Equity Syndication: How Multiple Investors Come Together in a Single Deal

The way of investing as a syndicate means pooling your cash and expertise with other angel investors to enable supporting early-stage companies. 

We explain why some investors like the idea of investing as a group and an equity syndicate works.

What is Equity syndicate?

An equity syndicate refers to a group of investors that pool their efforts and agree upon the price to sell new IPOs to the general public. 

Various factors such as risk and the company’s financial situation inform the decisions of the syndicate in terms of the price to float the IPO.

Equity syndicates usually come into existence when the amount of stock that needs to be issued is too large for one company. Therefore, the efforts of several firms help bring the new offering of shares to be sold quickly and completely.

The lead underwriter heads an equity syndicate who is responsible for the initial public stock offering. 

Among an equity syndicate senior officers from investment banks are usual members. 

Members’ profit through the underwriting spread, which is a difference between the price selling to the public and the price paid by the issuer. 

How it works

Since the members of the syndicate are bound to sell all the shares that are on offer, so they will have to purchase shares from the issuer and sell to the public. 

The process subjects them to the risk of price fall. They overcome the risk by diluting it across all the members of the syndicate. 

More shares may go to some members of the syndicate, which means more proportions of the underwriting spread. 

To avoid any dispute over the method of sharing, members of the syndicate often enter into an agreement that stipulates the number of stocks allocated, fees charged, and rights and obligations. 

For the lead underwriter in the equity syndicate, a significant amount of the profit comes as a result of undertaking the whole underwriting process. 

The lead underwriter allocates the stocks to each syndicate member according to their capacity and preference. In addition, it leads to the negotiation of the offering price and when to offer.

Reasons to join a syndicate

Here are the top reasons investors join a syndicate:

1. Pool your resources

2. Get an access to better deal

3. Diversification of portfolio

4. Be assured that due diligence is done

Factors to consider

Here are some factors to consider when you’re researching for syndicates to join, and after you join: 

1. Choose a reliable lead investor who has good track record and extensive knowledge of the sectors.

2. As a syndicate investor you should check whether syndicate is legally complaint.

3. Be ready to support your portfolio companies.

4. Check with lead investor whether an investment proposal is eligible for SEIS/EIS.

Some other information

• Generally, syndicates are the combination of the companies of the same industry.

• Syndicates are usually used in insurance industry to spread the risk among the firms.

• Syndicate is generally considered as partnership or corporation for tax purposes.

Conclusion

A syndicate is a short-term alliance of businesses that forms to execute a large transaction that would be difficult or impossible for its members to execute independently. 

Syndication makes it easy for companies to pool resources and share risk.