Club Deals Not Going Away

I just finished being interviewed by a reporter about the possibility of a Chrysler buyout, during which I was asked the following question: “Do you think it could be a club deal?” My response was a more articulate version of “hell yeah.”

The question’s undercurrent was this burgeoning notion that club deals are – or should be – on the decline. I haven’t yet heard a comprehensive reason for why this would be, but individual rationales include: (a) SEC inquiry into possible collusion between LBO firms; (b) LBO firms have so much fund capital that they no longer need to partner up; and (c) LBO firms are beginning to realize that it can be difficult to negotiate a club deal exit. Only the last of these has any substance, and it’s faint. After all: (a) The SEC inquiry has been dead since its months-old arrival and (b) Yes, firms have more capital — but the deals are getting larger, so it’s a wash.

More importantly, there are several prevailing factors that should keep club deals alive and kicking for some time to come:

First, club deals are a tough habit to break (particularly without a convincing reason to do so). Private equiteers think nothing of competing on one deal and then partnering on another – sometimes on the same day in back-to-back conference calls. It’s as common as dividend recaps and gaudy art collections. And it got this way for a good reason: Club deals help protect against downside. Sure they can also take a bit off the upside, but there’s usually enough of that to go around.

Second, increased dealflow in niche geographic and industrial sectors (China, Middle East, semiconductors, infrastructure, cleantech, etc.) often requires outside competencies. There are now multiple private equity firms specializing in most every niche, and it often makes sense to bring one or two in on a deal (for both due diligence and post-transaction expertise). Sometimes this is an industry-dedicated firm like Silver Lake or Providence, or perhaps a more generalized firm with strong industry practices (Carlyle). Either way, it’s always best to know what you don’t know well…

Third, it is basically true that fund size growth offsets deal size growth. But that’s only a dollars game. Deal volume growth also is increasing, and some firms simply don’t have the manpower to handle it – either during due diligence or post-acquisition. They’d prefer to have just one partner on a given deal, which would be impossible if they did a $10 billion buyout alone. But if you syndicate…