As the COVID-19 pandemic continues to cause turmoil in the global economy and financial markets, debt financing sources are tightening their grip on available liquidity while reassessing existing facilities and lending practices in light of these new market conditions. Many companies have drawn down existing revolvers as a source of liquidity to ride out the downturn. These factors have limited the availability of acquisition financings and resulted in more lender-friendly terms for any newly issued debt, including increased borrowing costs and stricter financial covenants. In light of the current economic circumstances, acquirors who wish to pursue new opportunities could consider a club deal as an alternative to debt financing and a way in which they may pursue larger targets, stretch their available dry powder, and spread their risk across a wider number of investments.
A club deal, also known as a consortium, is when two or more private equity firms, family offices or other investors jointly purchase a business. There are a number of reasons why an acquiror may consider a club deal in today’s market. First and foremost is access to additional capital, especially when access to debt may be limited and/or only available on very lender-friendly terms. Teaming up with one or more parties allows joint acquirors to pursue larger transactions than they otherwise may not have had the capital to pursue. In addition, sellers typically prefer an all-equity transaction because it generally can be executed quicker and offers greater deal certainty than a debt-financed deal (though this deal certainty may be offset somewhat by concerns a seller may have with a deal with joint bidders, as described below). Addressing another important concern in today’s market, club deals allow the joint acquirors to spread their risk over a number of investments rather than committing a large amount of capital to one target. Finally, certain partners can bring unique industry experience and synergy opportunities to the consortium that it may not otherwise have, making it a more appealing buyer, allowing it to pay more for the asset and enhancing the chances of success of the target following the acquisition.