Mergers and acquisitions are taking a page from the fast-food world, with a growing number of deals being supersized. Fueled by private equity firms eager to invest the mountains of dry powder that have built up in recent years amidst minimal M&A activity, coupled with soaring demand for technology as businesses across the board embrace artificial intelligence, the overall size of M&A deals has risen exponentially.
To help fund these mega-deals and reduce their overall portfolio exposure to any one deal, investors are increasingly turning to acquisitions known as club deals.
According to data from PWC, the number of deals larger than $1 billion in value was up 17% in 2024 –a trend that industry experts predict will continue to pick up momentum. By joining forces and pooling resources lenders can pursue larger deals than they otherwise could and are able to reduce the risk they assume on any one deal. Though such partnerships are not new and have been around for years, club deals are becoming more popular in the current investment environment.
“Private credit continues to grow substantially across all sectors. The pickup in club deals is inevitable and likely to keep growing,” says Carlos Lima, a managing partner at Excolatur, an AI risk management platform designed for the private credit sector.
“You’re suddenly talking about tens of billions of dollars in revenue and the size of individual deals reaching a billion or more,” says Sudeep Kanjilal, a co-founder of Excolatur and the former chief data officer, chief digital officer and head of AI for The Depository Trust and Clearing Corporation’s (DTCC). “Given the overall trend of engaging more and larger customers, and customers who may have a multi-jurisdictional presence, there is not just a need to pool capital, but to pool the risks as well… Many of these large borrowers are multi-sector industries, so there is expertise pooling, capital pooling and risk pooling. And, as long as the underlying trend continues, this could very well be more prevalent,” he says.
Benjamin Rubin, Partner at Proskauer
Supply and demand is a factor as well. “There are way more players in the market and there’s a lot of competition around these deals,” says Benjamin Rubin, a partner in law firm Proskauer’s private credit group.
“Hyper-competitive people want to deploy capital, but there are significantly less deals in the marketplace than there were two years ago… There aren’t enough deals to go around, so deals are getting split up much more than they used to,” he says, adding that behemoth sized deals in the $3 billion and $4 billion range are driving lenders to pair up in club deals. Amidst a dearth of deal activity and increased competition, Rubin says that PE firms are also splitting deals up among multiple lenders in an effort to maintain good relationships.
“Shops on both sides, borrowers and lenders benefit from having good relationships with each other. So, amidst a smaller pool of deals and a larger pool of lenders it behooves both sides to cooperate more on these structures,” says Rubin, adding that the terms in larger club deals also tend to be more favorable for sponsors.
Pairing up for club deals also gives sponsors the ability to hold more capital for future investments in companies they acquire. “If you’ve got a $3 billion to $4 billion credit with one or two lenders in it, and they do a $500 million acquisition, maybe those lenders can close the original deal, but I’m not sure they can fund that additional $500 million,” he says, noting that a club of lenders makes it more likely that sponsors will be able to access additional funding for the companies they acquire down the road.
When it comes to the benefit of diminished risks, club deals are somewhat of a double-edged sword. Even though one of the main attractions for club deals is reduced portfolio concentration in any one investment for sponsors and lower capital commitments for lenders, the greater complexity of these deals can introduce other risks.
“Club deals in private credit are picking up because they spread risk and let lenders collectively access larger opportunities without overextending themselves. From a legal standpoint though, they demand tighter coordination and cleaner documentation,” says Roy Kaufmann, an attorney and director of the Servicemembers Civil Relief Act Centralized Verification Service. “When funds are involved in these deals through a consortium, you have got to be careful that the terms protect each investor’s interest fairly and that one party is not driving decisions to the detriment of others. I have seen deals go sideways when that was not clearly addressed upfront,” he says.
Adds Excolatur’s Lima: “With more lenders, the risk is spread but the deal becomes more complex than with bilateral deals. There is also the question of return on an investment, the risk appetite of the fund and the risk appetite of the investors. Having multiple firms has benefits, yet also adds to risk compliance complexity. Our EXP platform addresses this and many other risk management issues and presents GPs’ with a sophisticated platform to address, manage and mitigate these and other risks.” Valuations for club deals can also be more difficult because having multiple firms valuing the same asset can lead to discrepancies, which is not the case when there is a single lender involved.
While industry experts anticipate that club deals will continue to be popular and that activity in this area may increase, the rise of activity is expected to remain primarily among U.S. deals. A major reason for that is that PE firms in Europe have to content with more regulations around these types of deals. Whereas, the weaker regulatory environment being created by the new administration in the U.S. is positive for such deals.
“Club deals are prevalent in the U.S. because of the risk profile of the investments that are coming up as opportunities,” says Ravi de Silva, CEO of financial regulatory compliance consultancy firm de Risk Partners, citing technology as one of the major drivers of the rising popularity of club deals. “As technology advances such as artificial intelligence (AI) and digital assets come into play, investments become very high risk. Rather than jumping in individually, a club deal is the best way to spread the risks,” says de Silva.
In particular, he notes that sectors such as real estate, healthcare and infrastructure –all of which have been actively embracing technology and undergoing significant change and advancements because of technologies like AI– are some of the biggest drivers of club deals.
The healthcare industry is one specific example de Silva points to. “From a healthcare perspective, with the changes in technology, research and development, a lot of the investment opportunities are high risk as well as high value. You see a lot of AI changes happening and things like robotic developments –highly expensive, high value type targets,” says de Silva, noting that he expects higher value deals to become more commonplace. “As time progresses and technology progresses, the risk profile of those deals will be higher,” he says.
Technology is also a major determinant of which private credit firms can get involved with club deals. “Technology is what’s driving and dominating this, and the larger firms have an upper hand… The more manual a deal is and the more complex it is, the riskier it is,” says Excolatur’s Lima, whose firm is building a risk management platform that aims to provide a holistic, integrated view of the private credit processing cycle that will allow smaller players to get involved with such deals as well.
“Having a club theoretically reduces the risk because it reduces the capital that you’re putting in. But every fund will have their own risk appetite, and it may change.” Kanjilal notes that the benefits of a club can quickly become muddied if a deal goes south or if parties in the deal have different perspectives on things such as how deal terms should be altered, how information should flow and even what statements should look like. What will be most telling is how things play out in these deals when things go south or if a covenant is breached and it is suddenly every man for himself, especially with multiple parties fighting against one another and negotiating to determine who will be deemed most important and first in line.
“With club deals having picked up over the last two to three years, the proof in the pudding has yet to play out,” says Kanjilal. “The ultimate attractiveness and risks of club deals still remain to be seen over the remainder of this decade as parties work through the life of these loans.”
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