Dead deal costs are the hidden bill of private markets—the legal, advisory, and diligence expenses on transactions that never close. In club deals and independent sponsor situations, who pays that bill is a real economic and relationship issue, not just a legal footnote.

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What dead deal costs are

Dead deal costs (also called broken deal expenses) are third‑party costs incurred on a transaction that ultimately fails before closing. They typically include:

  • Legal fees (SPA/LPA drafts, negotiations, regulatory work)

  • Financial and tax due diligence (accountants, tax advisors)

  • Commercial/market studies and specialist reports

  • Environmental, technical or operational audits (for real assets)

These expenses are real cash out the door even if no investment is made.

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Why dead deal costs matter

In a traditional fund, dead deal costs are spread across all LPs and all portfolio companies as part of the fund’s expense budget. In a club deal or independent sponsor model, there is no big fund behind the scenes—so someone must absorb them: the sponsor, the investors, or a mix.

This affects:

  • Net returns: Repeated failed deals can quietly erode MOIC and IRR if investors foot the bill.

  • ​Alignment: If sponsors pass most costs to investors with little skin in the game, incentives skew towards “chasing everything.”

  • Relationship quality: Unclear expectations create friction when the first deal breaks late in the process.

How dead deal costs are usually structured

Common approaches you’ll see in term sheets and LPAs:

  • Sponsor‑absorbed (investor‑friendly)

    • The sponsor pays all dead deal costs, effectively treating them as their business risk.

    • Typical where the sponsor is well‑capitalised or using dead deals to build long‑term dealflow credibility.

  • Shared, up to a cap (balanced)

    • Investors agree to reimburse dead deal costs only up to a fixed cap if they had formally “approved” or signed commitment letters.

    • Above the cap, the sponsor absorbs the excess.

  • Investor‑absorbed (sponsor‑friendly)

    • Once an LOI or term sheet is signed, investors agree to cover all third‑party costs, even if the deal dies.

    • Risk of over‑pursuing marginal deals if not balanced by strong sponsor alignment.

  • Your negotiation goal is a fair sharing that reflects who controls go/no‑go decisions and who benefits from a broad sourcing strategy.

Concrete examples

Example 1 – Real estate club deal (balanced)
A sponsor pursues a €40M logistics asset. Diligence costs: €250k (legal, technical, environmental). Late in the process, title defects are found and the deal dies.

  • Pre‑agreed terms: LPs reimburse up to €150k pro‑rata; sponsor absorbs €100k.

  • Rationale: LPs encouraged serious bids but capped their downside; sponsor remained careful with diligence spend.

Example 2 – Mid‑market buyout (investor‑unfriendly)
Independent sponsor runs a €60M acquisition with €400k in diligence. Financing evaporates; deal fails.

  • LPA says all dead deal costs are “fund expenses” of the SPV and must be reimbursed by investors who signed commitment letters, even though no closing occurs.

  • Impact: Each investor pays several basis points of their planned commitment for nothing, reducing appetite for the next deal.
Example 3 – Sponsor‑absorbed (credibility builder)

A new sector specialist sponsor commits to absorbing the first €100k of dead deal costs per transaction as part of building a franchise.

  • Investors only share costs beyond €100k and only if they voted “Approve” at IC.

  • Signal: Sponsor is confident in screening and serious about only bringing high‑conviction deals.

What to negotiate and check

When reviewing term sheets and LPAs, focus on these points:

  • Trigger point: From when do investors become responsible—LOI signed, IC approval, or only after definitive documents?

  • Cap: Is there a hard euro/dollar cap per dead deal and/or per year?

  • Scope: Which types of expenses count (legal only, or all advisors)?

  • Control: Who can authorise additional spend (e.g., “LPAC approval required above €X”)?

  • Carry/fee offsets: Are dead deal costs at least partially offset by reduced fees or improved economics elsewhere?

A good practice is to include a simple example schedule in the appendix of your documents, showing how dead deal costs would be allocated across sponsor and investors for different scenarios.

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Practical guardrails for family offices and LPs

  • Treat dead deal costs as a budget line in your direct/co‑invest program, not a surprise.

  • For new sponsors, push for sponsor‑absorbed or heavily capped structures until trust is built.

  • Use your IC memo to document what you agreed on dead deal economics and revisit if patterns emerge (too many broken deals, too much spend).

  • If you’re often the “anchor” LP, consider tying your willingness to share dead deal costs to meaningful governance and economics upgrades elsewhere (board rights, fee breaks)