When a company seeks to raise capital through an IPO, it is required to engage many participants in the process. However, there is always a risk of under-subscription of the IPO. To counter this risk, companies may go for a bought out deal.
The term ‘bought out deal’ refers to the process in which a company appoints a single or a group of entities who may be the underwriters or the sponsors of the IPO. They purchase the entire IPO issue and it is their responsibility to then find investors for the same. The purchasing entity in the bought out deal can be an individual or any financial institution.
Why is ‘bought out deal’ important
In a Bought Out Deal, the benefit for the company is that it can avoid the risk of under-subscription and the purchasing entity can get a discount on purchasing shares in bulk. They may be able to make profits by selling such securities to investors who are willing to buy them at a higher price.
