Last Updated on May 6, 2021
Club deal is a term that investors have likely come across in financial publications from time to time, but not really taken the time for a closer look. As we’ve continued to build out our foodservice investment pipeline (and, in the process, launched Aaron Allen Capital Partners), it’s something we have been evaluating more closely so we can implement our “Dynamic Perspective. Square Deals.” mantra.
What Exactly is a Club Deal?
It’s a relatively straightforward investment approach where investors pool their money to acquire a controlling or large stake in a business. This structure has been around for some time, but it has gained increasing traction among private market investors the past several years in lieu of the traditional investment fund model.
Some of the best deals don’t get done because of the factors that are eliminated by club deal approach, so It’s easy to see why some investors might find this structure attractive. This includes lower fees, greater control over the deal terms, and risk diversification benefits. We also believe these structures can be beneficial to the investment target as well, including bringing in a diversified group of investors that doesn’t necessarily dilute cap tables and the ability to develop value creation strategies that aren’t constrained by fund lifespans or return objectives.
By partnering with industry experts on a club deals, investors can also save time and money while expanding the reach and efficacy of their capital. Club deals led by industry experts allow investors to tap into their investment theses, diligence, value creation plans, and networks without eating up their budgets. Over time, it can give access to more, larger deals as well.
Below, we’ll examine the pros and cons of a club deal, and how this deal structure might maximize value for everyone involved, including co-investors, company management, and founders. We’ll also look at some of the drawbacks of a club deal, but also how working with the right partner can help to alleviate pain points.
Benefits of a Restaurant Investment Club Deal
Transparency and Control. Investors know what they’re getting with club deals as opposed to an investment fund, where a sponsor/GP raises funds from institutional investors (LPs) and other high-net-worth individuals. Fund investors won’t have access to the same information that the GP does, and could have capital locked-in for an extended period of time. Club deal investors, on the other hand, generally have a say on specific deal terms while deciding how much to invest in a given deal.
Lower Fees. Generally speaking, club deals offer lower fees than if investors chose to invest in an investment fund. Most investment funds have a traditional “2 and 20” fee structure, where the manager charges a 2% fee on the assets under management in the fund, and a 20% performance fee when a fund reaches its objectives. Club deal economics can vary widely, but many do not charge a management fee (though the manager/lead investor may charge the deal group a fee when the deal closes). In cases where a fee is charged, it’s typically based on invested capital and well below the 2% fee charged by investment funds.
Risk Diversification. Club deals allow smaller investors to collectively make larger investments they could not afford individually while spreading the risk among the group. Another way to think of this is would you rather own a single restaurant location (where your investment would likely be wiped out if the location closed) or a chain (where investor capital would likely withstand a single restaurant unit closer)? When combined with deal structure flexibility, we believe a club deal structure can offer investors ways to manage risk.
Potential Downsides of a Club Deal (And How the Right Partner Can Help)
Coordination. As anyone with a family can attest to, getting groups of individuals to agree on anything can be a challenge. A club deal is no different, and coordinating a group of investors for individual deals is of the major deterrents. But the right partner can leverage its network (like AACP with the global foodservice know-how and know-who) when acting as sponsor and syndicate a deal with other investors and put together a comprehensive value creation plan.
Investment Timeframe. Because club deals often involve illiquid assets, it may take time to build to an exit transaction, so investors have to manage expectations regarding investment timelines and realized returns. However, with access to industry executives and the ability to develop value creation plans, there’s potential for club deal targets to show rapid improvement, thereby reducing the time required before exploring exit transactions.
Deal Access. There is a lot of capital chasing deals right now, making it difficult to find attractive deals at reasonable valuations. This is true for club deals, where smaller investors may not have access to the same deals as an investment fund. (AACP, for instance, has a proprietary pipeline in the foodservice industry, and we’re fortunate to see potential deals well before other capital providers, with wide enough variety to satisfy any investor looking to put money into the foodservice industry).
About Aaron Allen & Associates
Aaron Allen & Associates is a global restaurant consultancy specializing in brand strategy, turnarounds, and value enhancement, and accelerating the future of foodservice. We have worked with a wide range of clients including multibillion-dollar chains, hotels, manufacturers, associations, and prestigious private equity firms.
We help clients imagine, articulate, and realize a compelling vision of the future, align and cascade resources, and engage and enroll shareholders and stakeholders alike to develop multi-year roadmaps that bridge the gap between current-state conditions and future-state ambitions.
About Aaron Allen Capital Partners
AACP is an investment group focused on funding the future of foodservice and solving the biggest pain-points for one of the largest industries globally.
Serving at the intersection of capital, concepts, and management, we connect investors with foodservice operators and technology companies and strive to contribute meaningfully to leading modern hospitality transformation stories.
Backed by decades of experience in consulting, we have worked with clients spanning six continents and 100+ countries, collectively posting more than $200b in revenue across nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business life cycle. Learn more about AACP.