Cracking the Club Code
The clear advantages include:
- access to larger transactions and higher value assets (and bolt-ons) which would otherwise be beyond an individual fund’s capacity or comfort level;
- for incumbent sponsors, the chance to realise an asset whilst retaining a stake with a winning platform and management team;
- sharing the cost and workload involved in the initial due diligence, preparation, and document negotiation stage (particularly beneficial on unsuccessful bids);
- combining expertise, specific sector knowledge and practical experience in the market; and
Club deals however require engaging in complex control-sharing arrangements among PE funds that are accustomed to claiming full decision-making authority. To get the best out of clubbing arrangements, all parties need to navigate and manage the joint relationship and co-operate during all stages of the investment’s lifecycle from acquisition, through the ‘managing and monitoring phase’ and onto exit.
Here are some of the key considerations and challenges faced by PE sponsors when embarking on a collaborative buyout:
Speak with one voice
A clear deal framework is crucial to cracking the club code. Consortium members should align on negotiation tactics, governance, economics, structure and advisers well in advance of submitting a bid to allow them to streamline decision making. When operating in a competitive auction process, the club needs to present a united and aligned front with a sleek ‘behind the scenes’ decision-making process. Such alignment needs to extend to the advisers – fault lines or rivalry will easily be exposed if not.
Bigger is not always better
Antitrust notifications or approvals are often triggered by the size of revenues in different jurisdictions – even where the Target itself has negligible operations. Antitrust considerations are of greater important on consortium deals as the parties’ revenues in different jurisdictions need to be considered together which increases the likelihood of an antitrust trigger. It is essential to prepare antitrust analysis in advance to understand the potential impact on transaction timelines and enhance execution deliverability.
Big brother/little brother
Contractual terms should be detailed and anticipate potential conflicts. Minority consent matters should be tightly drafted to ensure that what may, on the face of it, seem like an appropriate minority consent matter does not lead to inadvertent overreach on a material consortium or strategic decision. For example, what one party intended to be a high-level minority consent over material acquisitions could be interpreted by the other as a consent right over all and every granular aspect of such acquisitions.
Align on exit expectations
Due to the number of parties involved, club deals are potentiality rife with conflict including potential tensions among PE firms with different time frames and objectives. One of the most heavily negotiated areas in club deals are the transfer provisions and exit rights. This is of greater important when consortia consist of differing vintages of ownership which can lead to divergences on exit strategies, timing and structure. While the parties can look to include a typical lock up period following completion and a minimum return threshold, discussing and aligning on expectations – including the fraught question of who can drag whom - from the outset is key.
Club deals are most effective when all the investors are aligned on basic deal expectations and the eventual outcome of the investment. By fostering collaboration, ironing out conflicting agendas and staying alert to anti-trust implications early on investors can harness the collective strength of clubbing together.
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