Historically, relative to total risk, their capital accounts were very small, which led to one of the earliest syndicated underwritings—Pennsylvania Railroad in 1870. Another reason for forming syndicates is the combined distribution capability of all members. Banks of different sizes and dif erent expertise organized in syndicates can draw upon their combined know how.
Due to different strengths and weaknesses of each participant most often they have different functions within the syndicate, which might bring to mind a "pyramid structure": The syndicate manager is placed on top—he is also referred to as lead underwriter, managing underwriter, or lead manager. In the area of venture capital and private equity, the term "lead investor" is encountered most often.
The syndicate manager organizes the syndicate itself as well as the issuance of bonds and securities. For this purpose, he has to i nd further underwriters and organizations and invite them to form a syndicate. The syndicate manager negotiates terms and conditions as well as pricing questions within the syndicate and, as spokesman of the syndicate, with the issuer.
Furthermore, he has to assess. In accordance with the other syndicate members, the syndicate manager executes stabilizing transactions during the of ering period. Some syndicates may have several syndicate managers.
Together they form a so-called management group in which the above-mentioned management functions are split up and coordinated. The decision for or against implementing a management group depends on the security type of the issuance, possible relationships between issuer and investment banks, and the perceived abilities of the corresponding banks.
Usually, one bank of the management team is lead manager or book-runner. The remaining nonmanaging banks of the syndicate are also hierarchically placed structures, starting with the bulge bracket, followed by the major bracket, and finally by the submajor bracket. Between major and submajor bracket a mezzanine bracket may be found.
The syndication of venture capital or buyout investments in privately held companies differs from public offerings of stocks. The Securities and Exchange Commission (SEC) does but slightly regulate the manner in which shares are sold from private companies to venture capitalists and buyout funds.
This fact facilitates cooperation between investment companies. Furthermore, the venture capitalists and buyout funds invest forthright into their target companies and are willing to hold their investments for several years, and they are even obliged to do so for a period of more than 2 years.
Since usually the asymmetric information between investors and target companies is by far higher in venture capital and buyout funds than in public offerings, the investment decision is more complex. Syndication is one mechanism to reduce lacking information about potential target companies.
The conduct of negotiations, especially prior to first-round financings as well as in the following rounds, is one of the lead investor’s exclusive tasks. Furthermore, the organization of funding is part of the lead investor’s business. He is also responsible for continuous monitoring combined with hands-on assistance with respect to all business matters of the portfolio company.