Syndicate

A syndicate is an alliance of several companies in order to manage a large deal that is difficult to handle individually. Syndicate companies can join their resources and split the risks. There are different syndicate types, such as underwriting syndicates, banking syndicates, and insurance syndicates.

Understanding Syndicates

Usually, a syndicate is formed by companies of the same industry. For example, to create a new drug, research and development (R&D) is needed. Two pharmaceutical companies may join together for this purpose. To manage the construction of a large project (construction of a stadium, highway, bridge, or railroad), several construction companies may join together to form a syndicate. In the case of an attractive rate of return (RoR), a syndicate can be created to manage a particular business. Each company in the syndicate may be responsible for a certain aspect of work, according to the knowledge, skills, abilities and experience of the application. From a tax inspection point of view, syndicates are treated as partnerships or corporations.

To be presented at an initial public offering (IPO), several broker-dealers and investment banks join together in a syndicate. This allows them to sell debt securities or a new stock offering to investors and share risks. It is also an effective way to distribute a new issue of securities.

A syndicate of underwriters is managed by a lead underwriter. The syndicate gets the compensation — the underwriting spread. This is the difference between the prices of payment to the issuer and payment received from investors and other broker-dealers. If the securities are not sold at the bid price, the underwriting syndicate breaks up. As well, the syndicate breaks up 30 days after the sale is completed. But other types of syndicates that are not temporary and function together also exist.

Managing risk

The risks of each member of the syndicate can be different. Each member of an underwriting syndicate with an undivided account is responsible for selling the number of shares issued to it. Also, each member is responsible for any excess shares that the syndicate as a whole was unable to sell.

Thus, some members of the syndicate will have to sell more securities than they were given. In other types of syndicates, the level of risk for each member may be limited.

Syndicates and insurance risk

The insurance industry uses syndicates to distribute insurance risks among several firms. To determine the price of an insurance policy, it is necessary to assess the risk of insuring a particular asset or person. This is the responsibility of the insurance underwriter.

Here's an example of corporate health insurance for the company's employees. The underwriter assesses the potential disease risks of the company's employees. Based on statistical data, the actuary of the insurance company assesses the health risks for each employee of the company. In the case of a high insurance risk, the insurance company can create a syndicate to share it.