[self-funded] Brokers showing hesitation towards club deals

April 07, 2021

by a searcher from Katholieke Universiteit Leuven in Berlijn, Duitsland

Brokers are showing to be very sceptical to club deals and we would like to understand strategies to mitigate this issue
- Deal certainty has killed a few projects and reduced deal flow significantly
- Are there any common instruments used to battle this (i.e. LOI?)

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Reply by a searcher
from Katholieke Universiteit Leuven in Berlijn, Duitsland

You guys are right. Brokers do indeed see a club deal as something complex where a lot can go wrong. When comparing to a normal funded search the risk perception is higher as the investors for the classic fund did make a commitment up front. This is still not the same as Assets Under Management what some brokers are asking for.

From our end the key reason to pursue this strategy is that we find the search fund startup capital to be very expensive. Raising 200k for a 2 person search and then giving a 50% discount when you convert it into the companies equity is super expensive (IMO). In the EU you can easily reduce living expenses to 40k p.a. and make enough with consulting to cover any DD costs.

Therefor we try and pursue club deals where investors come in at the same valuation as us.

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

Agree. A club (multiple investor) deal just multiplies the potential risk that a transaction won't close because an investor pulls out, particularly if the club has not been formed yet. On the other hand, if you can demonstrate their commitment through letters of support/commitment, you might be able to turn it around and make it a positive (more capital available, more expertise to guide/advise, if one of four backs out, the other three can step up, etc.).

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