Club deals: how billionaire families team up on big deals
Built on Chapter 12 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
People often use the terms club deal and co-investment as if they mean the same thing. They are related, but they work differently, and the difference affects how a family should approach them.
What makes a club deal
A club deal is when several investors pool money to take on a deal that is too big for one of them. A family office might find an owner who wants to sell a business. If the price is more than the family wants to write alone, it brings in other families to fill the gap.
In a club deal, the partners usually come in on the same terms and under the same structure. They agree on those terms in advance. The partners are often active and close to equal in size.
A co-investment is usually an add-on. A fund or lead investor sources the deal and offers a slice to certain investors. Those co-investors tend to be more passive, and their terms are set case by case.
Who leads
Every club deal needs a lead, even among equals. The lead usually found the deal or knows the industry best. They run diligence, talk to the seller, and keep the partners moving.
Families should agree early on what the lead can decide alone and what needs a vote. They should also agree on whether the lead is paid for the extra work. Leaving this vague causes trouble later.
Big buyouts use the same idea
Some of the largest buyouts in history have been, in part, club deals. A founder or a family office teams up with an experienced private equity firm to take on a deal neither would do alone.
To me, the lesson is simple. Very wealthy families team with experienced partners to take on deals far bigger than they would do alone.
Investment clubs among families
I know of an energy family office that formed an investment club around one theme. Members vote families in and out of the group. That gives each deal a known set of partners with shared views.
Picking partners well
A club deal is a long marriage. One family office executive I interviewed for the book told me his team keeps checking a partner's references until they feel fully comfortable. They go past the obvious names to lenders and former staff, and then to vendors who have worked with the person.
He also said there is no single right way to do deals. The structure has to fit each family's goals and time frame. A great deal can still be wrong for a family that needs its money back sooner than the others.
Where club deals go wrong
Most fights I see come from a few sources. Partners have different time frames, so one wants to sell and another wants to hold. Partners disagree on whether to put in more money when things get hard. Or the lead stops sharing information as fully as before.
Agree on these points before you sign, in writing. It is much easier to settle them while everyone is excited than after the business hits a rough year.
What to take from this
- Use club deals for the deals your family could not or should not carry alone.
- Name a lead and define their authority and pay up front.
- Check each partner's references well beyond the list they give you.
- Agree on hold period, follow-on money, and reporting before closing.
This page is general information, not legal or investment advice. Speak with a qualified attorney before forming any investment partnership.
Questions and answers
What is the difference between a club deal and a co-investment? Club deals pool near-equal partners on shared terms. Co-investments are usually offered by a lead investor to more passive partners.
Who leads a club deal? Usually the partner who found the deal or knows the industry best.
What causes most club deal disputes? Mismatched time frames, follow-on funding, and information sharing.
Can families form standing investment clubs? Yes. Some families run groups around one theme and vote members in and out.