A syndicate is a temporary alliance of financial services firms or businesses that is formed to complete one or more specific financial deals, transactions or joint business efforts.
Syndicates can have various structures of organization, but are primarily either composed of primaries and secondaries, with associated rights and responsibilities, or of equal partners to a deal.
Syndicates tend to form when a deal or undertaking is either too large in monetary terms or too risky for only one organization to handle safely and effectively. For example, some of the largest initial public offerings (IPOs) are underwritten by syndicates.
Banking syndicates tend to form for financing very large corporate loans. Some projects or deals require massive amounts of investment that traditional capital markets are ill-suited to handle, in which case a syndicate of lenders is formed and a collective deal is struck for financing.
Syndicated lending is preferable for the borrower as it vastly simplifies the processes of securing the loan and making payments.
Underwriting syndicates are formed to support large initial public offerings (IPOs). Underwriters secure the IPO process by buying some or all of the shares of the initial offer at a fixed price and then selling the shares on the open market or through their internal sell-side divisions.
Large IPOs may have a total share value that is too great for one underwriter to take on, so they seek out partners to act in an underwriting syndicate. An underwriting syndicate will usually feature a syndicate manager who takes the lead role in organizing the IPO and then secondary underwriters whose only role is to provide additional funding for the IPO itself.
Global insurance is a multi-trillion dollar industry, and some insurance deals are correspondingly enormous. In these cases, insurance companies may form a syndicate to ensure that they can offer their clients comprehensive coverage without taking on extensive risks. Insurance syndicates are also prevalent in the reinsurance market, where insurance companies offer coverage to other insurance companies.
Joint Business Syndicate
Occasionally businesses will pool their resources on certain efforts and share the results according to pre-defined terms. These efforts may involve large projects that are too big for any single firm in an industry to handle, or research efforts where the results are shared among the participants.
Joint business syndicates tend to be the most varied in their structures and goals, as it is generally uncommon for businesses to form syndicates.
It is beneficial for traders to understand the nature of syndicates, especially when it comes to syndicates of investment banks underwriting IPOs.
IPOs present an excellent opportunity for a wide variety of trading strategies, from fundamental analysis to price action, and knowing who the underwriters are and their history with past IPOs offers invaluable insight into the future of a recently offered security.
Joint business syndicates can also present excellent trading opportunities, as the projects or research involved can be difficult to value according to traditional systems and metrics.