A distribution syndicate is a group of investment banks that underwrite and distribute new securities, pooling resources and sharing potential risks. This allows smaller banks to create a wider distribution network, minimize risk, and compete with larger institutions for business.
A distribution syndicate is a collection of investment banks that come together for the purpose of underwriting and acting as a distributor for a new offering of a particular security. Sometimes referred to as an underwriting group or a consortium of investment banks, member banks that are part of a distribution consortium are able to pool resources to accomplish distribution with maximum effect. At the same time, the banks involved in the syndicate share the potential risk involved in underwriting and distributing a new offering of securities.
Creating a distribution syndicate has several advantages, even for the smallest banking institutions. By teaming up with other banks that are mostly located in other parts of the country or the world, the smaller banks create a distribution network that they would never be able to create on their own. As each of the member banks brings unique contacts to the network, the ability to distribute the new stock to a wider range of potential investors has greatly improved. Therefore, a stock that may 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.
Grouping into a distribution syndicate also helps minimize the risk associated with launching a new security. This is especially important for smaller banks, as they are less likely to have sufficient resources on hand to absorb the loss in the event the security does not perform as expected. However, the distribution syndicate’s strategy means that no member has to bear the entire loss if the stock does not attract investors and does not increase in value within a reasonable period of time.
Joining as a distribution syndicate also allows smaller banks to compete effectively with larger institutions. While no single member bank has the resources to successfully roll out a new offering of securities, the cumulative resources found among member banks can enable the syndicate to handle large corporate projects as well. From this point of view, the syndicate agreement is a clear advantage for the member banks, since the distribution syndicate allows them to secure business that they would never have been able to secure on their own.
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