Syndicator Conflicts of Interest 101

This week, let’s tackle a topic that’s both common and complicated in the syndication world: Syndicator Conflicts of Interest 101. But SyndiCat’s fate seems sealed today!

One syndicator, two core situations, three broad issues and multiple conflicts… let’s dig in.

Syndicator conflicts arise out of two core situations:

1. same person creating a competing bid for the asset, and
2. same person being on both sides of the transactions.

What are the Conflicts that may arise

1. Perception of self-dealing and potential for valuation manipulation.
2. Misaligned incentives arising from syndicator’s interests (e.g. recouping or boosting a prior investment) and the fund’s interests.
3. Question mark on due diligence objectivity where syndicator could present a more favourable picture of the deal.
4. Breach of fiduciary duty towards LPs arising from biases.
5. Disclosure shortfalls due to material omissions (of previous holdings or concurrent investments) leading to claims of misrepresentation… even fraud.
6. Unequal access to opportunity if the syndicator acquired the asset under different terms or at a lower entry point.

Conflict of interest situations raise several issues. Ethical issues are clear here and the very first is that of breach of a fiduciary duty (of loyalty and fairness) toward LPs. Withholding information about personal stakes – previously existing or intended purchases – undermines LP confidence. And a lack of fairness – even perceived – can damage a syndicator’s credibility, positive outcomes notwithstanding.

Which brings us to the reputational issues for syndicators to consider. You should know that LPs talk! And a single perceived conflict can damage a syndicator’s long-term credibility. Institutional investors especially, have zero tolerance for blurred ethical lines. Even an appearance of conflict can be as harmful as an actual breach. So if lines are crossed, the syndicator could well kiss their future fundraises goodbye.

The SEC has its own regulatory take on these conflicts. It mandates disclosure requirements, claims on syndicators (for breach of fiduciary duty & misrepresentation of risk) and requires fund documentation disclosure of “affiliated investments”. Let’s highlight the important regulations:

Rule 204A-1 under the Investment Advisers Act of 1940:

• Registered investment advisers must adopt a written “code of ethics.”
• The code must include standards of conduct, require compliance with securities laws, and crucially, must:
  • Require advisers’ personnel to report personal securities holdings and transactions.
  • Require pre-approval of certain investments, particularly in initial public offerings (IPOs) or private placements, which includes many venture and startup deals.
  • Mandate internal disclosure of violations of the code

Personal Trading Restrictions and Disclosures:

• Advisers’ key personnel must periodically report their personal trading and holdings.
• Many typical codes of ethics – following SEC guidance – prohibit or require pre-clearance for personal investments in securities that are being considered for clients/funds.

• SEC expects advisories to “offer investment opportunities to clients first before the adviser or employees may act on them.” This is like offering your LPs with an ROFR on any investments you may want to make yourself.
• Blackout periods and restricted lists are frequently applied to prevent personal trades parallel to client investment activity. I saw this first hand when I was working for an investment bank. If bankers can institute them, so should the syndicators.

The Fiduciary Standard:

• SEC mandates that the advisers have a fiduciary duty to act in the best interests of fund investors.
• Investing personally in a deal before the fund or syndicate can be seen as “misappropriating an investment opportunity,” violating the adviser’s fiduciary duty.
• Disclosures must be clear and full in offering documents—any potential conflict (including personal investments) must be described to investors.

So far we have talked about what conflicts are, how they can arise and what are the ethical, reputational and regulatory implications. Now let me elaborate  some scenarios.

To be fair, not all conflicts arise out of greed. Sometimes there are genuine opportunities and situations and it might be important for syndicators to…

Avoid (or Manage) Conflicts

1. Full Disclosure: Always disclose – in writing – any personal or affiliated investment. Include (a) amount, structure, and timing; (b) any differential terms; (c) any expected benefit (carry, priority returns, or management fees).
2. Fair Allocation Policies:  Adopt a formal deal allocation policy defining how opportunities and allocations are split among personal accounts, SPVs, and funds.
3. Independent Oversight: For institutional or recurring syndications, appoint an independent review (e.g., a compliance advisor or board observer) for conflicted decisions.
4. Align Economics Transparently: If you invest personally, do it pari passu (on the same terms) as your LPs. Avoid preferential liquidity or carried interest.
5. Document Document Document Everything: Record rationale and approvals for any conflicted transaction. If questioned later, contemporaneous documentation is your best defense. (I really wanted to stress documentation and just bold wasn’t doing the job… so took to repetition)
6. Communicate Early and Often: Tell LPs before they discover conflicts on their own. Transparency doesn’t eliminate conflict – but it does earn trust.

Closing Thoughts

I need not tell you that in syndication, your reputation is your true carry. Conflicts aren’t always avoidable – but mishandling them is. LPs may not expect perfection, but they do expect integrity.

If you’re looking to create new SPVs, you’re welcome to browse Propel(x) SPVs page. If you want help deciding which option to choose for your next SPV, you are welcome to…

Cheers!