Backstop Purchaser
This is not a baseball team that signs up all the catchers they can find. Rather, a back-stop purchaser buys the leftover shares from the underwriter of an equity or rights offering. In that way, a back-stop purchaser is like an insurance policy. The purchaser guarantees that a company (and/or its investment bank) will raise the cash it needs to raise.
Example: Company A is going public. It plans to issue 10 million shares in an initial public offering (IPO). Bank B agrees to underwrite the IPO. Bank B does its research, or due diligence. Feeling good about the deal, Bank B agrees to sell the 10 million shares for $25 per share.
Bank B also comes to a special agreement with a wealthy hedge fund guy, Mr Hedge. Mr Hedge agrees to be Bank B's back-stop purchaser. If Bank ABC can't sell all the shares in the IPO, Mr. Hedge agrees to buy those leftovers. Being no dummy, Mr. Hedge obtains a fee for agreeing to be the back stop. He is taking on the risk of having to purchase and then trying to reissue Company A's securities.
Related or Semi-related Video
Finance: What is an Underwriter?82 Views
finance a la shmoop what is an underwriter Undertaker underwriter
taking your company public well then you need one of these guys and yeah if [Woman writing at a desk]
things go poorly well then you may need one of these guys but if things go well [Gravestone]
an underwriter will get to know your company audit your financials give their
Good Housekeeping Seal of Approval to the investment community with whom they
deal regularly and introduce you as part of their family selling a piece of your
company to that world you know hedge funds mutual funds private wealthy [List of benefits that come with an underwriter]
investors such that they are the you know financial wind beneath your wings [Skyscraper flying away]
for a brief moment in time the underwriter usually an investment bank
like the vaunted Goldman Sachs or Morgan Stanley or JP Morgan or UBS or Sumitomo
will actually themselves own whatever piece of your company you are bringing [Logos for the banks appearing]
public like if you're selling 18 million shares at 20 bucks the bank's our
underwriters take a new public will own all 18 million shares having paid you
$19.60 for them and then turning around five minutes later and selling them for
20 bucks to John Q invest or making 40 cents a share in spread or markup or in [Spread calculation shown]
this case 40 times 18 million or 7.2 million dollars just for the pleasure so
that's an underwriter and if they screw up well yeah and ironically the [Underwriter stamp]
announcement he'll see in the digital paper is usually in the shape of a
tombstone announcing everything why a tombstone well because it represents the
death of ambiguity or confusion in that company's former life as a private one [Gravestone for ambiguity]
The Undertaker's hopefully have far far away [The Undertaker running away with the word confusion]
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