It’s all about capital allocation efficiency.
Club deals gather together smart players with efficient strategies.
When the real estate developers know that they can count on light-speed answers (whether it is a yes or a no), they can identify projects early on. When the time it takes to gather financing is calculated in weeks, and not in months, this gives the ability to pre-empt the best projects available. By contrast, funds are slower to react.
Transparency is key
The 2nd catalyst is the high degree of transparency in the terms and characteristics of a project. Unlike blind pool investments, club deal investors select precisely where they invest. Sometimes, they will even participate in identifying potential investments.
It’s in my interest to protect your interests
The 3rd catalyst is alignment of interest. Investors’ proximity to the entrepreneur favours a clear exchange of information, financial and field data. The common incentive is to repeat the same club deals on future operations together, and trust becomes the most valuable outcome of a club deal.
Occasionally, some investors will want to be hands-on and try to help with their respective expertise (legal, engineering, commercial, etc.).There are many elegant ways to guaranty interests’ alignment with Preferred returns, such as IRR waterfall splits, where investors have a first right on the first distributions.
Lastly, club deals offer the flexibility and agility that giants can’t afford. On the one hand, deals are tailored to the high income population in terms of horizon, ticket size, returns, diversification and risks. On the other, they allow for quick decisions, precisely where the “equity gap” remains, because high operating costs of institutional players doesn’t permit them to intervene viably.
KPMG presented an international survey, where respondents favoured direct Real estate holdings and club deals in 76% of cases.