Summary
- A consortium allows two or more entities to pool resources towards a common goal whilst each member retains its legal independence and ownership structure.
- Consortium financing differs from loan syndication (which involves a lead bank and often multiple currencies) and joint ventures (which create a new legal entity).
- Key documents in a consortium deal include a preliminary consortium agreement and a share purchase agreement, each covering distinct rights and obligations.
- This article is a plain-English guide to consortium financing for Australian business owners, covering its legal structure, key agreements, and how it compares to related financing arrangements.
- It has been produced by LegalVision, a commercial law firm that specialises in advising clients on business financing and corporate transactions.
Tips for Businesses
Before entering a consortium, confirm each member’s rights and obligations in writing. Review exclusivity and withdrawal provisions carefully, as these affect your flexibility. Ensure the share purchase agreement clearly records shareholding, governance, and exit terms. Seek clarity on fee arrangements before committing.
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 (often companies, but the term can also be applied to individuals) that work together to achieve a common goal. For example, it can enable you to pool resources with other companies to raise capital, develop new products or intellectual property, expand into new markets, or generate profits 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 everyday 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, such as funding a large project. Often, entities in a consortium pool their resources without merging in any other way. This means there is no change in ownership for each individual business. Each company will remain separate. This differs from a merger or acquisition, where two companies typically combine to form a single entity. As a result, entities within a consortium maintain 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 following:
- large-scale nature of the project; and
- a financing institution or bank wants to spread the risk of its investment by funding a portion of a venture rather than the entire project.
Private Equity Consortiums
Private equity houses use consortiums since they allow the firm to buy ownership stakes in larger target companies. Similarly, using a consortium structure is preferable for each investor as they:
- limit their risk by sharing the investment with other consortium members; and
- This opens up the opportunity to pool their expertise as more investors are incentivised to help the target company.
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
- fees and expenses involved in the agreement may vary depending on whether the transaction or project 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 in the target company;
- corporate governance issues; and
- exit conditions.
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Other Types of Financing
As a business, being aware of other types of financing is beneficial if a private equity fund is interested in acquiring 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 in which the parties to the agreement create a new entity (usually a company, if this is an incorporated joint venture) to accomplish a specific task. As a result, they have their own legal structure.
Business owners typically use joint ventures to:
- leverage collective resources;
- cut costs;
- combine expertise; and
- access a new or foreign market.
Key Takeaways
A consortium is a structure in which multiple entities collaborate towards a common goal, typically 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 helpful if your business chooses how to finance its future projects.
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Frequently Asked Questions
A consortium agreement sets out the terms between consortium members, covering syndication rights, withdrawal rights, exclusivity provisions, and fees.
In a consortium, each entity retains its independence. In a merger, two companies combine into a single entity.
A share purchase agreement outlines each party’s shareholding, corporate governance arrangements, and exit conditions in a consortium deal.
Yes. Although consortiums commonly involve companies, individuals can also form them to collaborate towards a shared goal.
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