Edouard Guy, the corporate and finance at Rutsaert Legal, says the success of club deals for alternative investments depends greatly on transparency and trust between investors and the management team.
What does a club deal involve?
In the alternative investment world, a club deal is a transaction in which a small group of investors establishes an investment structure with a relatively precise idea about the nature or at least type of the targeted investments, of the individuals or entities who will be part of the club of investors, and that have great confidence in the team that handle the acquisition of the investments, their ongoing management and the ultimate exit. Typically, a club deal has between three and 10 participants and the investment structure used is regulated lightly or not at all.
What kind of club deal transactions have you carried out?
We established a $250m private equity fund investing in fintech firms for a leading asset manager. We involved two institutional investors that were considering investing in the process of determining the fund’s term sheet right from the start of the structuring phase as well as in the detailed drafting process to ensure that the structure would meet the expectations not only of our client but their major investors.
Another asset manager asked us to set up a fund in which angel investors could be part of the management team on certain investments as well as investing in the fund as a whole. The client asked us to structure the allocation of carried interest to the angel investors based on the success of the particular investments they were closely involved with.
Several clients have asked us to structure investment vehicles for financing the development of real estate projects that take between three and seven years from launch to realisation/exit. In such transactions most clients are seeking help on how to balance control by the financing parties with freedom of action for the developer.
What are the key elements in a successful club deal?
Most important is understanding the various parties, the asset managers and the investors, whose expectations may vary from one transaction to the next. We place a particular focus on the degree of sophistication of the parties, for instance in the level of detail in the documentation defining rights and obligations, in particular the rules for sharing the profit between investors and managers. It’s also important to gauge the level of trust held by the main investors toward the management team as well as between members of the team, and we seek to foster a spirit of transparency among all parties to help build mutual trust. The
alignment of interests should be well structured to ensure that incentivisation is properly calibrated for scenarios ranging from unsuccessful to highly profitable. Our experience has shown that it’s extremely important to involve participants in both sides of the deal, the management team and the investors, as early as possible in the structuring process.