Club Deals Are Back. Here’s Why Asset Owners Are Skeptical.

Concentration risk, deal complexity, and unaligned interests worry asset allocators.

A factory of medical supply company Medline Industries. (Tim Boyle/Bloomberg)

A factory of medical supply company Medline Industries.

(Tim Boyle/Bloomberg)

Club deals are back, whether institutional investors want them or not.

Since the beginning of June, Blackstone has announced that it completed three massive transactions alongside fellow private equity firms. Asset owners are watching closely to see if they’re a sign that club deals are becoming market mainstays.

And it’s for good reason: when multiple private equity firms join forces and pool their resources to buy a big company, limited partners in their funds don’t always benefit.

Among other things, allocators told Institutional Investor that club deals often concentrate the risks in their private equity portfolios — now a stake in one big company is a holding in multiple funds; add unwanted complexity; and make investors’ own financial interests secondary to the private equity firms themselves.

By way of example, an allocator that invested in one fund could now have unintended exposure to a private equity firm with which they’re unfamiliar.


“As an LP, you’ve now entered into secondary relationships with GPs that you may not want to be associated with,” said Geeta Kapadia, associate treasurer of investments at Yale New Haven Health System. “You have to be comfortable that that’s not within your control anymore.”

Blackstone partnered with Carlyle and Hellman & Friedman to buy healthcare supplier Medline Industries, reportedly for $34 billion, in early June. On Friday, Blackstone said it had paired with Vista Equity Partners to buy higher education firm Ellucian. And the latest deal, announced Monday, brought Blackstone Infrastructure Partners, CDP Equity, and Macquarie Asset Management together to buy one of Europe’s largest toll road operators, Autostrade per l’Italia.

Here’s how the deals work: a few general partners, typically private equity firms, although institutions may join as co-investors, pool their capital to make a massive investment. They could either sign on as minority or majority owners, depending on the structure. Limited partners don’t have a say in who their investment manager chooses to partner with.

Déjà Vu?

Club deals were popular in the lead up to the Great Financial Crisis of 2008, as PitchBook noted in a recent analyst note. In fact, in retrospect, they ended up being a signal for the peak of the market, unsustainable valuations, and a symptom of how much money the industry was sitting on. In some cases, they also ended in bankruptcy. For instance, after KKR, TPG, and Goldman Sachs acquired Energy Future Holdings for $45 billion, the company filed for bankruptcy in 2014. And it’s not the only one: Toys R Us and Caesars Entertainment were also victims of club deals, according to PitchBook.

While the return of these deals may not signal a 2008-like market downturn, they do show that there is a mountain of dry powder waiting to be invested, but not enough companies to go around.

“These giant buyout managers are having to partner with one another to take down deals,” according to an allocator who spoke to II under the condition of anonymity. “That’s something that’s a bit scary.”

Buying a House With Others Isn’t Simple

Deal complexity is a concern for investors. “It’s like buying a house with more than one person. You have to be comfortable that all parties will be able to agree on terms in order for the sale to go through,” Kapadia said.

According to the allocator, while general partners can negotiate for certain control rights, it’s rare that they are all at similar points during their fund lives. Each general partner may have different end goals for the deal, which can make things messy, particularly exits.

“It ends up complicating other things, and they end up giving up some control to other parties,” a separate asset owner at a public fund said. “It would make the exit more difficult.”

With Club Deals, Who Is Doing the Heavy Lifting?

Allocators also worry about the concentration risks that club deals pose. The asset owner could be invested with multiple general partners who are joining together on the deal. “Each of the funds is trying to manage concentration risk, but to you, as an investor, it doesn’t make a difference because you’re in both of the funds,” the asset owner said.

This concentration is particularly frustrating when two firms with different strategies — say, a buyout fund and an infrastructure investor — end up partnered on the same deal, they added. As an investor, one would expect to have uncorrelated returns from the funds, but that doesn’t end up happening when those funds partner on the same deal.

But there’s a flip side to that, Kapadia noted: it’s a good way to leverage economies of scale and to tap into different funds’ expertise and networks.

Still, limited partners may be getting less than they bargained for, including paying GPs fees for services that other parties to the deal might actually be providing.

“With private equity and other skill-based and people-based asset classes, you’re willing to pay these fees because the team brings to the table something unique that will, at the end of the day, provide you with excess return,” Kapadia said. “You’re paying for the deal that they might not have originated or perhaps they could be along for the ride. They aren’t the only GP doing the heavy lifting.”