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As a business owner who deals with finance and bank loans, you may come across the term ‘consortium’. A consortium is a group of two or more members who work together to achieve a common goal. For example, it can allow you to pool resources with other companies to raise capital for your business. As such, it can be valuable to understand how consortiums can help your business, particularly with large-scale projects. This article will explain:
- what is consortium financing;
- how it differs from loan syndication or a joint venture; and
- other common contexts in which business owners use consortiums.
What is a Consortium?
A consortium is a group of two or more members working together to achieve a common goal. Often, entities working as part of a consortium will pool their resources together but will not merge in any other way. That is to say, there is no change to the ownership of each individual business. As a result, entities within a consortium keep their independence.
In a finance context, consortiums usually occur when a company does not want to finance an entire project on its own. This can be for several reasons, including the:
- large-scale nature of the project; and
- financing institution or bank wants to spread their risk within their investment.
You are most likely to find businesses using consortiums in the private equity context.
Private Equity Consortiums
Private equity houses use consortiums since they allow the firm to pursue larger target companies. Similarly, using a consortium structure is preferable for each investor as they:
- limit their risk by syndicating their investment with other consortium members; and
- open up the opportunity to pool their expertise.
Once it is clear that the consortium financing is going ahead, the parties to the deal will typically enter into a preliminary consortium agreement. This agreement covers issues including:
- syndication rights, usually concerning when syndication occurs;
- withdrawal rights, for example, on the condition that there are problems at the merger approval stage;
- exclusivity provisions that prevent individual consortium members from pursuing the target company independently; and
- the fees and expenses involved in the agreement may vary depending on whether the transaction is successful.
Once the consortium agreement passes, the parties to the agreement will sign a share purchase agreement. The share purchase agreement will outline their respective shareholding, corporate governance issues and exit conditions.
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Other Types of Financing
As a business, knowing about other types of financing is helpful if a private equity fund wants to acquire your company.
Loan Syndications
Unlike consortium financing, loan syndication usually refers to a deal in an international transaction involving multiple currencies. A lead bank will arrange the deal’s conditions and organise the creditors’ syndicate. Consequently, the borrower must pay the bank a fee in exchange for this service.
On the other hand, a consortium does not typically involve a lead bank. Instead, the private equity house collates the consortium of lenders itself.
Joint Venture Agreements
A joint venture agreement can also appear like a consortium. A joint venture is an arrangement where the parties to the agreement create a new entity to accomplish a task. As a result, they have their own legal structure.
Business owners typically use joint ventures to:
- leverage collective resources;
- cut costs;
- increase synergies;
- combine expertise; and
- access a new or foreign market.
Key Takeaways
A consortium is a structure where multiple entities work towards a common goal, usually by pooling their resources. The term often arises in a private equity context where a consortium of financial institutions is used to fund large-scale projects and acquisitions. Ultimately, understanding a consortium deal and how it differs from other forms of financing can be useful if your business chooses how to finance its future projects. If you have any questions about a consortium, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A joint venture agreement is a legal contract between different entities where they agree to form a new entity for the purpose of a common aim.
Private equity houses are investment management companies that operate in the private equity sphere. Private equity houses often use high amounts of leverage to acquire and sell target companies.
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