Syndicate - Explained
What is a Syndicate?
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Table of ContentsWhat is a Syndicate?What are some types of Syndicate?Business Syndicate Finance Syndicate Insurance Syndicate Purpose of forming a syndicate Academic Research on Syndication
What is a Syndicate?
A syndicate is a temporary self-organizing group of two or more individuals, companies, corporations or entities formed to handle a large transaction and to promote a shared interest. These large transactions are difficult to be handled by a single entity, thus they form a syndicate to pool their resources and share risks.
Syndicates are generally considered to be corporations or partnership for tax purpose. Syndicates can be formed in different sectors including business, finance, insurance, media, and even crime.
Back To: BUSINESS TRANSACTIONS, ANTITRUST, & SECURITIES LAW
What are some types of Syndicate?
Two or more companies may form a syndicate to handle a specific project. They share their resources and expertise and also share the potential risk associated with the project. Usually, companies working in the same sector form a syndicate to operate jointly for a venture that is risky as well as profitable. Syndicates are often formed by the companies who share a common interest in the market but are not direct competitors. Large companies form syndicates to strengthen their market position. Syndicate is very common in the real estate industry where several real estate companies come together to form a syndicate for developing a large real estate project. Internet companies also tend to form business syndicates often with direct competitors. A syndicate can be formed nationally and internationally.
Banks often come together to lend a large amount of money for a specific purpose and to a single debtor. This is known as syndicated loan. These loans are underwritten by a bank syndicate. This kind of syndication is common in the US where corporates own the finance sector. The investment banks form a syndicate to issue new stocks in public. These stocks are issued jointly by the syndicate and the bank that leads the endeavor is known as the syndicate manager. The syndicate dismantles after 30 days of the completion of the sale or if the stocks cannot be sold at the offering price. There are other types of the syndicate which are not temporary. Venture Capitalist firms form syndicates to co-invest in an investee firm and share a joint pay-off. Syndication is an important part of the venture capitalist community.
Forming syndicate is a common practice in the insurance sector to share insurance risk among several firms. Insurance companies evaluate the risk of insuring a person or asset to determine the price of the policy. Suppose a company wants to insure its large asset. The underwriter would then evaluate the potential risk of insuring the asset and determine the price. If the risk is too high for a single insurance firm to handle, that company may form a syndicate to share the risk and profit of the insurance policy.
Purpose of forming a syndicate
Syndicates are mainly formed to serve two purposes; to share the risk and to pool the resources and expertise. Often a particular project comes with a high level of risk attached to it, but at the same time, the potential of profitability of the project is high. In such a situation different companies for a syndicate to share the risk. Some of the projects demand so many types of expertise that a single entity cannot fulfill on its own. On such occasions, different companies may pool the expertise by forming a syndicate to complete the project successfully. Each company contribute to a specific area of expertise and work together. Large construction projects like railroad, bridges or highway demand diverse form expertise and companies may form a syndicate to work on these projects. Some projects need a huge amount of capital to be invested and it is impossible for a single entity to invest such a large amount. Then several companies form a syndicate to invest jointly in the venture and earn a profit. In a syndicate, the amount of risk taken by each member is not necessarily to be the same. It may vary along with the potential earning available to that member.
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