the bank can flip the shares quickly for a higher price, it earns the spread plus any markdown (the difference between the buy price and the selling price). If it struggles to place shares and the price falls, the spread may not cover the loss.

Timeline and market advantage

A bought deal typically closes in 1–2 weeks—far faster than a registered direct offering or a best-efforts deal. This speed has strategic value. A company raising capital in a window of market strength can lock in today’s price and avoid waiting for registration or investor feedback. An issuer doing a bought deal after strong earnings can capture momentum before sentiment shifts.

For the issuer and its shareholders, this certainty is worth paying for. The underwriter spread compensates the bank for its speed and capital deployment. In essence, the issuer is buying the bank’s ability to absorb market risk over the next 1–2 weeks.

Conversely, if the market deteriorates sharply during the distribution window—a 5% drop in the broader stock market, for instance—the bank may take a loss. It cannot reprice or cancel the deal (that was the issuer’s protection). This risk incentivizes the bank to negotiate aggressively during bookbuilding and to have high conviction before committing.

Who uses bought deals

Mature public companies with stable fundamentals and strong investor demand are the typical users. A large-cap technology company raising $500 million in secondary equity can attract enough institutional demand that a bought deal makes sense. A mid-cap industrial company with moderate float might also use a bought deal, especially if it has an urgent capital need.

Spin-offs of public companies often use bought deals because they inherit the parent’s market stature and investor relationships. The market knows the business (it was a division of a known company), so pricing and distribution risk are lower.

Debt issuers—companies raising bonds—use bought deals extensively. A corporate bond from a investment-grade issuer is easy to distribute because institutional investors have standardized credit assessment and bond portfolios. The bank can easily lay off the bonds into a vast institutional base.

Conversely, speculative or illiquid securities are rarely bought deals. A micro-cap or penny-stock IPO, or a private company’s first equity raise, will almost never find a bank willing to commit upfront. These use best-efforts structures instead.

Pricing and negotiation

The price in a bought deal is negotiated between the issuer and the lead underwriter. The bank conducts preliminary investor feedback (sometimes called “sounding out”) to gauge interest and price elasticity. From this, the bank proposes a price that it believes will allow full distribution with modest upside.

The issuer wants a high price to minimize dilution. The bank wants a price it’s confident it can sell at or above. Negotiations hinge on who has leverage:

• A hot IPO or a company in red-hot sector (e.g., AI, biotech in bull markets) gives the issuer leverage to push for a higher price.
• A cyclical downturn or company-specific concern gives the bank leverage to demand a lower price as insurance against inventory risk.
• A competitor to the deal (another bank offering to lead) introduces competition and tightens spreads.

For a secondary offering by an existing public company, the price is often set at a modest discount to the current market price—say, 2–5%. This discount incentivizes institutional investors to participate and gives the bank confidence in placement.

Risk mitigation: syndication and the greenshoe

To reduce its inventory risk, the lead underwriter syndicates the deal—bringing in other banks and brokers who take portions of the offering. Each syndicate member is liable for its allocated shares; if the lead bank commits to 10 million shares but only takes 3 million itself, it spreads the other 7 million among 10 other banks.

A second risk hedge is the greenshoe (or over-allotment option). The bank receives a contractual right to buy up to 15% additional shares from the issuer at the same price. If the deal is oversubscribed and the stock rises, the bank exercises the greenshoe, buying extra shares and selling them at the higher market price—locking in a profit that offsets any loss on the original allocation.

If the stock falls below the offer price, the bank does not exercise the greenshoe, and the issuer simply issues that 15% to the market separately.

Bought deal vs. alternatives

Best-efforts offering: The bank does not commit. It tries to raise capital but can scale back or walk away. Used for speculative issuers or in weak markets. Slower and riskier for the issuer, cheaper for the underwriter.

Accelerated bookbuild (for secondary offerings): The bank conducts a very fast (typically 1–2 days) institutional placement without a retail component. The price is set after the book closes. Less risky than a full bought deal because demand is confirmed before pricing; used for mature issuers raising smaller amounts or opportunistically capturing market windows.

Negotiated underwriting (traditional IPO): The bank is the underwriter but does not commit upfront. Instead, it builds the book, prices the deal based on demand, and then allocates shares. Slower than a bought deal; used for IPOs because pricing is harder to predict.

The bought deal puts the bank’s capital and reputation on the line; it’s why the structure is used only for securities the bank is confident it can place quickly.

See also