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.
A Little More on What is a 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.
References for Syndicate
Academic Research on Syndication
The syndication of venture capital investments, Lerner, J. (1994). Financial management, 16-27. This paper uses a sample of 271 private biotechnology firms to examine the rationales for syndication of venture capital investments. The rationales it investigates are – in the first round of investment, the experienced venture capitalists form a syndicate with other venture capitalists with a similar level of experience. In later rounds, however, they form a syndicate with their peers as well as with less experience venture investors. Established venture capitalists invest in later rounds usually when the firm is doing well. The ownership stake of the venture capitalists often remains constant in the later rounds of investment, insured by the syndication. The paper argues that the result supports the proposed explanations.
Syndication networks and the spatial distribution of venture capital investments, Sorenson, O., & Stuart, T. E. (2001). American journal of sociology, 106(6), 1546-1588. This article analyzes the impact of the interim networks in the U.S. venture capital market on the spatial patterns of exchange. It is observed in empirical evidence that information about the investment opportunities usually remains within the geographic and industry spaces and this leads to geographic and industry localization of venture capital investments. Empirical analyses suggest the industry’s extensive of syndicated investing develops social networks in the VC community and information circulates through these networks across boundaries. It is suggested that the venture capitalists who develop the axial positions in the syndicated network tend to invest more often in spatially distant companies. Thus, the positioning of the venture capitalist within the structure affects their ability to overcome boundaries.
Venture‐capital syndication: Improved venture selection vs. the value‐added hypothesis, Brander, J. A., Amit, R., & Antweiler, W. (2002). Journal of Economics & Management Strategy, 11(3), 423-452. This paper uses data from Canadian firms to examine two possible reasons for syndication: project selection, as to get a second informative opinion from additional venture capitalists and the other one is complementary management skills. The study attempts to find out whether venture capitalists are involved primarily in the selection or in managerial value added. The result shows syndicated investments earn a higher return, thus the value-added interpretation is validated. Risk sharing and project scale as the possible reasons for forming syndicate are also discussed in the paper.
Syndication–the emerging model for business in the Internet era., Werbach, K. (2000). Harvard business review, 78(3), 84-93. This paper discusses how the advent of the internet is changing the business scenario by making the model of syndication popular across the industries. It argues, the syndication was rare in the past due to some inherent characteristics of the industrial economy such as fixed physical asset and slow-moving information. However, with the advent of internet and information economy flexible business networks have become essential and thus syndication is moving from business’s periphery to its center.
The syndication of venture capital investments, Lockett, A., & Wright, M. (2001). Omega, 29(5), 375-390. This paper analyzes responses collected from 60 firms (response rate 58.8%) to examine different motivations of forming a syndicate. Competing for finance, resource-based and deal-flow, these three rationales were examined in the paper. The result suggests finance is an important motivation for syndication, but the resource-based explanation is more important for the firms that are involved in at least some early state investments. The implications for researchers are that the venture capitalist firms are not homogenous and the investment stages in which they are operating may strongly affect their attitude towards syndication.
Stabilization, syndication, and pricing of IPOs, Chowdhry, B., & Nanda, V. (1996). Journal of Financial and Quantitative Analysis, 31(1), 25-42. This paper provides a rationale for the after-market stabilization of IPOs by underwriting syndicates. It argues uninformed investors can be compensated ex-post by underwriters buying back shares at the offer price in the after-market trading.
The structure and management of alliances: syndication in the venture capital industry, Wright, M., & Lockett, A. (2003). Journal of Management Studies, 40(8), 2073-2102. This paper conducts two surveys of venture capitalist firms and examines syndication documents to analyze the structuring and management of syndicated venture capital investments from the perspectives of both lead and non-lead syndicate members. The findings show non-legal sanctions, especially reputation effects are important for mitigating opportunistic behavior by dominant equity holders. The paper also highlights the role of repeat syndicate and contribute to the limited research on the dynamics of alliances.
Experience, screening and syndication in venture capital investments, Casamatta, C., & Haritchabalet, C. (2007). Journal of Financial Intermediation, 16(3), 368-398. This paper attempts to develop a theoretical model on the rationale for the syndication of venture capital investment. The rationale offered by the model states, syndication improve the screening process of venture capitalists and helps to avoid competition among the venture capitalist firms once the investment opportunities are announced. The cost of syndication in terms of investment decision or post-investment involvement is analyzed. The experience level of the venture capitalists significantly affects these costs. Empirical predictions are made regarding the determinants of syndication and the characteristics of syndicated deals.
Loan syndication and credit cycles, Ivashina, V., & Scharfstein, D. (2010). American Economic Review, 100(2), 57-61. This paper examines cyclicality in the supply of credit in the context of modern forms of banking. This is often referred to as the “originate-to-distribute” model. The paper particularly focuses on the role of syndicated loan offering.
The syndication of private equity: evidence from the UK, Lockett, A., & Wright, M. (1999). Venture Capital: an international journal of entrepreneurial finance, 1(4), 303-324. This paper examines the different rationale of syndication for venture capitalist firms, the determinants of partner selection and the relationship between competition and syndication in the market. The paper uses data from the surveys conducted in the UK and concludes that risk sharing explanation of syndication is more important than the resource sharing. The data shows that the resource-based perspective was even less important for the firms who invested sums of 5 million or greater. The results suggest while selecting a partner for syndication, firms mostly rely on past interaction, reputation and investment style. The result further shows that competition in the VC market affects the firm’s decision negatively to syndicate out a deal, however, this impact is significantly low for the decision to syndicate into a deal.
The role of venture capital syndication in value creation for entrepreneurial firms. Tian, X. (2011). Review of Finance, 16(1), 245-283. This paper analyzes the role of venture capital syndication in value creation for entrepreneurial firm. It shows, venture capitalist syndication creates product market value as well as financial market value for their portfolio firms. The younger firms receive significant investment from the VC syndicates in early financing rounds. It also nurtures innovation of the portfolio firms and helps them achieve better post IPO operating performance. It also shows that the firm supported by VC syndicate are more likely to have a successful exit, enjoy a lower IPO underpricing and receive a higher market valuation during IPO.
Syndication, interconnectedness, and systemic risk, Cai, J., Eidam, F., Saunders, A., & Steffen, S. (2018). Journal of Financial Stability, 34, 105-120. This paper develops a novel measure of bank interconnectedness. It uses syndicated corporate loan portfolios, overlaps on the basis of industry and region, and different weights. The paper shows that the bank diversification is the main reason for interconnectedness, whereas bank size or overall loan market size has a lesser impact. It further shows that there is a positive relationship between the interconnectedness and different bank-level systemic risk-measures including SRISK, DIP, and CoVar.