Peter Fogel April 23, 2014
Many of the largest and most familiar private equity deals of all time, including Energy Future Holdings (formerly TXU), Freescale Semiconductor and Hospital Corporation of America, are known for having multiple private equity firms join together to submit bids large enough to cover the entire equity check but still small enough for each firm to safeguard the integrity of their funds. Throughout the private equity boom years of the mid-2000s, these “club deals,” as they’re known, accounted for about half of all platform buyouts of more than $1 billion (large deals). Moreover, club deals usually comprised nearly two-thirds of the total capital invested in large deals from that era, data sourced from the PitchBook Platform show.
In recent years however, club deals (and larger deals in general) have lost some of their allure, as PE investors increasingly find their previous large deals to be either wholly unsuccessful (TXU is an example), essentially a wash or difficult to exit. During the early days of the financial crisis, the PE industry saw a decline both in the number of large deals and in the proportion of club deals greater than $1 billion. Less than 35% of large deals that closed in 2008 were club deals, a first for the 2000s, but it took until 2010 for non-club deals to make up at least half of the capital invested in large deals.
Since 2008, club deals have comprised only about one-third of large deals in a given year. To that end, capital invested in non-club deals has slowly been increasing as a percentage of overall capital invested in large deals, and in 2011, reached about two-thirds for the first time. While private equity firms are still somewhat interested in pursuing large deals, they may have lost a taste for the traditional club deal. Last year, we saw 85% of large deals and nearly 90% of capital go to non-club deals; however, several major buyouts that aren’t classified as traditional club deals, such as Dell and Neiman Marcus, saw PE firms partner with non-PE firms to execute such massive transactions.
Some people have explained the recent decline in club deals as the result of limited partners’ growing push toimplement co-investment programs with GPs, rather than see the funds they’re invested in partner with each other to conduct club deals. One of the main reasons for why LPs would rather directly co-invest with specific funds is that management fees can be reduced and the risk isn’t spread across several of its investments (if those funds co-invest with each other). In club deals of greater than $1 billion, limited partners tend to be invested across multiple funds investing in the same deal. For example, in the 2006 buyout of Freescale Semiconductor, at least 24 LPs were invested in at least three of the participating funds (Carlyle IV, Blackstone V and TPG V) and at least 72 LPs were invested in at least two of the funds. LPs would rather assume the same level of risk that they were exposed to in those deals but avoid the management fees associated with investing in several funds.
Others feel that the decline in club deals is partly related to target companies’ concerns that firms in club deals may be colluding to keep prices down. Companies have argued that club deals reduce the amount they could be acquired for by having other potential bidders wrapped up in the club, rather than competing against each other. However, others have argued that the club deal’s decline is due more in part to the lackluster returns generated by the major deals of the last decade. And still others feel that the decline in club deals is more of a reflection on thelack of large, desirable buyout opportunities.
The pivot away from club deals is probably a confluence of these factors, but limited partners and private equity firms will both continue to look for profitable endeavors and invest opportunistically. Some firms who did not see great returns from their mid-decade deals, such as TPG, have turned more toward large growth rounds (as seen by TPG’s recent investments in Uber and Airbnb). Others have moved to act as the sole investors in large deals, like KKR’s recent $3.7 billion buyout of Gardner Denver. And, yet, others have continued to make large investments with other private equity firms, such as in the $6.9 billion buyout of BMC Software, which involved Bain Capital, Golden Gate Capital and others.
In many ways, this overall shift away from club deals gives credence to growing diversification in PE firms’ approaches to investing, which the PitchBook Blog has covered in several articles detailing the rise of growth deals and add-ons.