The total value of UK private equity club deals hit GBP19.7 billion last year, a fourfold increase from the GBP4.5 billion last year, says Pinsent Masons, the multinational law firm.
The number of these ‘club deals’ has reached a three-year high (see graph below) – there were 56 deals last year, up 30 per cent from 43 the year before. A ‘club deal’ is when two or more private equity or trade buyers jointly acquire a company. One of the biggest club deals of recent years was the GBP6.8 billion acquisition of ASDA, in October last year by the Issa brothers and TDR Capital.
Alasdair Weir, Partner at Pinsent Masons, says by pooling their fire power, club deals allow groups of investors to buy bigger targets and share risk. In some cases this can reduce the amount of leverage needed, allowing deals to be equity funded more quickly and with more certainty.
The impact of Covid-19 on the economy has caused some lenders to exercise more caution on leveraged buyouts in those sectors most affected by the lockdown. By increasing the equity slice, club deals allow buyers to use lower levels of debt financing. Sellers will typically look more favourably on a purchaser that does not have to arrange a large debt financing.
Pinsent Masons says however, there are a number of considerations investors need to make before entering into a club deal. Parties need to ensure they are comfortable with the structure, management and decision making of the investee company, and that the other parties to the transaction are groups they can work and communicate with if the business underperforms.
Pinsent Masons says that whilst PE investors have significant capital they are looking to deploy they may still want to diversify their risks by sharing a deal with a partner. Some public M&A deals have even seen bidders who were initially competing join forces in a club deal to secure the target. This was the case in the takeovers of both Signature Aviation and The AA Group. A club bid might also make a more technically difficult investment less of a stretch to a fund as it allows the PE fund to pool its expertise with that of its partner’s particular expertise, for example in finance or operational change, or a geographical or specialist focus as was seen in the joint offer by Intact Financial and Tryg for RSA Insurance Group.
Club bids also allow investors to buy larger businesses whose established market leading positions in their sector might provide it with more stable cash flow generation than a company half its size.
Weir adds: “Whilst the expectation might be that private equity wants to be in sole control of its portfolio investments, PE funds are often comfortable with working in partnership with other funds and sharing strategic decision making.”
“The amount of money that funds need to deploy means they are willing to be flexible looking at both club bids and co-invests. The recent successful exit of the Blackstone led consortium from Refinitiv might act as a catalyst to other investors, proving that large consortium deals can be agile and deliver outsized returns.”
“The composition of these groups of investors is absolutely key – issues around governance, control and exit mechanisms need to be agreed at the start. Club deals allow investors to have skin in the game but less concentrated risk. This has become attractive to investors in the current climate where significant uncertainties remain.”
