A syndicate is a temporary, professional financial services alliance 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.
Understanding Syndicates
In many cases, businesses that set up a syndicate operating in the same industry—several financial services or media companies will band together to form a syndicate. A separate entity is created to apply their expertise to a product or service. Syndicates are generally considered a partnership or corporation for tax purposes.
Companies may form a syndicate for a specific business venture if it promises the potential for an attractive rate of return. The amount of risk taken on by each syndicate member can also vary. For instance, an undivided account in an investment banking syndicate means each underwriter in the syndicate is responsible for selling an allotted amount of stock along with any excess shares not sold by the syndicate as a whole. An individual member may have to sell far more securities than allotted. Other syndicates limit the amount of risk for each member.
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. In situations like these, companies may form a syndicate that allows each firm to apply its specific area of expertise to the project.
Examples of Syndicates
Syndicates can be created by many different businesses in a variety of industries. 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. Banks will band together to form a syndicate to loan a very large amount of money to a single party.
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 leads this endeavor is called the syndicate manager. The syndicate breaks up thirty days after the sale is complete, or if the securities cannot be sold at the offering price. Some other types of syndicates represent a joint effort but are not temporary.
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 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.