Selling concession
Capital MarketsThe part of an underwriting spread paid on shares each bank actually places, and conventionally the largest of its three components.
Also written: concession, underwriting spread split
A gross spread on an equity offering divides three ways. A management fee goes to the banks that ran the transaction, paying for origination and process rather than for risk. An underwriting fee compensates the syndicate for the book risk it takes under a firm commitment. And the selling concession is paid on the shares each bank actually places, rewarding distribution, which is conventionally the largest of the three because distribution is what the issuer is really buying.
The split is set deal by deal rather than by rule, and issuers increasingly hold back a discretionary slice to allocate after the event on the basis of contribution, which is a direct response to the complaint that a fixed pool paid banks that did little.
The arithmetic is where marks are lost. Each component is a percentage of the spread, not of the gross proceeds, and net proceeds to the issuer are gross proceeds less the whole spread.
One warning about the words: the management fee here is a slice of an underwriting spread paid to banks. It has nothing to do with the management fee a private equity firm charges its investors on committed capital, or with a monitoring fee a sponsor charges a company it owns.
Worked example
An offering raises €400M at a 6.5% gross spread, so the syndicate takes €26.0M and the issuer nets €374.0M.
A component set at 20% of the spread is €5.2M, not 20% of €400M. The two errors that produce almost every wrong answer are applying the component percentage to the proceeds, and quoting net proceeds without deducting the spread.