Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How Club Deals Are Reshaping Middle-Market Buyouts
Transcript
- Lucas: Last year, a three-firm private equity consortium paid about two point one billion dollars for a midsize industrial coatings company. Not one firm. Three. And that's not an outlier anymore. Luna: So these are club deals. We've seen them in mega-buyouts for years, but you're saying they're moving down into the middle market now. Lucas: Exactly. Club deals—where multiple private equity firms pool capital to acquire a single target—used to be reserved for the ten billion plus transactions. But since around 2023, they've become common in the one to five billion range. The industrial coatings deal is a perfect case study. Luna: Why the shift? I'd think most PE firms would rather keep the whole deal to themselves. Lucas: They would. But the math has changed. Middle-market companies have been getting more expensive relative to earnings. A single firm taking down a two-billion-dollar company might have to commit four to six hundred million in equity. That ties up a huge chunk of one fund. By syndicating, each firm puts in, say, two hundred million, they still get meaningful exposure, and they can do more deals per fund. Luna: So it's about portfolio diversification at the fund level. But then you have three sets of limited partners, three investment committees, three sets of opinions on strategy. Lucas: Right, and that's where governance gets tricky. In the coatings deal, the consortium had a lead investor who held about forty percent of the equity and got three board seats. The other two firms each had one seat. Day-to-day operations were run by the lead, but major decisions—acquisitions, refinancings, the exit—required approval from at least one of the minority firms. Luna: That sounds like a recipe for deadlock. What happens if the lead wants to sell in three years but one of the minority firms thinks the company isn't ready? Lucas: That's where drag-along and tag-along rights come in. Most club agreements include a drag-along provision: if the lead and a majority of equity holders approve a sale, the minority has to sell their shares on the same terms. Protects the exit. But the minority usually negotiates tag-along rights too—so if the lead tries to sell just their stake to a third party, the minority can force the buyer to include them on the same price. Luna: So the minority can't be left behind in a partial exit. That seems fair. But what about carry? How do you split carried interest across three firms with different cost bases and fund terms? Lucas: That's one of the most negotiated points. In the coatings deal, each firm kept its own carry on the capital it contributed. So Firm A's carry structure might be a twenty percent carry with an eight percent hurdle, while Firm B has a different hurdle. They don't pool carry. But the lead firm typically charges a small management fee to the consortium for handling the oversight—usually around zero point five percent of total equity annually. Luna: I can see why LPs might not love that. They're paying management fees to their own GP, and then indirectly paying a fee to the lead firm too. Lucas: That's a real tension. Some LPs have pushed back, requiring that the lead firm's fee be offset against its own management fee. But it varies. And there's another structural risk: if one firm hits a liquidity crunch mid-hold, it might want to sell its stake. That can trigger complex pre-emptive rights and valuation disputes. Luna: Is there any data on whether club deals actually outperform single-sponsor deals? Lucas: The data is thin, but a 2024 study by a private equity data provider looked at about two hundred club deals from 2015 to 2022 and found that, on average, they had slightly lower gross IRRs than single-sponsor deals—by about one point five percentage points. But the net IRRs were closer because the single-sponsor deals had higher leverage and thus more risk. Luna: So clubs might be a bit safer but with a lower ceiling. That makes sense for larger, more stable companies. Lucas: Exactly. And that's the profile we're seeing. The coatings company had predictable cash flows, a strong market position, but needed a lot of capital for a bolt-on acquisition strategy. No single middle-market firm wanted to take on that much equity risk alone. Luna: What about management? If you're the CEO of a company being bought by three different PE firms, who do you report to? Lucas: In practice, the lead firm takes the primary board relationship. But the CEO will have to build relationships with all the investor directors. In the coatings case, the CEO said in an interview that he spent about twice as much time on board prep as he did under the previous single-sponsor owner. Multiple board members means more updates, more calls, more alignment meetings. Luna: That's a hidden cost. Management time is not free. And if the consortium disagrees on strategy, the CEO becomes the mediator. Lucas: Right. And that's why some clubs fail. There was a well-known case in 2022—a healthcare services company—where the consortium split over whether to pursue a large add-on acquisition. The lead wanted to do it, the minority firms thought the price was too