Club Deals and Private Equity Fund Partnership

5 min readAug 12, 2020

Club deals or “consortium deals” are used by private equity firms. Private equity funds either acquire stock in a target company individually or combine with other private equity firms to acquire a target. The combination deals let them spread out the risk. It is also important since many funds require only a certain percentage. For instance, 10% of a fund’s assets can be invested in any particular investment.

A billion fund, or a large equity firm by any standards, would be limited to acquisitions of a maximum of $1 billion for 100% acquisition. This is if it chose not to use debt to complete the transaction. If this is the case, they may opt to combine forces with other private equity firms when they are trying to complete a large acquisition.

Examples of Private Equity Fund Partnership and “Club Deals”

For instance, Silver Lake Partners in 2005 completed the second-largest LBO up to that time. The company combined with six other private equity firms to acquire Sungard Data Systems. They did so for $10.8 billion.

Blackstone Group, Kohlberg Kravis & Roberts, Texas Pacific Group Goldman Sachs Partners, and Providence Equity Partners. These are just the other private equity firms that participated in the takeover.

Private equity firms form competing groups or partnerships because of their too much involvement in takeovers. They also bid against each other for takeover targets. Let’s take a great example from 2005. That year, KKR combined with Silverlake Partners to acquire Agilent Technologies Inc.’s semiconductor products business. They did so for $2.6 billion.

Agilent Technologies Inc.’s Acquisition

As a part of a focusing strategy, Hewlett-Packard spun off this company in 1999. Agilent Technologies pursued a focusing strategy in 2005 when it decided to try selling out its chip unit and lighting business.

William Sullivan, their CEO, said that Agilent was trading a 25% to 35% discount to its peers, considering that it was a diversified company. Giving the company increased sell-offs was key to lowering the discount that the market was applying to his company.

KKR and Silverlake won the contest in which they were bidding against two other buyout groups. One featured Brain Capital and Warburg Pincus, while another had Texas Pacific Group, CVC Partners, and Francisco Partners as participants.

For others, like Officer, Ozbas, and Sensoy, club deals tend to lower the pool of potential demanders for target companies. Hence lowering the prices that targets are getting in the market. Their study concludes that target shareholders receive 10% less of pre-bid value and 40% lower premiums.

This may mean that private equity buyers might be colluding to lower prices they pay for targets. These results were, however, not consistent with other results.

For instance, Boone and Mulherin failed to find lower target prices. This was after analyzing a sample of 870 publicly traded targets from the year 2003 up until 2007. They think that these results are because of the changes in the market. Like the increased use of go-shop provisions and the availability of stapled financing. The latter could even eliminate some of the benefits club deals may have over single buyers.

“Club Deals” Over the Recent Years

Club or consortium deals have become less popular in recent years. Private equity firms do not have complete control as much as they do when they acquire the target by themselves. They learned that dealing with other owners can make the transaction and the management and subsequent sale more complicated. Diverse views on how the company should be managed, the appropriate time, and way to seek an exit have made more private equity firms bypass this option.

Private Equity Business Model

The business model is relatively simple. Compared to some of the leading names in finance work in this industry and often lucrative compensation. First, for the private equity buyers, have contacts with investors and sales skills. This will let them convince institutional investors to invest a portion of their capital into one of their private equity funds.

Next, find undervalued targets where they can be directly assisted by poor management in the target company. Perhaps it is facilitated by weak governance of corporations, where the managers may have run the company in a way that hindered its potential.

The moment that an acceptable target is found and there is an agreed-upon acquisition price. The GPs secure the debt capital using relationships they have with various banks. Funds are able to acquire this capital at very low rates. This is with the help of recent expansionary monetary policy for the Federal Reserve and global central banks.

Buying Undervalued Targets

Private equity buyers use cheap debt to buy undervalued targets. There are also plus points if the targets do not already have significant debt. Since they may want to have the target to acquire more debt which can be used to pay themselves a “dividend”.

Private equity firms love when the market rises. It lets them buy at one price, and then a few years later, sell the target in an elevated market at a higher price than what they paid.

Then, they conduct this business in a good economy with a rising market. Once they have the chance, they flip the target, higher debt, and all, onto a buyer.

In the 2000s, financing the deal was done at low costs, and this magnified their returns on the relatively small equity investment that they made. When the market is rising, and the cost of debt is low with an ample supply of capital available, private equity industries are at the advantage. Dealmakers may seem smart and are asking for too much, but the steps in the process are very simple.

Other Exit Strategies for Private Equity

One way a private equity buyer can exit from an investment is through a sale to a corporate buyer. The buyer sees the acquisition as a complement to its business strategy. Another is a sponsor-to-sponsor deal. This is where one private equity firm sells a prior acquisition to another private equity firm. Another is by means of public offerings. This is where the private equity firm sponsors a public offering in the stock it owns in its previous acquisition.