This week Cinven and CVC teamed up to buy NewDay, a UK consumer finance business, for a consideration understood to be around £1 billion ($1.2 billion; €1.1 billion). The deal was notable for a number of reasons, but chiefly because it taps into a theme of recent market chatter; club deals being on the rise.
“The market is incredibly crowded with a lot of capital chasing deals,” says one London-based investment banker. “Firms will want to partner with each other more.”
Club deals are – of course – far from a new phenomenon. They were a common feature of the boom-era deal landscape.
All things being equal, limited partners would prefer their GPs not to invest together. This is primarily because, having created a diversified private equity programme by committing to different managers, they can end up with a concentrated exposure to a single asset.
The California Public Employees' Retirement System, for example, has exposure to the unsuccessful $28 billion investment in Caesars Entertainment – or Harrah's as it was previously known – through its commitments to both TPG Partners V and Apollo Investment Fund VI. The Caesars investment has dragged on both of those funds, which were generating IRRs of 8.8 percent and 3.8 percent respectively as of March, according to CalPERS' data. The pension was unavailable for comment at press time.
“If it is just about pooling capital, then we don't like it,” says a private equity investor at a European pension fund. “If both parties have individual competencies, we are OK with it.”
In the case of the NewDay deal, one driver behind “clubbing it” would have been the size of the equity cheque involved. Another would have been the level of comfort the two parties would have had in each others' ability to transact in an uncertain, post-Brexit deal environment.
Generally speaking, teaming up with another GP is unlikely to be a managers' first choice. For one thing, it can slightly muddy the waters when it comes to analysing and attributing performance after the event. If the investment is a success, which firm takes credit for deal sourcing and value creation? In some cases it may also leave LPs, many of whom have been actively pressing for co-investment opportunities, wondering why they are not participating as co-investor instead.
But while LPs may theoretically dislike club deals, they won't say no to decent returns. Cinven and CVC, for example, can point to a track record of working well together in the past; their joint investment in Avolon, an aircraft leasing business acquired May 2010, ultimately generated 2.3 times invested capital. In fact, Cinven's most successful deal to date – its 2005 investment in Amadeus delivered a 7x return – was a club deal with BC Partners.
In the end, it is the performance that counts.