Exclusive: UK private equity firms pool £20bn fire power as they circle higher value targets
The total value of UK private equity club deals reached £19.7bn last year, a fourfold increase from the £4.5bn in 2019.
Moreover, the number of club deals has reached a three-year high as there were 56 deals in 2020, a jump of 30 per cent from 43 the year before, according to new data that City law firm Pinsent Masons shared with City PM this evening.
A ‘club deal’ is when two or more private equity or trade buyers jointly acquire a company.
One of the biggest club deals of recent years was the £6.8bn acquisition of supermarket chain Asda, in October last year by the Issa brothers and TDR Capital.
Lower levels of debt
The impact of covid-19 on the economy has caused some lenders to exercise more caution on leveraged buyouts in those sectors most affected by the lockdown.
By increasing the equity slice, club deals allow buyers to use lower levels of debt financing, explained City-based Alasdair Weir, partner at Pinsent Masons,
“Sellers will typically look more favourably on a purchaser that does not have to arrange a large debt financing,” he told City PM
By pooling their fire power, club deals allow groups of investors to buy bigger targets and share risk. In some cases this can reduce the amount of leverage needed, allowing deals to be equity funded more quickly and with more certainty, Weir added.
Diversifying risks
While private equity investors have significant capital, they may still want to diversify their risks by sharing a deal with a partner, as some public M&A deals have even seen bidders who were initially competing join forces in a club deal to secure the target.
This was the case in the takeovers of both Signature Aviation and The AA Group.
“A club bid might also make a more technically difficult investment less of a stretch to a fund as it allows the private equity fund to pool its expertise with that of its partner’s particular expertise, for example in finance or operational change, or a geographical or specialist focus,” Weir said.
For example, this was the case in the joint offer by Intact Financial and Tryg for RSA Insurance Group.
“The recent successful exit of the Blackstone led consortium from Refinitiv might act as a catalyst to other investors, proving that large consortium deals can be agile and deliver outsized returns,” he added.
“Club deals allow investors to have skin in the game but less concentrated risk. This has become attractive to investors in the current climate where significant uncertainties remain,” Weir concluded.