A club deal, in finance, refers to a

leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...

or other

private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...

investment that involves two or more

private equity firm A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including lev ...

s. It can also be referred as consortium or syndicated investment.

Definition

In a club deal, the investor group of

s pools its assets together and makes the acquisition collectively. The practice has allowed private equity to purchase larger and more expensive companies than each firm could acquire through its own private equity funds. By syndicating the equity ownership across a group of investment firms, each firm reduces its concentration and is able to maintain the diversification of its portfolio of investments.

History

In the US, syndicated investment began as early as 1870 with a Pennsylvania Railroad offering. In the 1920s several syndicates existed for the purchase and sale of securities. From 1984 to 2007, an average of 63% of US venture capital firm investments were syndicated according to a 2010 study, rising up to 77% in 2000. In the US, the years from 2000 to 2010 have been called “the conspiratorial era.” The years from 2003 until 2007 were also described as "the era of club deals", since the 2006 antitrust investigation of the Department of Justice prompted a decrease; though, the Department has not brought charges. In 2007, private plaintiffs filed a first

class action law suit A class action, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class action ...

against 13 private equity firms for conspiring in club deals to keep buyout prices down, followed by two more in the ensuing years, which the court consolidated and scaled down against 11 equity firms. In June 2014, Bain Capital Partners, LLC and Goldman Sachs settled for a combined $121 million after more than six years of litigation. An unnamed Goldman executive was quoted as saying “club etiquette” had prevailed in the $17.6 billion takeover of

Freescale Semiconductor Freescale Semiconductor, Inc. was an American semiconductor manufacturer. It was created by the divestiture of the Semiconductor Products Sector of Motorola in 2004. Freescale focused their integrated circuit products on the automotive, embe ...

. End of July Blackstone,

Kohlberg Kravis Roberts KKR & Co. Inc., also known as Kohlberg Kravis Roberts & Co., is an American global investment company that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit, and, through its strate ...

, and

TPG Capital TPG Inc., previously known as Texas Pacific Group and TPG Capital, is an American investment company based in Fort Worth, Texas. The private equity firm is focused on leveraged buyouts and growth capital. TPG manages investment funds in growth c ...

settled for a combined $325 million, as published only in August. In September 2014 a judge will decide whether the plaintiffs can be considered a class whether to approve the settlements. The

Carlyle group The Carlyle Group is a multinational private equity, alternative asset management and financial services corporation based in the United States with $376 billion of assets under management. It specializes in private equity, real assets, and ...

is the only hold out that has not settled yet.

Financial characteristics and outcomes

In a 2009 study of 198 leveraged buyouts in the US from 1984 to 2007, 29% were syndicated and "target shareholders receive approximately 10% less of pre-bid firm equity value, or roughly 40% lower premiums, in club deals compared to sole-sponsored leveraged buyouts", the so-called club discount. However, the lower premiums disappeared with increasing percentage of institutional ownership in the target company, maybe because of institutional owners greater bargaining power for a higher price. On average, club deals were larger in transaction size than sole-sponsor buyouts, but fewer than 20 percent were larger than the largest sole-sponsor buyouts in the last four years. Premiums were lower in club deals announced prior to 2006 than since then. Club deals were no less risky as measured by return volatility and beta, than a sole-sponsor buyout. Even when controlling for size, risk and leverage ratios, club deals required more lenders than sole-sponsor buyouts. According to authors of the 2010 study, the prevalence of syndication suggested a diseconomy associated with venture capital firm scale.

Criticism

In 2006 the US Department of Justice, concerned with bid rigging, opened an investigation of private equity firms regarding their participation in consortiums in past sales. The 2009 study of US buyouts from 1984 to 2007 with 59 club deals concluded that " ..private equity clubs constrain the supply of debt financing for competing bids by aggressively locking up debt financiers”. Institutional investors investing as limited partners in private equity funds criticize the practice of club deals that results in holdings in the same investment through different funds. Large limited partners have preferred to support large leveraged buyouts through

equity co-investment An equity co-investment (or co-investment) is a minority investment, made directly into an operating company, alongside a financial sponsor or other private equity investor, in a leveraged buyout, recapitalization or growth capital transaction. ...

s alongside the leading financial sponsor.

Examples

Among the most notable of the large club deals completed were the following: :*''

Houghton Mifflin The asterisk ( ), from Late Latin , from Ancient Greek , ''asteriskos'', "little star", is a typographical symbol. It is so called because it resembles a conventional image of a heraldic star. Computer scientists and mathematicians often voc ...

'', 2002 - Acquired by a consortium of

Bain Capital Bain Capital is an American private investment firm based in Boston. It specializes in private equity, venture capital, credit, public equity, impact investing, life sciences, and real estate. Bain Capital invests across a range of industry se ...

, the

Blackstone Group Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate bu ...

and

Thomas H. Lee Partners Thomas H. Lee Partners, L.P. is an American private equity firm based in Boston investing in middle market growth companies across financial technology and services, healthcare and technology & business solutions. History Founded in 1974 by ...

:*'' SunGard'', 2005 - Acquired by a consortium of seven private equity investment firms led by Silver Lake Partners (

, the

Goldman Sachs Capital Partners Goldman Sachs Capital Partners is the private equity arm of Goldman Sachs, focused on leveraged buyout and growth capital investments globally. The group, which is based in New York City, was founded in 1986. As of 2019, GS Capital Partners had ...

, KKR, Providence Equity Partners, and

Texas Pacific Group TPG Inc., previously known as Texas Pacific Group and TPG Capital, is an American investment company based in Fort Worth, Texas. The private equity firm is focused on leveraged buyouts and growth capital. TPG manages investment funds in growth ...

) :*''

'', 2006 - Acquired by a consortium led by the

and including the

Carlyle Group The Carlyle Group is a multinational private equity, alternative asset management and financial services corporation based in the United States with $376 billion of assets under management. It specializes in private equity, real assets, and ...

Permira Permira is a global investment firm. Founded in 1985, the firm advises funds with assets under management of €60+ billion. The Permira funds have made approximately 300 private equity investments in four key sectors: Technology, Consumer, Ser ...

, and

) :*'' HCA'', 2006 - Acquired by a consortium of KKR,

, Merrill Lynch and the Frist family :*'' Kinder Morgan'', 2006 - Acquired by a consortium including

, the

and

Riverstone Holdings Riverstone Holdings is a multinational private equity firm based in New York City focused on leveraged buyout, growth capital, and credit investments in the energy industry and electrical power industry sectors. The firm focuses on oil and gas ...

together with co-founder Richard Kinder :*'' NXP Semiconductors'', 2006 - Acquired by a consortium of KKR, Silver Lake Partners and

AlpInvest Partners AlpInvest Partners is a Dutch private equity asset manager with over $47 billion of assets under management as of September 30, 2017. The firm invests on behalf of a broad range of institutional investors from North America, Asia, Europe, South ...

:*''

Biomet Biomet, Inc., was a medical device manufacturer located in the Warsaw, Indiana, business cluster. The company specialized in reconstructive products for orthopedic surgery, neurosurgery, craniomaxillofacial surgery and operating room supplies. In ...

'', 2007 - Acquired by a consortium including the

, KKR,

and

:*'' TXU'', 2007 - Acquired by a consortium including KKR,

and

Lonkevich, Dan and Klump, Edward
KKR, Texas Pacific Will Acquire TXU for $45 Billion
Bloomberg, February 26, 2007.

Definition

History

Financial characteristics and outcomes

Criticism

Examples

See also

References

Further reading