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Why The Rich And Super­Rich Like Club Deals


 Forbes Insights

The Little Black Book of Billionaire Secrets

Russ Alan Prince
CONTRIBUTOR


Among the rich, and even more pronounced among the super­rich, there’s an increasing interest in club deals. “Investing in private companies is a major approach the wealthy are using to create new wealth,” explains Carlos Ferreira, partner at Grant Thornton LLP. “There are a lot of ways the wealthy are investing in companies such as through private equity funds. At the same time, club deals are another way that’s currently getting an awful lot of attention.” 

The attractiveness of club deals can be seen in their appeal to family offices. “In general, family offices are embracing club deals at a growing rate,” explains Steffianna Claiden, founder and editor­in­chief of Family Office Review. “They like the level of control and potential value club deals provide. From what we are seeing and hearing from our clients around the world, this is a trend that is here to stay. It’s part of a permanent shift in investment strategy in response to the post­2008 economy.” 

Club deals (derived from the idea that deals were made among members at the country club) are where the wealthy invest in business ventures sourced by other wealthy individuals and families. In effect, the affluent are teaming up, forming a “club” to make investments in privately held companies including start­ups. This is usually done on a deal by deal basis as opposed to some sort of fund or pool. 

There are a variety of reasons club deals are proving so appealing.  Some of their advantages include:

  • The potential for high­returns. 
  • The ability to leverage personal and family industry expertise. 
  • The opportunity to capitalize on personal and family relationships. 
  • The possibility to be hands­on with the companies invested in. 


Another major advantage of club deals for the financial elite is that they can be designed to mitigate the taxes. “There is the ability to structure investments to be more income and transfer tax efficient based upon the wealthy family’s tax profile,” notes Edward Renn, partner at Withers Bergman LLP. “Like club deals themselves, this type of tax planning is customized for the wealthy family doing the deals.”At the same time, there are obstacles often experienced by the rich and super­rich in seeking to put together club deals. Accessing high­quality investment opportunities is a major consideration. Effectiveness here is very often a function of, not only the death and breath of the family’s network, but of the ability to “work” the network. 

Generally, club deals require having the requisite professionals on tap to execute the deals. This includes the ability to conduct extensive due diligence of all the parties involved. “Because of the way a lot of these deals are sourced, it’s often crucial to do deep background checks of everyone in the deal,” explains Carolyn Renzin, managing partner at Guidepost Solutions, LLC. “Many potential club deals have lots of problems, and the sooner they come to light, the better.” 

While club deals are one way for very wealthy families to invest, they’re likely to become a larger share of their portfolios for some time to come. “With the growing attractiveness of club deals the ability to integrate them into a wealth family’s overall portfolio is very important today and will likely be more important going forward,” said Richard Flynn, principal at Rothstein Kass, LLP.
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