Club Deal

A club deal is a private equity buyout or the assumption of a controlling interest in a company that involves several different private equity firms. This group of firms pools its assets together and makes the acquisition collectively. The practice has historically allowed private equity to purchase much more expensive companies together than they could alone. Also, with each company taking a smaller position, risk can be reduced.

While club deals have grown in popularity in recent years, there are many issues that can arise related to regulatory practices, conflicts of interest and market-cornering. For example, there are concerns that club deals decrease the amount of money that shareholders receive, as a group of private equity firms has fewer parties to bid against.

There are some private-equity firms that do not engage in club deals as a rule, but the choice is up to the firm and the wishes of the limited partners who make most of the big money decisions within those firms. As with many large private equity deals, the main objective is to fix up and then dress up the acquisition for future sale to the public.

A club deal is a type of buyout strategy. Other types of buyout tactics include the management buyout strategy or MBO, in which a company’s executive management purchases the assets and operations of the business they currently manage. Many managers favor MBOs as exit strategies. Large corporations are often able to sell divisions that are not part of their core business anymore in a MBO.

In addition, if owners wish to retire a MBO allows them to retain assets. As with a leveraged buyout (LBO), MBOs require substantial financing that usually comes in both debt and equity forms from managers and additional financiers.

Leveraged buyouts or LBOs are conducted to take a public company private, spin-off a portion of an existing business, and/or transfer private property (e.g. a change in small business ownership). An LBO usually requires 90% debt to 10% equity ratio. Because of this high debt/equity ratio, some people view the strategy as ruthless and predatory against smaller companies.

In 2015, the private equity firm Permira teamed up with Canada’s Pension Plan Investment Board to purchase Informatica, a California-based enterprise software provider for $5.3 billion. This was one of the year’s most high profile LBOs, particularly within enterprise software. To enable the deal banks provided $2.6 billion of long-term debt. Shareholders received $48.75 in cash for each share of common stock as per the deal terms.