Anchor Investor

What is an anchor investor?

Anchor investor refers to the investor who, in a financing round, a fund or an IPO, is the first to commit a significant amount firmly. In doing so, the anchor investor creates the basis on which further investors take part. The commitment reduces, for the other investors, the uncertainty as to whether the round, the fund or the issue will come about at all. The role resembles that of a large supermarket that signs as the first tenant of a new shopping centre: further tenants are then easier to find.

Anchor investor describes a role, not a type of investor: a fund, a family office or a corporation can take it on. The term is used in three contexts. In a company's financing round, the anchor investor is often also the lead investor, that is, the investor who leads the round. The anchor investor presents the term sheet, negotiates valuation and terms and takes the largest single amount.

When a fund for venture capital or private equity is launched, the anchor investor is the first larger investor. In an IPO, the anchor investor commits before the start of the offering to take a fixed portion of the shares; in the German market this role is usually called a cornerstone investor. Its terms are set out in the term sheet and the investment agreement and, for funds, in the subscription agreement and a side letter.

Anchor investor in the financing round

Investors decide more easily when another investor has already examined the valuation and the business model and is committing a substantial amount. The anchor investor's commitment therefore acts as validation towards further investors, towards existing shareholders and often also towards customers and candidates. With it, the other investors' question shifts from taking part in the round to the size of their participation.

Anchor and lead investor

Usually the two roles coincide. It is also possible, however, for an investor to commit a large amount without negotiating valuation and terms. This may be, for example, a strategic investor or a family office that relies on the price set by a lead investor yet to be found. Such a commitment shortens the search for further funds but does not replace the investor who sets the terms.

Binding and non-binding commitments

What matters for the effect is how firm the commitment is. A non-binding expression of interest (soft commitment) shows interest but commits to nothing. In practice, a signed term sheet that has been preceded by approval from the investor's decision-making body counts as a firm commitment. Even this term sheet is usually still non-binding in its core economic points. The commitment becomes legally binding only with the investment agreement and the declaration of subscription for the new shares. Anyone who promotes an anchor investor to third parties before its bodies have decided risks their credibility if the commitment does not materialise.

Rights and terms of the anchor investor

Because the anchor investor bears the risk of the first step, it often demands rights that go beyond those of the other investors:

• Advisory board seat: a voting seat on the advisory board, often combined with consent requirements for material decisions.
• Minimum round size: its commitment is conditional on a certain total amount being raised, so that the company is financed to the next milestone.
• Say over further investors: a consent or consultation right in the selection of co-investors, for example to exclude competitors.
• Information rights: regular reports and direct access to the management (information rights).
• Allocation: a fixed share of the round that is not reduced even if the round is oversubscribed.

In an equity round, all investors in the same share class in principle pay the same price per share, and a price discount for the anchor investor is rare there. Some rounds are implemented in several closings, that is, in steps in which shares are issued and contributions paid each time. The first closing then often takes place with the anchor investor; further investors join within a set period on the same terms. Price deviations are more likely with convertible loans or with staggered closings on rising terms.

Anchor investor in funds

When a fund is launched, the anchor investor is the first large investor. Its commitment makes it possible to start the fund with a first closing and to make investments before the target size is reached. For first funds of new teams, an anchor investor is often a prerequisite for further investors to enter due diligence at all.

In return, the anchor investor often receives a reduced management fee, rights to co-invest in individual investments, a seat on the advisory committee of investors and occasionally a share in the earnings of the management company. An example: with a commitment of EUR 30 million, its management fee falls from 2% to 1.5%. Over a five-year investment period, it thus saves EUR 30 million × 0.5% × 5 = EUR 750,000. In Germany, public development institutions and funds of funds often take on this role, in part combined with requirements on the investment focus.

Anchor investor in an IPO

In an IPO, anchor investors commit before the start of the subscription period to take shares in a fixed amount at the offer price. They are usually large institutional investors such as fund companies, insurers or sovereign wealth funds. Their commitment secures part of the issue and makes the decision easier for the other investors. The securities prospectus generally discloses such commitments.

