Club deals fulfill investors’ appetite for very large deals, for example the $31,6 billion acquisition of the biggest US hospital operator (HCA) in 2006. At the time of its announcement, this was the world’s largest leveraged buy-out and this was a club deal realized by KKR and Bain Capital, together with Merrill Lynch and the Thomas Frist family (HCA company founder).
Another important reason that investors pursue club deals is that club deals allow investors to have more control over their investment compared to investing into funds.
The outburst of investors’ disappointment and mistrust in fund managers during the financial crisis made investors want to take a more active role in their investments. Some of the previously passive investors shifted to direct investment by co-investing with other like-minded investors. Private investors particularly appreciate the high degree of transparency and flexibility these deals offer. This allows them to have more control over the product they allocate capital to than investing in a fund in which they are tied to rigid fund terms.
However, there are also downsides of club deals. The major concern is internal control issues. Joining a club may have to share authority over decision making and to share confidential information, which investors are generally very hesitant to do. Club deal investors gather out of common interest and mutual trust.
However, interest conflict and division of opinion can happen at any time, complicating decision-making process and governance. Another challenge to co-investor is the potential lack of expertise that has traditionally been the preserve of fund managers to exercise efficient control and influence over their investment.