Syndication is a traditional and contemporary approach to investing and working together. In the situation of investing in private equity deals and growth companies, syndication can be said to be defined, when at least two Investors carry out a joint investment with a view to sharing the profits and sharing the risk. Such a collaboration involves sharing both the risks and the potential gains.
Syndication is therefore a way for investors to co-manage the: deal flow; investment assessment; investment management; deal maturation and investment exit. Syndication is a smart and natural way of investing in growing high-technology firms. Yet, there are significant distinctions in the motivation and benefits of syndication.
A competitive edge is offered by syndication. It is a really smart way for a High Net Worth (HNW) Individual, Family Office and a small to medium PE Funds to co-invest. Syndication, for such investors is also known as “hunting in packs”. Collectively, via syndication, they can compete with the large well-resourced Venture Capital and Private Equity firms.
In South East Asia, there are many HNW and UHNW Individuals, often using shared family office structures such as Independent Wealth Management Firms for wealth protection. Compared to USA and W. Europe, for the amount of wealth, there are a smaller number of shared and single, Family Offices.
In Asia HNW and UHNW Individuals, in our experience, are one of the greatest candidates for benefiting from syndication – as demonstrated by being one of our best sources for fresh and high-quality deal flow.
Let’s, consider and discuss five motives for syndication.
“Sharing risk & investment” This motive is for the investment partners to share the risk associated with a given private equity deal by co-sharing the total investment required by the company and so limiting each co-investor’s maximum potential loss. This is obtained by diversifying investments but can also result from the pooling of information and/or expertise.
“Deal screening” An investor, has their own lens for selection and bias, often based upon past failures and bad experiences. By syndicating or for High Net Worth Investors, “hunting in packs” the evaluation of the PE deal by several investors improves selection. Also, if there is an active investment committee, then and via a mastermind approach, means there is mutual coaching and mentoring.
“Deal sourcing and sharing” Getting fresh and good deals takes a large finders network and a lot of expensive specialist capability in screening and selection. Investors desire to benefit from investment opportunities proposed by other HNW Investors & PE firms and, through this collaboration, increase their high-quality business flow while minimizing the cost of research and selection.
“Sharing supplementary and complementary capabilities” Simply, one investor may be great at deal flow sourcing, screening and selection; and another investor may be good at managing the Company’s CEO/Founder and managing the investment. Together, the syndication of expertise covers a great breadth of process and bringing a growth market and investment to maturity.
“Establishing a path to maturity and exit”. An early stage investor may wish to syndicate with a later stage investor. Therefore, in early stage an investor may take a small investment stake with higher risk. Then in the next tranche of fund raising, syndicates with a later stage investors, that can take a large investment quantum yet at reduced risk. Also, to take the growth market to maturity and exit via a trade sale or public listing. Simply: one investor may be great at early stage investing; and another investor may be good at managing the later stage and facilitating the exit.
Please private message or email me, if you have deals to syndicate or wish to discuss syndication further.
Source: Paul Anthony Zaman (GAICD, SID, Cranfield MBA88);