A syndicate is a temporary alliance of businesses that joins together to manage a large transaction, which would be difficult or impossible to effect individually. Syndication enables companies to pool their resources and share risks effectively. This form of collaboration is often seen when a group of investment banks works together to bring a new issue of securities to the market. Multiple types of syndicates exist, including underwriting syndicates, banking syndicates, and insurance syndicates.
Embracing Syndicates for Effective Market Participation
Types of Syndicates
Syndicates typically comprise companies within the same industry. For instance, two pharmaceutical firms may combine their research and development teams to form a syndicate aimed at producing a new drug. Similarly, several real estate companies may collaborate to manage a large development. Financial institutions might form a syndicate to lend a substantial amount of money to a single borrower. Additionally, companies may form syndicates to oversee specific business ventures promising attractive rates of return.
Some projects require diverse expertise that no single company can provide alone. Common examples include large construction projects such as building a stadium, highway, bridge, or railroad. Under these circumstances, companies form syndicates to ensure that each organization can bring its specific skill set to the project. For tax purposes, syndicates might be considered partnerships or corporations.
Managing Risk Effectively
The level of risk assumed by individual syndicate members can vary. For example, in an undivided account of an underwriting syndicate, each member is responsible for selling an allotted number of shares as well as any surplus shares not sold by the syndicate as a whole. Hence, a syndicate member could end up needing to sell significantly more stock than initially allotted. However, different types of syndicates might restrict the amount of risk each member faces.
Underwriting Syndicates: Paving the Way for Successful Market Entries
During an initial public offering (IPO), several investment banks and broker-dealers form a syndicate to facilitate the sale of new stock or debt securities to investors. This underwriting group shares the risk and aids in the efficient distribution of the new securities issue. The lead underwriter orchestrates and manages the underwriting syndicate and is compensated through the underwriting spread— the difference between the price paid to the issuer and the price received from investors and other broker-dealers. An underwriting syndicate typically dissolves 30 days after the sale if the securities cannot be sold at the offering price. However, some syndicates are not temporary but continue to function jointly over a longer period.
Key Takeaways
- A syndicate is a temporary alliance formed by professionals to handle large transactions that would be impossible to execute individually.
- By forming a syndicate, members can pool their resources together and share in both the risks and potential for attractive returns.
- Generally, businesses within the same industry form syndicates.
Syndicates in the Insurance Industry: Distributing Risk Equitably
Syndicates frequently play a vital role in the insurance industry to disperse insurance risk across multiple firms. Insurance underwriters evaluate the risk of insuring a specific person or asset to price an insurance policy accordingly. For example, a corporate health insurance underwriter might evaluate the potential health risks among a company’s employees. An actuary then uses statistical methods to assess the likelihood of illness within the workforce. If a single insurance firm determines that the potential risk of providing health coverage is too significant, it might form a syndicate to distribute this risk amongst several firms effectively.
Related Terms: underwriting, joint ventures, investment syndicate, loan syndication, corporate partnership.
References
- Corporate Finance Institute. “Syndicate”.
