Investing in a group can offer many advantages, but do so-called ‘club' deals make good commercial sense? Julian Schiller reports
The buzzword in the unlisted funds market over the past 12-24 months has been ‘club' deals. However, are such deals in vogue due to the air of exclusivity that comes from being involved in such transactions, or are there more valid commercial reasons?
Whatever the reason, such deals are becoming increasingly desirable for both investors and managers, and will therefore become more prevalent in the investment universe.
Firstly, and in order to avoid confusion, club deals are defined as funds that are structured with a limited number of investors, typically two to five. Usually, but not always, these tend to be the larger ticket investors, committing in excess of €40m each.
As with any concept in an investment market, club deals require the buy in and demand from investors. Unlisted real estate investors have identified such deals as attractive for a number of reasons, and consequently the volume of these types of deals has increased substantially.
The benefits for investors of being involved in club deals can be broadly summarised as follows:
This ability to act quickly is often vital to taking advantage of off-market direct transactions. At the same time investors do not have to forfeit their powers as would be the case with opportunity fund managers who typically have far more discretion and wider operating frameworks. Speed of decision making and the smaller nature of the funds will often allow for swifter drawdown.
Despite a manager having to compromise moderately on fees and have less power than is typical in a more traditional fund structure, partnering with a nimble group of like-minded long-term capital providers is an attractive proposition. Of course,
not having to undertake long road shows is also beneficial.
It must be noted that the most active club deal investors are the larger Dutch, Nordic and UK investors, which are also the investors with significant amounts to invest in unlisted funds across all markets.
Taking a step further is single investor deals. Such deals offer perhaps the highest level of flexibility beyond that of club deals as the sole investor can typically negotiate to have almost total control. For example, should an investor/investor group wish to make a partial or complete exit, they can typically force the manager to terminate the vehicle early.
An example of a single investor deal is a transaction arranged by Jones Lang LaSalle Corporate Finance earlier this year between CBRE Investor and GPT Halverton, the European high yield specialists. CBRE Investors funded a vehicle, fund and asset managed by GPT Halverton on behalf of the multi-manager's discretionary clients and their fund of funds vehicle to acquire light industrial assets with a focus on the Benelux region and Germany.
The arranging of club funds typically happens in one of two ways:
But do all investors benefit from club deals? Key considerations of club deals include the illiquidity associated with being part of a smaller club of investors, and despite the positive attraction of the increased flexibility on terms, decision making and corporate governance, this structure is not preferable to all investor groups. Essentially, the investors that do not benefit are those that either do not have access to such deals, as increasingly the superior managers seeking to raise below €400m are opting to use club fund equity, or for those that do not wish to be involved in the fund decision making at all post closing.
It is our expectation that club fund investing will continue in the foreseeable future as the larger long-term investors have undoubtedly decided that the club fund structure is one that appeals.
Additionally, with the increased allocations to real estate and a greater number of investors able to commit in excess of €40m, and often in excess of €75m, only a small number of investors is now required to create a meaningfully-sized fund, which will remain attractive to managers.
Overall, for the right investor group, the club investing route provides a more tailored means of accessing strong management teams, and those management teams are provided with greater flexibility to concentrate resources on increasing value in the underlying asset base rather than the structuring and raising of capital for a given vehicle.
Julian Schiller is head of indirect investment, Jones Lang LaSalle corporate finance