What Is a 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.

Key Takeaways

  • A club deal refers to a private equity buyout where several private equity firms pool their assets to acquire a company.
  • Club deals allow private equity firms to collectively acquire expensive companies they normally could not afford and spread the risk among the participating firms.
  • Criticism of club deals includes issues regarding regulatory practices, market cornering, and conflicts of interest.

Understanding Club Deals

While club deals have grown in popularity in recent years, there are issues that can arise from them related to regulatory practices, conflicts of interest, and cornering the market. 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 during the acquisition process.

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 a future sale to the public.

Club Deal and Private Equity Buyouts

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. Using an MBO strategy, large corporations are often able to sell divisions that are no longer a part of their core business.

In addition, if owners wish to retire, an 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 a 90% debt to a 10% equity ratio. Because of this high debt to equity ratio, some people view the strategy as ruthless and predatory against smaller companies.

Example of a Club Deal

In 2015, the private equity firm Permira teamed up with Canada Pension Plan Investment Board (CPPIB) to purchase Informatica, a California-based enterprise software provider for $5.3 billion. To enable the deal, banks provided $2.6 billion of long-term debt. This was one of the year’s most high-profile LBOs, particularly within enterprise software.

However, as is the case with some leveraged buyouts, the road to completing the deal was not without challenges. Law firms representing shareholder rights investigated the deal, questioning if this was the best option available. After reviewing other options (including an attempt to sell the company through an auction), management determined the private equity deal offered by Permira and CPPIB was the best alternative.

Eventually, shareholders approved the deal and received $48.75 in cash for each share of common stock. At the completion of the deal, Informatica turned private and delisted from the NASDAQ.