DEFINITION of Distributing Syndicate

Distributing syndicate is a group of investment banks that work together to sell an initial public offering (IPO) of stock or other securities to the market. Investment banks often form syndicates when working on large securities offerings to reduce risk and to increase the speed and efficiency of selling the securities to investors. This is especially true in the case of firm commitment offerings, where the primary underwriter may expose itself to inventory risk if the full offering cannot be sold by its own group of salespersons. The underwriter will form a syndicate to market the new securities and pay these other banks that distribute them.

BREAKING DOWN Distributing Syndicate

When a large offering is involved, heavyweight investment banks that act as lead underwriters like JP Morgan Chase, Bank of America Merrill Lynch and Goldman Sachs typically choose to form syndicates to serve their clients. Distributing syndicates are of particular importance to smaller investment banks. These "boutique" banks would be unable to underwrite many IPOs because they lack the capacity to sell large offerings alone. Further, a boutique bank would only be able to work on one or two offerings at a time. Banding together as part of a syndicate allows boutique banks to work on several offerings simultaneously, take on larger offerings and more effectively compete with large investment banks.

Distributing Syndicate Process

When a company begins working with a lead underwriter to prepare securities for the market, whether stocks, bonds or other types of securities, the underwriter considers how many other investment banks would be needed to market and distribute the securities in the intended timeframe. The underwriter then selects the other banks it believes is best capable of smooth distribution. These banks then contact their clients to obtain "indications of interest" in the new offering. The ballpark figures are communicated and updated to the underwriter leading up the issuance date. With these numbers in mind, the underwriter then allocates portions of the entire securities offering to the distributing syndicate at or around the issuance date.