How does a syndication agreement share risk?
Risk sharing is one of the four responses to risk according to the enterprise risk management (ERM) framework. The other responses to risk include risk acceptance, risk reduction and risk avoidance:
So how would a syndication agreement help share the risk for a company? Well, let’s start by understanding what a syndication agreement is. A syndication agreement is when a group of companies, lenders, or investors come together to accomplish a mutually agreed upon transaction. This transaction could be a loan, acquisition, or an investment.
For example, investor A may want to purchase Burger World. However, he may view the investment as somewhat risky, so rather than acquire 100% of Burger World, the investor may choose to bring in investors B and C. Investor A would lose the potential upside, but investor A would also reduce the downward risk should Burger World go bankrupt (or experience other significant losses). Either way, the risk is now spread across multiple investors rather than just being held by one investor.
Another example could be several banks forming a syndicate to loan money to risky client. The risk is now shared by multiple banks rather than just one bank.
Lastly, another common example where the term syndication is used is in venture capital investing. Investment syndicates consists of 2+ investors that coming together to make one investment into a company. Syndicate investing is on the rise as it allows investors to pick and choose the different venture capital investments they want to make.
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