What is a Distributing Syndicate?

A distributing syndicate is a collection of investment banks that band together for the purpose of underwriting and acting as the distributor for a new offering of a given security. Sometime referred to as an underwriting group or investment banking syndicate, the member banks who are part of a distributing syndicate are able to pool resources in order to accomplish the distribution to 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.

The creation of a distribution syndicate has several advantages, even for smaller banking institutions. By joining with other banks that are primarily located in other parts of the country or the world, the smaller banks establish a network for distribution that they would never be able to create on their own. Since each of the member banks brings contacts into the network that are unique, the ability to distribute the new security to a wider range of prospective investors is greatly enhanced. Thus, a security that might have undergone a relatively slow period of growth over a longer period of time may receive much more attention from more investors in a shorter period of time.

Banding together in a distributing syndicate also helps to minimize the risk associated with launching a new security. This is especially important for smaller banks, since they are less likely to have enough resources on hand to absorb the loss in the event the security fails to perform as expected. However, the distributing syndicate strategy means that no one member has to incur the entire loss if the security does not attract investors and does not rise in value within a reasonable period of time.

Coming together as a distributing syndicate also makes it possible for smaller banks to effectively compete with larger institutions. While no individual member bank has the resources needed to successfully distribute a new security offering, the cumulative resources found among the member banks can make it possible for the syndicate to handle even large business projects. From this perspective, the syndicate arrangement is a definite benefit to the member banks, as the distributing syndicate makes it possible for them to secure business that they could never have managed to secure on their own.