Club Deal Private Equity: investing collectively in unlisted companies
What is a Club Deal in Private Equity?
Definition and principles of Club Deal Private Equity
One Club Deal in Private Equity, it is when several investors come together to invest together in a company that is not listed on the stock exchange.
Unlike a traditional investment fund that manages several investments in parallel, the Club Deal focuses on a single project at a time.
Difference with other types of Club Deals:
- Real Estate Club Deal: Several investors buy a major real estate property together.
- Club Deal infrastructures: Same principle but applied to projects such as roads, wind turbines or hospitals.
- Classic Investment Club: Larger structure, without focusing on a single project.
Good to know: One Club Deal “classic” can concern any type of group investment. A Private Equity Club Deal is more specific: the group invests only in unlisted companies. The objective is to make these businesses grow in order to resell them at a profit a few years later.
How does a Private Equity Club Deal work?
The first step is selecting the target business. Experts look for a company that has potential, study its finances and check that it matches the goals of investors.
Then comes the structuring of the investment. This is the time when we organize everything: we create a special investment company, we decide who invests how much, and we put in place the legal documents that protect everyone.
The detention period generally lasts between 4 and 7 years. It is during this time that investors help the business grow. They advise managers, open their address book and follow the results closely.
The exit strategy is thought out from the start. The aim is to sell the shares at a profit, either to a larger company or to another investment fund. Choosing the right time and the right buyer is crucial to maximizing the return on investment.
Private Equity: understanding this investment sector
What is the private equity business?
Private equity is a job that consists in transforming companies to make them more efficient. Investors don't just bring money: they also put their expertise at the service of the company to help it grow.
There are three main ways to intervene depending on the type of business:
- Venture capital: It finances young innovative startups that need money to launch, even if they are not yet making a profit.
- Development capital: It supports businesses that are already profitable and want to grow more quickly, for example by opening new factories or buying out competitors.
- Capital transfer: It makes it possible to buy mature businesses, often when their manager retires, in order to modernize them and sell them stronger a few years later.
In all cases, the objective is the same: to make the business grow for 4 to 7 years in order to resell it at a profit. It is a real work of transformation that requires expertise and time.
What is the objective of Private Equity?
Private equity pursues three main strategies for successful investments:
Value creation is at the heart of the approach. Concretely, it is a question of improving the organization of the company, modernizing its tools and developing new products to make it more efficient.
Accelerated growth then makes it possible to change the scale. The company is using its new capabilities to conquer new markets, acquire other companies and expand internationally. This phase of rapid expansion is transforming a local company into a major player in its sector.
Finally, maximizing returns is the end goal. After 4 to 7 years of intensive support, the company is worth much more than at the beginning. Investors can then sell their shares at a significant profit, rewarding their initial commitment.
Profitability and risks of private equity in club deals
What are the risks of private equity?
Private equity is no exception to the basic rules of investment: opportunities for significant gains are always accompanied by risks that should not be overlooked.
Illiquidity is the most restrictive point. Your money is locked up for several years and cannot be recovered until the end of the project. It's not like the stock exchange where you can sell your shares overnight.
You can also lose some or all of your bet if the business doesn't take off as planned. Even the best management teams cannot guarantee the success of a business project.
Patience is mandatory, as these investments last between 4 and 7 years. During this period, it is difficult to know the true value of your investment. The concrete results only appear at the end, during the resale.
The club deal makes it possible to share these risks with several people, but does not make them disappear. This is why it is essential to properly diversify your investments and not to put all your eggs in one basket.
How to analyze a private equity fund?
Before investing in a private equity fund, you need to look at the right indicators to make the right choice.
You have to look at the results of the fund's previous investments: how many companies were successful? What returns have been obtained? Even if the past does not guarantee the future, it is a good indication of the expertise of the team.
The management strategy should be clear and consistent. You need to understand how the fund selects its businesses and what methods it uses to make them grow.
The quality of the companies already selected reveals the fund's ability to identify good opportunities. A good fund knows how to identify businesses with high potential.
To reduce risks, it is essential to diversify your investments and to conduct a thorough analysis (due diligence) before engaging.
Financial mechanisms and remuneration in Private Equity
How does a private equity fund work?
A private equity fund is structured around three main players.
Investors who provide initial capital. Then comes the management company that manages all operations: it selects companies, negotiates purchases and supports their development.
To finance acquisitions, the fund combines two sources: money from investors and bank loans. This strategy, called leverage, makes it possible to buy larger businesses. The fund keeps these businesses for between 4 and 7 years, the time needed to develop them before reselling them with added value.
How do you get paid for a private equity fund?
The remuneration of a private equity fund is based on several types of fees. Investors first pay annual management fees, generally between 1.5% and 2.5% of the amount invested. These fees allow the management company to finance its team and its daily operations.
The main source of income comes from “carried interest.” It is a performance bonus that the management company receives when it resells businesses at a profit. In general, it takes 20% of profits once investors get their initial bet back and a minimum return.
Other fees are added depending on the operations:
- Entry fees upon initial investment (1 to 3%)
- Study fees to analyze target businesses
- Legal Fees for Purchase and Sale Contracts
- Follow-up costs for portfolio companies
Opportunities and strategies for investing in Club Deal Private Equity
What is the best private equity fund?
The choice of a fund depends above all on your investment strategy. The best funds stand out for their track record (historical performance) and the expertise of their managers. The essential criteria are the consistency of past returns and the experience of the team in its sector.
Two types of structures stand out on the market:
Large institutional funds manage billions of euros and invest in large companies. They require high admission tickets (often several million) but give access to prestigious deals. Their track record is often longer and more stable.
Club deals, which are more accessible, allow several people to invest in established companies. Entry tickets are lower and investors can participate more actively in decisions. These structures offer more flexibility but require a good knowledge of the sector.
Why choose a Club Deal over a Private Equity Fund?
A club deal represents an investment transaction where several investors join forces directly to acquire a specific company. They have direct control over the investment and are actively involved in strategic decisions.
A private equity fund, on the other hand, is an investment structure managed by a professional management company. Investors entrust their capital to this company, which invests them in several companies according to a predefined strategy.
The main differences relate to governance. The choice between the two therefore depends on what you are looking for: if you want to keep control of your investments and have the necessary expertise, the Club Deal can be interesting. If you prefer to delegate management to professionals and diversify your investments, a Private Equity Fund will be more suitable.
Conclusion
Club Deal Private Equity is a different way of investing together in companies that are not on the stock market. Instead of entrusting your money to a large fund that manages dozens of businesses, you focus on a few well-chosen projects that you follow closely.
This approach has its advantages: we know exactly where our money is going, we can give our opinion on important decisions, and we benefit from the expertise of a team that knows its job well. Of course, there are also constraints: the money is locked up for several years and you have to be ready to take risks.
To explore this type of investment, the best approach is to discuss it with experienced investors. Join our Business Club To talk with them and discover new investment opportunities.
To deepen your knowledge, also discover our complete article on Club Deal.