Syndication - are two heads better than one?

Greg Williams, a partner at Cardiff-based Hugh James Solicitors, shares some of his experiences of dealing with syndicated investments.

With interest rates still at an all-time low and other investments attracting low returns, angel investors are looking to private equity for better returns. Angels are often keen to consider syndication for high-risk deals or those that require significant funding. Added to this, new investors have much to gain from the experience of their more seasoned counterparts.

“Syndication offers considerable benefits but obviously the more investors involved, the more complex the process,” Williams explains. “I’ve noticed recently that the number of business angels and private investors working together to provide funding to entrepreneurs is increasing.”

Syndicates can often be made up of investors with different motivations and investment goals. Indeed, investors will often approach the deal from different angles, as Williams explains: “Different investors will come up with different questions for the investee company. You’ll also meet some strong characters as well as any number of accountants, solicitors and others advisers.”

This can significantly increase the time it takes to conclude a deal and potentially increase the cost, too. Despite the fact that such deals can also be complex with reduced equity stakes, there are also clear advantages.

“I’ve found that investors who regularly work together will develop trusted partnerships, with individual investors often sourcing and evaluating deals for the group. It’s also quite common for one investor to take the lead on a particular deal,” he continues.

Williams is keen to highlight that syndication can offer benefits to investor and business alike and highlights a few important benefits.

Benefits to the investor

• Opportunity: Investors can become involved in a larger number of deals
• Bargaining power: Syndicated groups can have more bargaining power
• Better returns: Returns can be higher in a syndicate as they can often fund further rounds and avoid dilution

Benefits to the business

• Control: Businesses can avoid the situation where one investor has too much unilateral control
• Expertise: Businesses can benefit from the expertise of all investors
• Access to capital: Syndicates often make more capital available and there’s often potential for additional future investment

If you’re thinking of investing as part of a syndicate, Williams offers the following tips:

• Compile ‘heads of terms’ specifying each investor’s requirements. This will ensure everyone’s goals are aligned and you’ll avoid potential disputes.
• Agree a timetable and stick to it. Additional decision makers can make a deal more protracted.
• Make sure each investor’s key requirements are considered and well documented in legal agreements. 
• Invest with people you know or members of a network such as xénos. You’ll meet other like-minded investors and potential investment partners.
• The xénos team has a wide range of expertise and can introduce you to additional investors.
• Companies often welcome help and advice from their investors. Agree each investor’s on-going involvement and who’s most suited to doing what.