What are Club Deals?

A club deal is a leveraged buyout or private equity transaction that involves two or more private equity firms that provide capital to acquire a target company. Through club deals, private equity firms are able to spread transaction risk among participating firms, thereby reducing the risk exposure of each individual firm.  Club deals are also known as syndicated investments or consortiums.

Participating firms are able to pool assets to provide capital for an acquisition the individual firms could not finance on their own.  Club deals usually involve transactions greater than US$ 100 million. Private equity funds have an investment horizon of 5 years, after which an investment is sold.

Key Learning Points

  • Club deals enable private equity firms to pursue larger transactions by pooling their capital.
  • The private equity funds involved in these deals typically focus on targets with particular characteristics to ensure profitability and ensure that the consortium enjoys a high return on exit, typically after an investment period of five years.
  • An  LBO (leveraged buyout) analysis is useful in determining the maximum price that the consortium could pay for the target and the amount of debt

Club Deals – Why?

Firms participate in club deals to access additional capital, particularly when access to debt may be limited, and facilitate larger transactions that would not be possible for the firms individually.  Importantly, sellers generally prefer an all equity transaction as it can be executed more rapidly and with greater certainty.

Club Deals – what do private equity funds focus on?

The private equity funds involved in club deals typically focus on targets (companies) with steady cash flows and low working capital requirements, low fixed costs, potential for operational improvements, an attractive valuation upon entry, and a clear exit strategy. The target is likely to be in a mature industry, demonstrate a clean balance sheet with low or no debt, present low future CAPEX needs, a strong competitive advantage, a robust market position, and sound management. have a clean balance sheet with no or low levels of outstanding debt, low future CAPEX

Advantages of Club Deals

The primary advantage of a club deal is that it allows private equity firms acting together to access larger deals than they could manage independently. Often, the transactions are multi-billion dollar deals of a magnitude beyond the capacity of one firm.

In recent years, pension funds and other institutional investors have provided considerable funding for private equity firms. This has enabled buyout firms to form ever larger investment funds and, when they form consortiums, they have access to an expanded range of potential acquisition targets.

Club deals also enable investors to partner with strategic investors or sponsors who have relevant industry experience.

These transactions also spread deal risk among multiple investors, reducing the risk exposure for each individual firm. This is imperative for private equity firms, as by virtue of their partnership agreements, they are generally required to diversify their funds. Most private equity firms are limited to no more than 10% of investable capital in a single investment.  When private equity firms form a consortium to acquire a target, they are able to remain within investment limits and take equity stakes that would otherwise have not been possible.

Sharing risk is a key advantage of club deals. The degree of risk assigned to each participating firm in the consortium is in proportion to the capital it contributes. This keeps losses for each participating firm to a minimum should the transaction fail to go as planned, although it limits the return as well.

A point of concern, however, is that club deals could adversely impact the return to shareholders in each private equity fund. Much depends on how the controlling interest is handled. Another concern is that by forming a consortium, a group of private equity firms could act to suppress a fair and competitive bidding process. A group of private equity firms could potentially agree to divide the market among themselves,  consequently suppressing competition.

Leveraged Buyouts (LBO)

A club deal is a type of buyout strategy, such as a leveraged buyout (LBO). For example, two private equity firms could team up to purchase a company for US$ 6 billion. To enable the deal, banks provide debt financing of US$ 3 billion in long-term debt. The group’s objective is to achieve higher returns by using leverage.

An LBO analysis is useful to determine the maximum price that investors should pay for the target, and the optimal amount of debt financing.The analysis requires various assumptions to be made, which then inform financial projections and pro forma financial statements. The analysis can estimate the present and future free cash flows of the target, the hurdle rate required by equity investors, the financial structure, and interest rates. The analysis will ultimately yield an estimated internal rate of return (IRR), which will determine whether the investment is worth pursuing. Typically, the minimum IRR that is acceptable is 30% or above.

For private equity investors in an LBO,  the ability of the target to generate cash flows and repay debt is a key consideration. The typical ratio of an LBO is 90% debt and 10% equity. For example, if a group of private equity investors is acquiring a target for US$ 200 million, they will borrow US$ 180 million and pay US$ 20 million from their own cash. As a result of the high degree of leverage, the IRR to the equity investors will greatly exceed the returns to debt investors.

In a leveraged buyout, the private equity investors will form a new entity to acquire the target. The capital structure in an LBO refers to the various components of financing – bank debt, high-yield/subordinated debt, mezzanine debt, and common equity – that is used to acquire the target.

Key credit metrics in an LBO model include:

  • Debt/EBITDA
  • Interest Coverage Ratio (EBIT/Interest)
  • Debt Service Coverage Ratio (EBITDA – Capex)/ (Interest + Principle)
  • Fixed Charge Coverage Ratio (EBITDA – Capex – Taxes)/(Interest + Principle)

LBO – Acquiring/Purchase Price – Example

Suppose a group of private equity investors enter into a club deal via a leveraged buyout. The first step is to make a few assumptions regarding sources and uses of funds. This group needs to determine how much it will pay to acquire the target company. They can do this using an EBITDA multiple. Assume that they pay 9 times the current EBITDA.

Next, suppose the revenue of the target company is US$ 5 million, and the EBITDA margin is 15%, and the EBITDA computed is US$ 75,000.

Now, to calculate the price to acquire the target company, we multiply the EBITDA multiple of 9 by the EBITDA – which is equal to US$ 675,000 (i.e. the purchase price).

Test Your Knowledge

Download the Excel files for the answer.

Club Deals - Workout 2


A key point regarding club deals is that they are about more than just looking for any relatively suitable private equity partner. The right partner will have the experience, expertise, and industry relationships to maximize their value to the transaction.