Club deals are now a well established part of the real estate investment market, and are often used by wealthy private investors, family offices and asset managers.
A club deal in the real estate market is essentially where several like-minded private equity investors pool their capital and expertise to make a property acquisition together. When excecuted properly, I have seen them produce many benefits such as:
- allowing investors to enter into profitable deals they often would not be able to access on their own either due to capital constraints or lack of expertise
- giving investors more control to customise deal terms and structures for their own priorities rather than conforming to the stipulations of a fund manager
- avoiding the fees and lack of control that come with investing in a fund
- building relationships with partners that have expertise and connections in a particular asset class
- lowering risk by reducing the portion any one party has in the overall investment
Because of these benefits and more not listed, club deals have increased in popularity over the past 10 years to the point where even mezzanine capital is now sometimes being handled through club deals. I do a lot of work with family offices and have noticed that many of those that primarily invest in real estate have started to specialise in club deals. Even the wealthiest families that don’t need to join with other investors to access an acquisition due to financial constraints often engae in club deals because of the benefits around relationship building and knowledge sharing that they afford participants.
However to reap the benefits that can come with a club deal, it is important to think carefully about who you’re investing with and how the deal is structured. One of the most crucial elements to get right is to find investors with the same objectives, timelines and investment philosophies. Without these aligning, the club deals is sure to fail. Problems would inevitably arise if some investors want to buy and hold, and some want to buy and sell in 5 years. Having a poorly structured club deal also leads to problems. For example, there must be contingency planning built into the deal for situations where a minority investor wants to exit the deal or for them to have the ability to take over control of the deal if the lead investor exits.
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