Tuesday, January 25 2022

Club deals are back whether institutional investors like it or not.

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

And for good reason: when several private equity firms join forces and pool their resources to buy a large company, the sponsors of their funds do not always benefit.

Among other things, the beneficiaries said Institutional investor whereas club agreements often concentrate risk in their private equity portfolios – now, a stake in a large company is equivalent to a stake in several funds; add unwanted complexity; and to put the financial interests of investors in the background to the private equity firms themselves.

As an example, an allocator who has invested in a fund might now have unintentional exposure to a private equity firm with which he is unfamiliar.

“As an LP, you have now formed secondary relationships with general practitioners that you might not want to be associated with,” said Geeta Kapadia, associate treasurer of investments at Yale New Haven Health System. “You have to be sure it’s out of your control. ”

black stone in partnership with Carlyle and Hellman & Friedman Acquire Healthcare Provider Medline Industries, apparently for $ 34 billion, early June. Friday, Blackstone say it partnered with Vista Equity Partners to purchase higher education firm Ellucian. And the last chord, announced Monday, brought together Blackstone Infrastructure Partners, CDP Equity and Macquarie Asset Management to purchase one of the largest toll motorway operators in Europe, Autostrade per l’Italia.

Here’s how the deals work: A few general partners, usually private equity firms, although institutions may join as co-investors, pool their capital to make a massive investment. They could either sign as minority or majority owners, depending on the structure. Limited Partners have no say in who their investment manager chooses to partner with.

Already seen?

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

While the return of these deals may not signal a market downturn similar to 2008, they do show that there is a mountain of dry powder waiting to be invested, but not enough companies for everything. the world.

“These giant buyout managers must team up to close deals,” according to an allocator who spoke with II on condition of anonymity. “It’s something that is a little scary.”

Buying a house with others is nott Simple

The complexity of transactions is a concern for investors. “It’s like buying a house with more than one person. You have to be sure that all parties can agree on the terms for the sale to go through, ”Kapadia said.

According to the allocator, while general partners can negotiate certain control rights, it is rare for all of them to be at similar times during the life of their fund. Each general partner may have different end goals for the transaction, which can complicate matters, especially exits.

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

With club offers, who does the heavy lifting?

Beneficiaries are also concerned about the concentration risks presented by club agreements. The owner of the asset could be invested with several general partners who meet on the deal. “Each of the funds tries to manage concentration risk, but for you as an investor it doesn’t make a difference because you’re in both funds,” said the asset owner.

This concentration is especially frustrating when two companies with different strategies, say a buyout fund and an infrastructure investor, end up teaming up on the same deal, they added. As an investor, one would expect to get uncorrelated returns from the funds, but this does not happen when those funds team up for the same trade.

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

Still, sponsors can get less than they bargained for, including paying GP fees for services that other parties to the agreement might actually provide.

“With private equity and other skill-based and people-based asset classes, you’re willing to pay these fees because the team brings something unique to the table that, in the end, will provide you with excess return. Kapadia said. “You pay for the case that maybe they didn’t initiate or maybe they could be in. They aren’t the only GPs doing the heavy lifting.

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