Among buyout practitioners, going it alone used to be the strategy of choice. It was one team, one fund and the deal. No matter how large the target, sharing the risk let alone the reward was not on the agenda. Just think back to RJR Nabisco.
Those days are well and truly over. Today one in three leveraged buyouts are club deals, involving at least two if not more sponsors sharing the equity commitment. There are several reasons for this trend, most notably that buyouts are getting bigger while debt remains scarce, so that more equity is needed to get deals done, and equity is expensive. And the recent increase in LBOs ending in write-offs has reminded GPs that betting the fund on a bad deal could cost them the firm – or at least the firm's prospects of ever raising new capital. Much better to reduce their exposure to any one transaction by bringing competent partners.
Because deal size is increasing, such deal sharing doesn't necessarily mean that GPs will have to invest their capital more slowly than they might be inclined to. To the contrary, if the big buyout funds keep inviting each other into whatever data room they happen to sit in, chances are the industry as a whole will be putting a lot of money to work pretty quickly – and resume fundraising sooner than their limited partners might have expected.
What this means is that the club deal phenomenon when applied to buyouts could be a great catalyst for those large, institutionalised general partnerships aiming to further grow funds under management. Asset gathering might be the name of the game, particularly if deal completion rates pick up as expected. Whether these familiar firms raising new funds will find enough supply to keep replenishing their increasingly interconnected war chests will then be up to the buyside. The legacy of the club buyout may be more profound than many LPs – and possibly the GPs involved – realise.
Philip BorelManaging Editor