What Is an Underwriter Syndicate?
An underwriter syndicate is a temporary group of investment banks and broker-dealers who come together to sell new offerings of equity or debt securities to investors. The underwriter syndicate is formed and led by the lead underwriter for a security issue. An underwriter syndicate is usually formed when an issue is too large for a single firm to handle. 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 underwriter syndicate is also referred to as an underwriting group, banking syndicate, and investment banking syndicate.
Understanding Underwriter Syndicates
Depending on the make-up of the offering, members of an underwriter syndicate are required to buy the shares from the company to sell to investors. An underwriting syndicate mitigates risk, especially for the lead underwriter, by spreading the risk out among all the participants in the syndicate.
How Underwriter Syndicates Work
Since the underwriting syndicate has committed to selling the full issue, if demand for it is not as robust as anticipated, syndicate participants may have to hold part of the issue in their inventory, which exposes them to the risk of a price decline. In exchange for taking the lead role, the lead underwriter gets a larger proportion of the underwriting spread and other fees, while the other participants in the syndicate receive a smaller portion of the spread and fees.
Members of an underwriting syndicate often sign an agreement that sets forth the allotment of stock to each participant and the management fee, in addition to other rights and obligations. The lead underwriter runs the syndicate and allocates shares to each member of the syndicate. The allocations may not be equal among the syndicate members. The lead underwriter also determines the timing for the offering, as well as the offering price. The lead underwriter deals with any regulatory issues with the Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA).
For popular initial public offerings (IPOs), investors may exhibit a greater demand for shares than there are shares available. In this case, the IPO is oversubscribed. This kind of demand can only be met once shares begin actively trading on the exchange. This pent-up demand could lead to dramatic price swings during the first few days of trading. As such, there is significant risk associated with individual investors participating in IPOs, either receiving shares as the client of an investment bank or by buying and selling shares once they begin trading.