A syndicate is an organized group of just about anything – corporations, other entities, or even individuals. The group is organized independently by the entities that form it. A syndicate’s primary notable quality is that the groups within it work together to conduct some type of business in order to pursue and promote their collective interests. In most cases – almost entirely true in the case of syndicated companies and corporations – the primary purpose is to promote goods and services and increase profits for all the entities involved.
In investment banking, syndicated lending is when a group of banks provides the capital for a single loan, spreading the risk across several institutions.
In many instances, a syndicate is formed on a temporary basis, though temporary is defined as whatever length of time the groups within the syndicate need to promote one another and accomplish the goal that they’ve established. For tax reasons, syndicates are treated as newly-formed corporations or partnerships in order to keep taxation at a minimum.
In the realm of trading, a syndicate is usually a group of independent traders and brokers that band together to collectively assume the risk of buying and selling securities.
The Pros of Syndication
The positive aspects of forming syndicates, specifically in the financial world, include the ability to spread out risk while maximizing reward. For example, if a group of independent traders and brokers form a syndicate during a particularly active month in the markets, more stocks can be bought and sold, with the group collectively assuming the risks while getting more money to utilize to maximize the potential reward. It also means that the group enjoys the luxury of taking on more risky trades with less fear of potential risk repercussions.
The Cons of Syndication
Perhaps the largest drawback of syndication is the aspect of group mentality and decision-making. This is especially true when it comes to multiple companies or corporations banding together to work on a specific project or task. If, for example, a number of companies syndicate in order to seize the opportunity to acquire more real estate, it means that they can potentially expand their independent organizations and grow not only their client base but their potential profit.
However, a major issue comes with the fact that syndicated businesses typically must vote on different opportunities and purchases and make a group decision on what locations will be purchased and what companies get each location. While the opportunity to acquire more real estate is a major advantage, one that smaller companies, alone, might not be able to enjoy, the drawback is that the potential to end up with a less advantageous location is very real.
The potential for great opportunities and increased profit while minimizing risk are all great aspects of syndication. However, there are possible drawbacks. Understanding the pros and cons are important for anyone in the financial and business worlds considering the prospect of joining a syndicate.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: