What Is a Syndicate?
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 makes it easy for companies to pool their resources and share risks, as when a group of investment banks works together to bring a new issue of securities to the market. There are different types of syndicates, such as underwriting syndicates, banking syndicates, and insurance syndicates.
Types of Syndicates
Syndicates are usually comprised of companies in the same industry. For example, two pharmaceutical companies may combine their research and development (R&D) teams by creating a syndicate to develop a new drug. Or, several real estate companies may form a syndicate to manage a large development. Sometimes banks will form a syndicate to loan a very large amount of money to a single party. Companies also may form a syndicate to manage a specific business venture if the opportunity promises an attractive rate of return (RoR).
Some projects are so large that no single company can have all of the expertise needed to do the job efficiently. This is often the case with large construction projects such as building a stadium, highway, bridge, or railroad. In these situations, companies may form a syndicate so that each firm may apply their specific expertise to the project. For tax purposes, syndicates are generally considered as partnerships or corporations.
In financial services, the underwriting syndicate plays a critically important role in bringing new securities to the market.
The amount of risk assumed by each syndicate member can vary. For instance, in an undivided account of an underwriting syndicate, each member is responsible for selling an allotted amount of stock along with any excess shares not sold by the syndicate as a whole. In this way, an individual syndicate member may need to sell far more securities than they are allotted; other types of syndicates, however, may limit the degree of risk for each member.
In an initial public offering (IPO), a number of investment banks and broker-dealers form a syndicate to sell new offerings of stock or debt securities to investors. The underwriting group shares the risk and aids in the successful distribution of the new securities issue.
The lead underwriter for the new issue initiates and manages the underwriting syndicate. The syndicate is compensated by the underwriting spread—which is the difference between the price paid to the issuer and the price received from investors and other broker-dealers. An underwriting syndicate usually breaks up 30 days after the sale is complete, or if the securities cannot be sold at the offering price. There are other types of syndicates, however, that function jointly, but which are not temporary.
- A syndicate is a temporary alliance formed by professionals to handle a large transaction that would be impossible to execute individually.
- By forming a syndicate, members can pool their resources together, and share in both the risks and the potential for attractive returns.
- In general, businesses in the same industry join to form syndicates.
Syndicates and Insurance Risk
Syndicates are often used in the insurance industry to spread insurance risk among several firms. Insurance underwriters evaluate the risk of insuring a specific person or a particular asset and use that evaluation to price an insurance policy.
For example, an underwriter in the corporate health insurance field may evaluate the potential health risks of a company's employees. The underwriter’s actuary would then use 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.