Investors often spend weeks underwriting the company and hours reading the system that will govern them after closing. In a club deal, both deserve diligence: the asset creates the return, but the decision system determines how risk, information and control travel between investors.

A club deal can make a private-market opportunity possible. It can assemble capital, expertise and relationships around an asset that one investor might not pursue alone. It can also give investors a more direct view of a company, project or transaction than a diversified blind-pool fund.

That directness is attractive. It can also be deceptive.

An investor may understand the company’s revenue, margins, leverage and exit case, yet still be unable to answer who controls a follow-on financing, how a conflict is cleared, whether information reaches every participant at the same time or what happens when one member cannot fund. Those are not administrative questions. They can change the economics of the investment.

The relevant diligence therefore has two files. The first asks whether the asset is worth owning. The second asks whether the group’s rules remain investable when the original plan stops working.

File one: underwrite the asset without the sponsor’s narrative

The asset diligence should stand on its own. The investment memorandum may be the starting point, but it should not become the model’s only source of truth.

For an operating company, the work normally includes revenue quality, customer and supplier concentration, cash conversion, maintenance and growth capital expenditure, working-capital behaviour, leverage, tax, legal and regulatory exposure, management depth and the sensitivity of valuation to the exit assumptions. For a real asset or credit opportunity, the relevant risks change, but the discipline does not: verify the cash flows, the security package, the operating dependencies and the downside.

Invest Europe’s professional standards place specialist legal, tax and regulatory advice alongside the commercial assessment and treat the underlying diligence materials as part of the continuing record for monitoring. That is an important distinction. Diligence is not a ceremony completed at signing; it defines the facts against which ownership performance will later be judged.

Three cases should be modelled before the base case is accepted:

The operating case misses but survives. What additional capital, covenant headroom or management intervention is required?
The timetable extends. What happens to cash needs, financing costs, incentive plans and the expected exit route?
The thesis is wrong. What can be sold, refinanced or restructured, and who has authority to decide?

An attractive asset may still be an unattractive investment at the proposed price, leverage or structure. That is the first diligence.

File two: underwrite the people who will decide together

The second diligence begins with a different question: when investors disagree, what converts competing preferences into a decision?

A club may include a lead sponsor, investors with different ticket sizes, related parties, management shareholders and participants with other commercial relationships. Their interests can be aligned at closing and diverge later. A family office may prefer a longer hold. A fund may face a term constraint. A strategic participant may value commercial access. A highly concentrated investor may prioritise liquidity. The sponsor may manage another vehicle that can invest in the same asset.

None of this proves a conflict has been mishandled. It shows why the decision architecture matters.

ILPA’s Principles 3.0 ask managers to disclose how co-investment opportunities, interests and expenses are allocated, whether priority applies, how potential conflicts are mitigated, whether economics differ and how follow-on investments are treated. Invest Europe similarly emphasises advance clarity on co-investment terms, conflicts and relations among syndicate members. These standards were written for fund relationships, not as a universal legal template for every club deal. The governance questions, however, travel well.

Allocation is part of the investment case

Before asking for an allocation, understand why the club exists.

Is the sponsor syndicating because the asset exceeds a concentration limit? Because its primary vehicle lacks capacity? Because a particular investor adds expertise? Because the sponsor wants to preserve capital for other deals? Or because the opportunity was designed as a stand-alone club from the outset?

The answer affects alignment. The documents and diligence should show:

how the asset was divided between the sponsor, its vehicles, affiliates and third parties;
whether participants acquire the same security at the same time and on the same terms;
which fees, carry, transaction costs and broken-deal expenses apply, and to whom;
whether anyone has priority over future allocations or information; and
how unused or scaled-back allocations are redistributed.

The purpose is not to insist that every investor must have identical economics. Differences may reflect role, risk or negotiation. The purpose is to see the differences before capital is committed and to understand what behaviour they may encourage.

The information package needs an operating specification

“Quarterly reporting” is not an information system. Investors need to know which information, in what format, by what deadline and with what escalation if performance deteriorates.

The package may include management accounts, covenant reporting, cash and liquidity forecasts, budget variance, operational KPIs, valuation methodology, material litigation, related-party transactions and ESG or regulatory incidents where relevant. Different assets require different data. The minimum useful question is constant: will the group receive information early enough to make the decision that the documents expect it to make?

