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A dealer syndicate is a group of investment banks that come together to underwrite and distribute a new security offering, sharing the potential risk and resources. This helps smaller banks establish a distribution network, minimize risk, and compete with larger institutions.
A dealer syndicate is a collection of investment banks that come together to underwrite and act as dealer for a new offering of a certain security. Sometime called an underwriting group or investment banking syndicate, member banks that are part of a distribution syndicate can pool resources to make distribution have maximum effect. At the same time, the banks involved in the syndicate share the potential risk associated with underwriting and distributing a new security offering.
Creating a distribution syndicate has several advantages, even for the smallest banking institutions. By uniting with other banks that are mainly located in other parts of the country or the world, smaller banks establish a distribution network that they could never create on their own. Since each of the member banks brings contacts to the network that are unique, the ability to distribute the new security to a broader range of potential investors is greatly enhanced. Therefore, a security that might have experienced a period of relatively slow growth over a longer period of time may receive much more attention from more investors in a shorter period of time.
Joining a distribution syndicate also helps minimize the risk associated with a new security release. This is especially important for smaller banks, as they are less likely to have enough resources on hand to absorb the loss in case the security doesn’t work as expected. However, the syndicate’s distribution strategy means that no member has to incur a total loss if the security does not attract investors and does not increase in value in a reasonable period of time.
Coming together as a distribution syndicate also makes it possible for smaller banks to compete effectively with larger institutions. While no individual member bank has the resources to successfully distribute a new security offering, the cumulative resources found among member banks may make it possible for the syndicate to handle even large commercial projects. From this perspective, the syndicate agreement is a definite benefit to member banks, as the distribution syndicate allows them to secure business that they could never have secured on their own.
Smart Asset.
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