What is a syndicate?
Syndicates are two or more private investors working together to share the risks and rewards of investing in private companies. Syndicates differ from individual business angel investors, as syndicates are typically comprised of a ‘fixed’ group of people who regularly invest together over a period of time, building trust and leveraging experience.
Business angel syndicates are groups of like-minded investors that invest in a specific region or sector that is of interest to them. They are high net worth individuals who provide smaller amounts of finance (typically in the range €25/£40k to €250/£200k) at an earlier stage than many venture capital funds are able to invest. In Ireland and Northern Ireland business angel syndicates are growing in number and capacity to invest. Syndicates will typically co-invest with seed venture capital funds, government agencies like Enterprise Ireland and other private investors.
The benefits of syndication are:
- Diversified portfolio: portfolio investing (i.e. investing in more than one company) is a lower risk approach to investment compared to the higher risk ‘all eggs in one basket’ approach of investing in just one or two companies
- Pooling of economic resources: pooling of funds provides the opportunity to invest in several companies and/or in larger deals
- Pooling of skills, contacts and experience: syndicate members will benefit from each other’s skills, networks of contacts and experience which enhances the possible success and returns of investing
- Due diligence: ability to undertake a greater level of due diligence
- Recognition: a formal syndicate can leverage its recognition in the investment community to attract deal flow to a greater extent than an individual can
- Common Purpose: a syndicate tailored towards preferred industries means that Angels with common interests can share common goals and foster a sense of camaraderie
How HBAN Syndicates Operate
HBAN’s Investment Syndicates operate on similar principles to a club. They are primarily member-driven, and members are expected to play an active role in the operations of the syndicate and to become involved in the coordination and delivery of investment activity. The syndicates do not operate as a fund. For any one investment opportunity presented to the group, only those who find that opportunity worthy of followback and investment are required to become active in evaluating and completing that investment. There are 2 key documents members are required to sign:
On joining the syndicate group individuals sign a syndicate charter which addresses the following:
- standard of conduct of members, informing syndicate reputation in the marketplace;
- confidentiality and conflicts of interest;
- participation and on-going responsibilities of members including actively participating in pre-investment due diligence and post-investment monitoring and support; and
- modus operandi including minimum amount that individual investors are expected to invest in any given deal in which a member participates.
Each investment an investor is then required to sign a separate syndicate agreement which will include the following:
- Appointment and duties of syndicate representatives as co-shareholders in relation to a particular investment;
A power of attorney to permit the syndicate lead to represent them in the investment;
- Provision for majority voting; and
- Outlines how new members are facilitated.
Syndicates have the discretion to charge a fee to its members. Any fees charged go towards offsetting the costs of the syndicate operation and not any costs in relation to making, managing or realising any one investment. As a syndicate grows and becomes self-sustaining, a syndicate member or a third party could undertake some due diligence and activities supporting the completing of investments; in this case, membership fees could contribute to such costs.
Costs relating to making, managing or realising investments may also be funded via an agreed fee calculated as a percentage of the money invested. These costs are dealt with separately and or shared between investors and investee, in a manner agreed by both parties at termsheet stage (or earlier) prior to commencing the investment process.
It is for each syndicate to decide on the level of membership fees charged. Currently for those syndicates that charge fees, the annual membership fee ranges from €250/£350 to €3,000/£2,500 excluding VAT.
If you are interested in joining HBAN as a syndicate member, please register with HBAN here.