In Finance, what is a Club Deal?

Club deals are investment strategies in in which a group of private equity firms work together to gain controlling interest in a company. Rather than working along to acquire that control, the firms choose to band together and pool the assets that are used to arrange the equity buyout. There are several benefits to the arrangement of a club deal, including the ability to take on larger projects and the reduction of risk that is assumed by each partner firm. Critics of this type of acquisition deal sometimes have concerns that involve the effect of the deal on the return shareholders receive, and the potential for conflicts of interest to arise.

In terms of benefits to the buyers, a club deal makes it possible for the firms participating in the limited partnership to take on acquisition projects that would be difficult, if not impossible for the firms to manage individually. This means that a collective or syndicate of private equity firms can each contribute specific resources to a common pot that is then used to gain control of larger and more profitable companies. Attempting the same type of leveraged buyout individually would either be outside the means of single firm, or would put so much stress on its resources that the ability to engage in other deals would be seriously hampered.

Another key benefit of the club deal is that the firms involved get to share the risk, rather than one business taking on the entire risk. Typically, the degree or risk assigned to each partner is in proportion to the resources contributed toward the acquisition of the controlling interest. While this may limit the return earned from the venture, it also means that should the business deal not go as planned, the losses for each partner are kept to a minimum.

While many consider the club deal a viable way of doing business, there are some concerns in the business community regarding the impact of this type of acquisition on both the targeted company and the general marketplace. One major concern is how the acquisition impacts the return shareholders receive. Depending on how the controlling interest is handled, and the ultimate plans of the partners who gain that control, the returns to shareholders may be adversely affected.

In like manner, if the club deal plan is to acquire the business with an eye to selling the entire operation or even breaking up the corporation into smaller entities that are ultimately sold, this could also create a situation where the influence of the business in the marketplace is diminished. At the same time, if the goal is to acquire controlling interest and marry that business with other businesses that operate in the same general market, there may be some concerns about market-cornering that eventually freezes out competitors and limits consumer choices.