Syndicate investing, where professional and independent investors lead each and every investment opportunity, is a better alternative to company-led equity crowdfunding as it provides greater access, mitigates risks, and reduces potential conflict of interests.
Today, platforms specialising in Equity Crowdfunding, P2P lending or Crowd Lending promote themselves as ways to invest in private companies. However, Syndicate Investment platforms such as CapBridge offer an alternative and improved way for investors to participate in promising private companies, without only leveraging the “crowd” factor. While both crowd and syndicate investing platforms utilize technology to reduce costs and improve efficiencies, syndicate investing additionally leverages time-tested processes by having a lead investor to reduce risks and improve visibility of opportunities for all participating investors.
A Brief History of Private Equity
Historically, investors seeking above-market returns have looked to invest in private companies outside of public stock exchanges. Such private equity opportunities are typically exclusive and less accessible to many. To invest in private equity, investors generally pool their monies into private equity funds managed by professional fund managers. These fund managers would then invest in a diversified portfolio of private companies while charging considerable management and profit-sharing fees. As the industry mature, technology evolves and the investment process becomes more complex, fund managers increasingly make investments together with other funds to form “Syndicates”. In a private equity syndicate, Lead Investors, who are typically domain specialists, conduct due diligence, set valuation and take an active role in portfolio management. Lead Investors then leverage other fund managers as co-investors for additional financing and enabling greater diversification. The co-investors benefit by “piggy-backing” on the diligence and pricing done by the Lead Investor.
Equity Crowdfunding – A Relatively New and Untested Fundraising Tool
With the continued growing interest in start-ups, a series of alternative funding platforms have emerged, widening investor access to capital raising activities. These platforms provide a marketplace for individual investors to directly discover and invest in investment opportunities. Equity crowdfunding involves investing in shares sold by a company and receiving a share of the profits in the form of a dividend or distribution. In equity crowdfunding, investors are expected to conduct their own due diligence, analyse a start-up’s financial information and independently decide on investing in start-ups. The risks to investors are considerably high, because many often do not have the necessary due diligence capabilities, and have to rely on information solely provided by the fundraising companies themselves.
Syndicate Investing Platforms – A Better Alternative
Syndicate Investing is different from equity crowdfunding. In syndicate investing, professional Lead Investors, who invest considerable time, effort and money, are motivated to conduct thorough due diligence, negotiate fair valuation and favourable investment terms. Co-investors are then able to invest alongside these professional lead investors and leverage on their term sheets and industry expertise. It is the same tried and tested investor-led process as private equity firms practise. When deployed on technology platforms such as CapBridge, this syndicate investing process further allows the democratisation of investor-led opportunities and information, without the fees typically charged by private equity firms.
A Key Difference – Company-led vs Investor-led
Equity crowdfunding has helped many start-ups and SMEs raise millions of dollars in capital. However, some of these companies are in the early stages and may have yet to establish a track record. Yet in equity crowdfunding, it is typically “Company-Led” e.g. the company itself is setting the valuation and terms of the deal. Companies have an incentive to present themselves in the best possible light in order to raise capital. While early stage private investing offers the most investment opportunities, it is also the riskiest and costliest when it comes to due diligence.
On the other hand, on Syndicate Investing Platforms, deals are “Investor-led”, where an independent, professional investor negotiates the best possible deal for themselves and other co-investors. In addition, Lead Investors are putting money where their mouths are and leveraging their sector expertise. These deals tend to also be in larger, growth stage companies, where Lead Investors are better able to deploy institutionalized due diligence and investment monitoring processes.
Enabling a Streamlined Path to Liquidity
Investing in private companies is highly illiquid and there is a risk that Investors may not be able to sell the securities or have to offload them at a substantial discount. For Syndicate Investing, as professional investors are involved, they typically have experiences in ensuring protective investment structures and are experienced in managing portfolios for optimized exits. Often, Lead Investors manage funds with finite fund lives of up to 10 years and are highly motivated to deliver timely exits to establish their track record.
Information sharing and fraud risk
The information provided in equity crowdfunding varies according to the platforms that facilitate the funding, and in some cases might be considered inaccessible and opaque. Investors may not have direct contact with the companies and there is a risk that the project or proposals may not be legitimate, as there is no independent verification.
In Syndicate Investing, due to the vested interests of lead professional investors, due diligence has to be performed to confirm the investment. Lead investors in a syndicate platform may also allow other co-investors to view the information they had obtained from the due diligence they had conducted.
While equity crowdfunding has been growing rapidly as an alternative fundraising solution, it presents many challenges and difficulties for investors to properly assess each opportunity. Syndicate investing, however, may help address these issues. By leveraging on professional, independent lead investors to lead on each investment opportunity, co-investors have better access, thereby mitigating risks and reducing potential conflict of interests from company-led equity crowdfunding. As such, syndicate investing would provide a much needed and better alternative to investing in private companies.