What is a 'Syndicate'
A syndicate is a temporary professional financial services group formed for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks. There are several different types of syndicates, including underwriting syndicates, banking syndicates and insurance syndicates.
BREAKING DOWN 'Syndicate'
An example of an underwriting syndicate is a group of investment banks that work together to issue new stock to the public. The bank that takes the lead in this endeavor is called the syndicate manager. Thirty days after the sale is complete, or if the securities cannot be sold at the offering price, the syndicate breaks up. Some other types of syndicates represent a joint effort, but are not temporary.
When a syndicate is set up, the amount of risk taken on by each syndicate member can vary, along with the potential earnings available to that member. In an investment banking syndicate, for example, an undivided account means that each underwriter in the syndicate is responsible for selling its allotted amount of stock and any excess shares not sold by the syndicate as a whole. An individual member may have to sell far more securities than it was allotted. Other syndicates limit the amount of risk for each member.
Examples of Syndicates
Companies may form a syndicate for a specific business venture that carries a high level of risk but also an attractive potential rate of return. In many cases, these businesses operate in the same industry and form a separate entity to apply their expertise to a product or service. Two drug companies, for example, may combine research and marketing knowledge to create a syndicate and develop a new drug. A large real estate project may be developed using a syndicate formed by several real estate companies.
Factoring in Insurance Risk
Syndicates are often used in the insurance industry to spread insurance risk between several different firms. Insurance underwriters evaluate the risk of insuring a specific person or a particular asset and use that evaluation to price an insurance policy.
In the corporate health insurance field, an underwriter may evaluate the potential health risks for each of the firm’s employees. The underwriter’s actuary uses statistics to assess the risk of illness for each employee in the company’s workforce. If the potential risk of providing health insurance is too great for a single insurance firm, that company may form a syndicate to share the insurance risk.
How Companies Combine Available Expertise
Some projects are so large that no single company has all of the expertise needed to efficiently complete the project. This is often the case with large construction projects, such as a stadium, highway or railroad project. Companies form a syndicate so that each firm can apply a specific area of expertise to the project. In addition, subcontractors are assigned specific components of the project, such as lighting or concrete work. Each subcontractor obtains financing for its portion of the contract.