high. The deadlock lasted eight months, the target was bought by a competitor, and the consortium eventually sold the company at a loss. Luna: So the governance documents have to be really tight. What's the best practice you've seen? Lucas: The best agreements have a clear 'decision matrix'—which actions need unanimous approval, which need majority, and which are delegated to the lead. For example, anything above a certain dollar threshold—say fifty million for an acquisition—requires majority consent. But hiring or firing the CEO usually requires unanimous consent. And there's often a 'deadlock resolution' clause: if the board can't agree for more than sixty days, a tie-breaker mechanism kicks in, like a forced auction or a buy-sell provision. Luna: A buy-sell—that's where one firm can offer to buy out the others at a set price, and the others can either accept or counter? Like a shotgun clause. Lucas: Exactly. It's brutal but effective. If the minority thinks the lead's offer is too low, they can flip it and buy the lead out instead. That tends to concentrate minds. Luna: So for listeners who are operators considering selling to a consortium, what should they watch for? Lucas: First, ask who the lead will be and how much authority they have. Second, understand the exit alignment—are all firms on the same timeline? If one has a shorter fund life, they might push for an earlier sale. Third, negotiate a single point of contact for management, ideally the lead firm's operating partner. And finally, get independent legal advice on the shareholders' agreement—don't just rely on the consortium's draft. Luna: That's solid. I think a lot of entrepreneurs assume that more PE firms means more resources and smarter oversight. But it can also mean more bureaucracy and conflicting agendas. Lucas: Exactly. Club deals aren't inherently good or bad. They're a tool. And like any tool, they work when they're designed for the specific job. The coatings deal seems to be going well so far—they've closed two add-ons in the last twelve months. But we won't really know until the exit. Luna: If these conversations have moved your work forward in some small way, that's really the whole point. Honestly, if today was worth a coffee to you, that's the link—buy me a coffee dot com slash fexingo. Lucas: Yeah, that kind of listener support is what keeps this show ad-free and independent. It's a small thing, but it matters a lot to us. Luna: Okay, back to club deals. I wanted to ask about the tax implications. When multiple firms co-own a portfolio company, is there any structural complexity for things like interest deductibility? Lucas: Great question. In the US, as long as the entity is a standard limited partnership or LLC, each firm's share of the debt and interest flows through pro rata. So no special tax vehicle is needed. But if the consortium includes a foreign investor, you might need a blocker corporation to avoid UBIT issues for tax-exempt LPs. That adds layering and cost. Luna: And what about the trend of pension funds and sovereign wealth funds co-investing directly alongside PE firms in these club deals? That's become more common, right? Lucas: Yes. Large LPs like Canada Pension Plan or GIC sometimes co-invest without paying carry, which changes the economics for the PE firms. In those cases, the PE firm might earn a smaller fee but gets to deploy more capital and strengthen the relationship. Some clubs are now a mix of two PE firms and one institutional co-investor. That adds another layer of governance complexity, because the co-investor usually doesn't want board seats but may have veto rights on major decisions. Luna: So the spectrum is widening. At one end, pure PE consortiums; at the other, hybrid lp gp clubs. And we'll probably see more of both as middle-market equity checks get bigger. Lucas: I think so. The data from the first half of this year—2026—shows that club deals account for about fifteen percent of all middle-market buyouts, up from eight percent in 2021. That's a meaningful shift. And as interest rates stay where they are, I don't see it reversing. Luna: One last thing: what's the single most important clause you'd look for in a club agreement if you were an LP? Lucas: The 'most favored nation' clause, or MFN. It ensures that if one firm in the consortium negotiates better terms in a future co-investment—say a lower carry or a higher hurdle—the other firms can adopt those terms. Without it, you could have GPs in the same consortium earning different economics on the same deal, which creates misalignment. Luna: That's a smart angle. MFN clauses are common in fund documents but I hadn't thought about them applying within a club. Lucas: They're becoming standard in well-negotiated club agreements. And they help keep the partnership stable through the life of the investment. Which is ultimately what everyone wants—alignment, clarity, and a clean exit. Luna: Next episode, we'll look at how earnout structures are evolving in club deals. Spoiler: they're even more complicated with multiple sponsors. Lucas: That's a good teaser. For now, if you want to dig deeper into the coatings deal, the public filings are actually quite detailed—search for the acquisition by the trio of firms back in April 2025.