Syndicate

An individual with Rs 50 lakh cannot easily get into a start-up's funding round on the same terms as a large investor. A syndicate solves that.

A Lead Investor finds a deal, does the due diligence and puts in money of their own. Other investors then pool their money into a special purpose vehicle (SPV), and the SPV makes one single investment in the company. The company sees one shareholder; behind it sit many.

The lead is paid for the work — sometimes a one-time fee, sometimes a share of the profits in the style of carried interest. Several online platforms offer syndicate services.

Chapter 11 (section 11.1.2) lays out the sequence:

1. The Lead Investor gets access to a high-risk, high-return deal in a potential start-up.
2. Before syndicating, the lead ensures thorough due diligence — financial, business, operational and technological.
3. Convinced of the growth potential, the lead creates the syndicate and commits capital, to ensure skin-in-the-game.
4. The syndicate is listed on an investment platform and the lead approaches other investors willing to co-invest.
5. The SPV subscribes to the company's equity shares as a single investor.

Who may invest. The workbook states that as per the SEBI (AIF) Regulations only accredited investors are permitted to invest in syndicate deals, so the lead must ensure every investor complies with the Accredited Investor Framework.

What the lead earns. A fee for due diligence and deal scouting that varies across deals and investors — either a one-time fee or a share in the profits like carried interest.

What the lead gets in the company. Lead investors investing through syndicates also receive one board seat to represent the interest of the individual investors.

The word also appears in other senses in the workbook, which is where confusion starts: an LBO is financed by a debt syndicate of banks and bond investors; private credit is sometimes syndicated by an AIF manager acting as lead investor; and acquisitions are often funded through a syndicate of investors such as private equity funds. All share the idea of one lead and several participants.

Profit            = Exit proceeds - Total capital of the syndicate
Lead's carry      = Carry % x Profit
Paid to investors = Exit proceeds - Lead's carry, shared pro rata to committed capital

The workbook's example. Mr A is a lead investor raising Rs 25 crore for the Pre-Series A round of Company XYZ. He sets up a syndicate, ABC LLP, commits Rs 5 crore himself, and accredited investors commit the balance Rs 20 crore, with a carry of 15%. After 3 years ABC LLP exits at Rs 75 crore.

Now the split. Suppose (illustratively) Kavya is one of the accredited investors, with Rs 2 crore — 8% of the Rs 25 crore.

Kavya turns Rs 2 crore into Rs 5.40 crore — 2.7 times. Mr A turns Rs 5 crore into Rs 21 crore — 4.2 times — because the carry is paid on the whole syndicate's profit, not just his own.

Chapter 11 (Investment Strategies, Investment Process and Governance of Funds), section 11.1.2 lists syndication as the fourth investment strategy for Category I and II AIFs with the Mr A example; section 11.6.10 gives syndicate leads a board seat. Chapter 8 uses "debt syndicate" in the LBO structure. Expect a question on who may invest in a syndicate (accredited investors only), on what the lead does, and a carry computation on the workbook's pattern.

• Only accredited investors may invest in syndicate deals, per the workbook.
• The SPV makes a single investment in the target company; the company does not deal with each syndicate member.
• The lead commits own capital — that is the skin-in-the-game the workbook insists on. A lead who only arranges is not the model described.
• Carry is computed on profit, not on exit proceeds. 15% of Rs 50 crore is Rs 7.5 crore; 15% of Rs 75 crore would be wrong.
• The lead's fee can be one-time or a profit share — the workbook says it varies across deals and investors.
• A debt syndicate in an LBO is a different thing — banks and bond investors lending to the acquisition company, not small equity investors pooling in an SPV.