Board representation does not automatically solve the issue. A director may owe duties to the company that are not identical to the appointing investor’s preferences, and confidentiality or inside-information constraints may limit circulation. The rights of the vehicle, the rights of individual investors and the duties of directors should not be casually treated as interchangeable.

Reserved matters need thresholds, clocks and consequences

A list of vetoes can look protective while remaining difficult to operate. Consent rights should be tested as a workflow.

Who proposes the decision? What information must accompany it? Is approval by headcount, invested capital, a class majority or unanimity? Do related parties abstain? Is there a response deadline? Are emergency decisions treated differently? What happens after a deadlock? Can the company raise rescue capital while investors continue to disagree?

The most important reserved matters usually concern changes that can redistribute value or risk: new securities, additional debt, related-party transactions, acquisitions or disposals, material changes to the business plan, distributions, management incentives and exit. But a universal list is less useful than thresholds calibrated to the asset.

Protection that cannot operate under time pressure may become a source of loss. Equally, a sponsor discretion broad enough to solve every emergency may leave investors with little practical control. The drafting must choose where judgement sits.

Follow-on capital is where alignment is tested

The first cheque is often the easiest one. A delayed project, covenant reset, acquisition opportunity or underperforming company can require more capital before the exit.

Invest Europe recommends that follow-on decisions receive the same rigour and written support as the original investment and that conflicts be handled through the agreed procedures. For a club, the pre-investment questions are concrete:

Is capital committed or merely expected?
Does every investor have a right, an obligation or neither?
What happens if one participant does not fund?
Can another investor fund the shortfall, and on what security and valuation?
Do anti-dilution, priority return or default penalties apply?
Can a related fund provide capital, and how is the price independently tested?

The answer should not be an optimistic sentence about “supportive shareholders”. It should be a worked capital-call and dilution scenario.

Exit governance begins on entry

An exit is not just a multiple in a model. It is a sequence of decisions involving timing, buyer selection, warranties, reinvestment, drag and tag rights, transfer restrictions and sometimes a conflict between liquidity and continued ownership.

Invest Europe recommends agreeing a common realisation strategy before investment, while recognising that markets may make the original route unavailable. A useful club-deal review therefore asks who can initiate a sale, who can block it, whether a majority can drag the minority, how a partial liquidity proposal is treated, what happens to investors who want to roll over and how transaction liabilities are allocated.

Transfer rules matter before a full exit as well. Can an investor sell to a competitor, affiliate or third party? Is there a right of first offer or refusal? Can an interest be pledged? Does a transfer trigger regulatory, tax or change-of-control consequences? A theoretical right to sell is not the same as practical liquidity.

Run the decision system through five failures

Before committing, conduct a governance stress test alongside the financial downside case:

The sponsor is conflicted: another vehicle or affiliate wants to invest, lend, buy or sell.
One investor cannot fund: the company needs capital quickly and the shortfall must be allocated.
Information arrives late: performance has weakened before the club can react.
The group splits on strategy: sell now, hold longer or inject more capital.
The lead changes: a key person leaves, the sponsor is acquired or responsibility moves to a new team.

For each case, identify the decision-maker, voting rule, information required, conflict process, deadline and economic consequence. If the answer is “the parties will agree”, the system has not yet been designed.

The best asset cannot compensate for an unreadable system

The two diligences should meet in one investment paper. The asset case determines which decisions are likely to matter. The governance case determines whether the investor can receive the information, exercise the rights and supply the capital assumed by that asset case.

CGPH Banque’s Investment Advisory & Private Markets work may include opportunity assessment, financial analysis, governance and process review, preparation of decision materials and coordination within an agreed mandate. Investment selection remains the investor’s decision. Legal, tax, regulatory and suitability advice, discretionary management, execution, custody, distribution and any regulated activity remain with the responsible parties and appropriately qualified or authorised advisers. Access, allocation, valuation, liquidity, performance and exit are not assured.

A club deal is not made robust by adding more participants. It becomes robust when the asset and the rules for owning it survive the same downside scenario.

References and further reading

This article is provided for general information only. It does not constitute investment, legal, tax, regulatory, financing, transaction or valuation advice, a recommendation, an offer or a solicitation. The structure, rights, obligations and regulatory treatment of a club deal depend on its complete documentation, participants, assets and applicable law. Decisions should be taken with the relevant qualified or authorised advisers.