Anchor investors often undertake to a holding period (lock-up) during which they may not sell the allocated shares. In Germany, allocation and holding period result from the agreement with the issuer and the banks. In some markets, for example India, the securities regulator expressly regulates allocation (anchor allocation) and the minimum holding period (lock-in period).

Worked example: anchor commitment with a minimum size in a Series A

A software company plans a Series A of EUR 8 million at a pre-round valuation of EUR 24 million. A venture capital fund, as anchor investor, commits EUR 4 million, on the condition that at least EUR 6 million is raised in total.

• Valuation after the round at full size: EUR 24 million + EUR 8 million = EUR 32 million
• The anchor investor's share: EUR 4 million divided by EUR 32 million = 12.5%
• Amount still open after the anchor commitment: EUR 8 million minus EUR 4 million = EUR 4 million, of which existing investors take EUR 1.5 million and new co-investors EUR 2.5 million
• If only the minimum size is reached: valuation after the round EUR 24 million + EUR 6 million = EUR 30 million, anchor investor's share EUR 4 million divided by EUR 30 million = around 13.3%
• Below EUR 6 million the commitment lapses, and the round must be set up again

The condition protects the anchor investor from financing a company whose funds do not last to the next milestone. For the company, the search for the remaining EUR 2 million up to the minimum size determines the timetable of the round.

Distinction: anchor investor, lead investor and cornerstone investor

• Lead investor: negotiates the valuation and terms of the round. It is usually, but not necessarily, also the anchor investor.
• Co-investor: participates on the negotiated terms without carrying the round.
• Cornerstone investor: the usual term in a German IPO for the anchor investor of an issue. Unlike the anchor of a financing round, it does not negotiate terms but takes shares at the offer price.
• Follow-on investment: the participation of an existing shareholder in a new round. An existing investor can be the anchor investor of a follow-on round, for example in an internal round without a new lead.

Common mistakes

• Promoting non-binding interest. If an investor is named as the anchor before its decision-making body has approved and it then withdraws, this weighs on the entire round.
• Commitment with a circular condition. If the supposed anchor investor makes its commitment conditional on another investor committing first, no anchor exists.
• Minimum size too high. A minimum amount close to the target size leaves little room and endangers the round if individual co-investors drop out.
• Excessive special rights. Far-reaching veto rights or allocation guarantees of the anchor investor can deter other investors and make later rounds harder.
• No alternative in discussion. Anyone who is not holding further talks in parallel is left without a fallback if the anchor investor withdraws in due diligence.
• Reputation not checked. The standing of the anchor investor transfers to the round. Former founders and co-investors can provide information on it.

Frequently asked questions

Is the anchor investor always the lead investor?

Usually, but not always. The anchor investor is the first with a significant commitment, while the lead investor negotiates the terms. If one investor takes on both roles, it carries the round both economically and substantively.

Can a round have two anchor investors?

Yes. Two investors can jointly lead the round and share the amount. It must then be agreed in advance who negotiates the term sheet and how advisory board seats and consent rights are allocated.

Does an anchor investor get a better price?

In an equity round, as a rule not, because shares of the same class are issued at the same price. Its advantage lies rather in rights, allocation and say.

What happens if the anchor investor withdraws?

The round loses its basis and often has to be set up again, because the other investors had relied on its review. Talks held in parallel with other possible anchor investors shorten the restart.

Who qualifies as an anchor investor?

Above all investors who regularly lead rounds of this size and have experience in the company's industry. In institutional rounds these are usually venture capital and growth funds, occasionally family offices or strategic investors.

The Roemer Capital view

In Roemer Capital's processes for Series A to C, the first firm commitment is the turning point of a round that generally takes six to eight months in total. Roemer Capital therefore approaches first the investors that actually lead rounds of this size, and only afterwards co-investors who orient themselves on a negotiated price.

Roemer Capital names a name to other investors only once the investment decision has been made. Terms such as a minimum size are recalculated with the financial model. According to the plan, the minimum amount must carry the company to the next milestone; otherwise the condition protects neither the investor nor the company.