Syndicate investing simply describes a situation in which there are multiple parties to the deal.  In many cases, the syndication is done in order to ensure that the minimum required capital that the company is trying to raise is met.  In this particularly tough market environment, you will find that far fewer deals get done where there is only one bank or one investor. As a company looking for funding, syndications allow access to a bigger pool of opportunities. As an investor looking to be a part of a syndicated deal, there are various factors that may make such an investment a better alternative to being a sole investor in a deal.

As the timeless proverb goes it’s usually not a good idea to put all your eggs in one basket.  The case certainly applies to investments in particular.  Syndicated deals offer investors an opportunity to invest without having to risk all of their capital.  While the total capital needed by the company may total $10 million dollars, PIPE investors with smaller amounts of capital may still be able to get in on the deal at much smaller amounts.  The trade off under this situation is the fact that the smaller investors generally are not able to drive the deal terms.  While it is the responsibility of all investors to conduct their own due diligence, it is not uncommon for many of the smaller investors, particularly individuals, to rely solely on the work that’s done by the lead investor.

While syndications offer safety in numbers, it also creates other potential risks.  One critical issue in particular is the concept of overhang.  In most PIPE deals, there is a projected timeline in which investors have the ability to exit out of their position.  Since these PIPE deals involve publicly traded companies, there is a real concern that if all investors try to exit at the same time, the company’s stock price will be negatively driven down.  This potential adverse effect is what we deem as overhang risk.  Such risk is can only be minimized by investing with only groups that you are familiar with.  Unless you are the sole investor, there are many variables that are outside your control. Investors should invest only within the comfort of their risk reward box.

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