What is an Investment Syndicate?
Definition of an Investment Syndicate
In investment circles, a syndicate is an alliance of different businesses that team up together to tackle a large purchase or transaction that they’d struggle to take on individually. The idea is to make it easier for companies to team up together to pool their resources and to share risks. If the purchase fails or they lose money, the losses will be split amongst each member of the syndicate, rather than any single company taking it all on.
A classic example of an investment syndicate is when multiple banks work together to issue new securities to the market. There are also other types of syndicates in the world of business, including insurance syndicates and underwriting syndicates. There have even been crime syndicates where multiple criminal organizations come together.
As a general rule, syndicates are made up of two or more companies that operate in the same industry. For example, two video game manufacturers might work together to create a new game, or two real estate companies might work together to manage a huge development project.
Syndicates are formed for a variety of different reasons, but the most common reason is that there’s a huge project that no single company could hope to cope with. For example, when a city wins the right to host the Olympics, they’ll typically work with a syndicate of construction companies to develop all of the infrastructure that’s needed.
And while it’s often the lack of monetary resources that forces a syndicate to take on a project, it can also be a lack of expertise. Going back to that example of hosting the Olympics, the syndicate might consist of one company that specializes in transportation, one that specializes in sporting venues and one that specializes in accommodation.
Syndicates have been rising in popularity since the financial crisis of 2008, as they allow companies to reduce the risks that they face in a volatile financial environment.
In most cases, investment syndicates are created with a specific project in mind, but there are also examples of syndicates that are designed to spread investments across a number of different projects. This is another way of helping to spread risk and to boost the return on investment that the syndicate investors can expect.
When investment syndicates work on multiple projects, the decision on whether or not to go ahead with any given investment is usually put to the vote. In some cases, every syndicate member will receive an equal vote – in others, it will depend upon how large their contribution is to the syndicate as a whole.
The way that the investments are made can also depend. For example, for individual projects, each member of the syndicate is usually given the choice of whether or not to invest and then the investment is made accordingly. For spread investments, where the might of the entire syndicate is required, the decisions are usually made based upon a majority vote.
Syndicates are particularly common in the world of tech start-ups, because they allow smaller scale investors to band together and to compete against huge venture capital firms.
Another key advantage of taking part in an investment syndicate is that the other members of the syndicate are doing their due diligence, as well as you. That means that there are more pairs of eyes on potential investments, and that therefore it’s more likely that someone will spot potential issues early. These issues can range from a lack of product-market fit to any tension between the founders.
At the same time, investing as part of an investment syndicate also means less work for any given investor, because tasks can be split between different members of the syndicate. Basic investors typically don’t have to worry about the red tape and the paperwork that come along with major investments, either.
How are syndicates treated when it comes to tax?
The answer to this question can vary depending upon the country in question. However, in most cases, syndicates are treated as partnerships or corporations and are taxed and treated accordingly.
Not necessarily. Again, this depends upon the terms that are agreed between the different members of the syndicate, and these terms will typically be documented to ensure that there are no disputes between the different members of the syndicate at a later date.
What is an underwriting syndicate?
An underwriting syndicate occurs when multiple banks and brokers come together for the purposes of an initial public offering (IPO). This allows them to divide risk and helps the stock and securities to be more widely distributed.
Underwriters are also used in the insurance industry to spread risks amongst multiple different companies so that if a large claim is made, it’s not just one company that’s responsible for the pay out.
What are the requirements to join a syndicate?
Each syndicate has different requirements for participation, and so it falls to you to do your research and to ensure that you meet the minimum threshold for any syndicates that you plan to join. Some syndicates have no requirements at all, while others require certain specializations or a minimum financial investment.
How can you find syndicates?
There are different ways to find syndicates, with one of the most tried and tested ways being to tap into your professional network and to reach out to other investors. There are also websites out there like OurCrowd and AngelList which allow investors to find and participate in different syndicates.
Do start-ups benefit from syndicates?
Yes! In fact, start-ups can benefit from syndicates just as much as any individual investor, and for obvious reasons. When start-ups are looking to raise money, it almost doesn’t matter where that money is coming from. Founders and entrepreneurs can also benefit from the time savings that come from only needing to deal with the syndicate’s lead, rather than with a number of different investors.