Question

Which of the following statements regarding club deals is least accurate? Club deals:

Select one:

a. provide a competitive opportunity for weak private equity firms

b. offer increased returns for investors

c. offer diversification benefits to participating private equity firms

d. provide an investment opportunity when private equity capital is scarce

Answer 1

Club deals refers to a buyout where multiple private equity firms combine their resources to acquire a company. This allows private equity players to invest in much more expensive acquisitions than they could if they were investing alone. This arrangement ensures that each Firm has to pool a smaller amount towards the buyout and hence this leads to risk reduction via diversification. Thus the overall returns of the private equity firms is increased, by taking a reasonable level of risk.

Ans: a) is the least accurate statement because club deals do not necessarily provide competitive opportunity for weak private equity firms. Mid sized and strong private equity firms are also benefitted.