Reviewed by Oct 05, 2020| Updated on
Distributing syndicate is a consortium of investment banks working together to sell equity or other assets into the market for an initial public offering ( IPO). While operating on large securities offerings, investment banks also form syndicates to reduce risk and improve the speed and efficiency of selling the securities to investors.
This is particularly true in the case of firm commitment offerings, where the primary underwriter may be exposed to inventory risk if its group of salespersons can not sell the full offer. A syndicate would be created by the underwriter to sell the new securities and pay any other banks that distribute them.
The heavyweight investment banks can act as lead underwriters, such as JP Morgan Chase, Goldman Sachs, and Bank of America. Merrill Lynch typically chose to form syndicates to serve their clients when a large offer is involved. Distributing syndicates is particularly important for smaller investment banks.
These "boutique" banks will not be able to underwrite many IPOs because they lack the resources to sell big deals on their own. Also, a boutique bank may only operate on one or two deals at a time. Banding them together as part of a syndicate allows boutique banks to work simultaneously on several offers, take on larger offerings, and compete more effectively with large investment banks.
When a company starts to work with a lead underwriter to prepare securities for the market, be it stocks, bonds, or other forms of securities, the underwriter decides how many other investment banks will be required to sell and distribute securities within the timing expected.
The underwriter then chooses the other banks that it feels are ideally fit for smooth delivery. Such banks then contact their customers to receive "demand signals" on the new deal.