The club deal, that bastion of the buyout boom, has returned as a way for buyout shops to write bigger equity checks on deals.
Club deals gained favor in the middle part of this decade as a way for buyout shops to spread risk on huge deals, such as the $11.3 billion buyout of SunGard Data Systems in 2005 by Bain Capital,
Today’s club deals are different from those of the buyout boom, when banks tripped over themselves to grease ever-larger LBOs with easy credit, and cocksure buyout shops were willing to load their companies up with debt. Today, club deals present a way for firms to collect enough cash to sign deals in the $2 billion to $5 billion range that require a substantial equity check. The Skype deal, for example, is being funded with $1.9 billion in cash. Silver Lake co-founder Jim Davidson said at Buyouts West conference in November that the deal is the single largest investment in the firm’s history. Club deals can also ease limited partner liquidity concerns.
“Given that liquidity events over the past 24 months have been relatively constrained with the IPO market returning only recently, LPs are encouraging GPs to be more measured in the speed in which they deploy their funds,” John Miller, the global head of financial sponsors for Barclays Capital, which helped advise the investors in the SkillSoft and Skype deals, told Buyouts.
Where the latest club-deal trend will go remains subject to debate. A senior financial sponsor executive at a major Wall Street bank told Buyouts he expects to see deals north of $10 billion as banks continue to stabilize. Such deals would almost certainly require clubbing. “My personal opinion is we’ll see bigger deals sooner than most people think,” he said.
Barclays Capital’s Miller and others interviewed are skeptical, however, that club deals will take off like they did five years ago. Buyout firms have plenty of capital to put to work, and rebounding credit markets could make it easier for them to go it alone. “I would expect to see most deals done on a non-club basis, so long as deals are staying in the couple billion, $3 billion deal range, and there’s reasonably robust lending,” said an attorney who has worked on several club deals and is currently advising a $5 billion company evaluating deal opportunities that would most likely require multiple sponsors.
With club deals there is also the unwelcome challenge of making sure each buyout firm is on the same page when it comes to strategy, which is difficult to bake into deal documents because of the unforeseen difficulties an investment can encounter, said Brian Gallagher, managing partner of