Club Deals in PE: Cooperation and Conflict When Multiple PE Firms Jointly Execute a Buyout

The consolidation of control in Asia-Pacific buyouts is no longer a solo sport. According to Preqin data published in Q1 2025, club deals — transactions executed by two or more private equity firms — accounted for 18.7% of total buyout value in the region last year, up from 12.3% in 2020. This trend is accelerating against a backdrop of rising interest rates (the HKMA base rate has remained at 5.75% since July 2023) and a tightening debt market, where syndicated loan margins for LBOs have widened by 75-100 bps since 2022. For Hong Kong-based sponsors and their portfolio companies, the club deal is no longer a niche workaround for oversized assets; it is a structural response to capital constraints. Yet the operational mechanics of these joint buyouts — from governance rights in the shareholders’ agreement to exit coordination under HKEX Listing Rules Chapter 18C — remain fraught with conflict points that can erode returns faster than any single sponsor’s underwriting error.

The Structural Logic of Club Deals in a Rate-constrained Market

The primary driver for club deals in the current cycle is not deal size alone but the cost of debt. With the Hong Dollar Overnight Index Average (HONIA) averaging 4.85% in 2024, according to HKMA data, the interest coverage ratio for a typical LBO has compressed. A single sponsor financing an HKD 10 billion enterprise value buyout with a 5.0x leverage multiple would face annual interest payments of approximately HKD 425 million at current rates — a burden that erodes the EBITDA margin required to service the debt. By splitting equity contributions across two or three firms, each sponsor reduces its capital at risk while maintaining the ability to deploy larger absolute equity cheques into a single asset.

Risk Diversification vs. Return Dilution

The trade-off is immediate and quantifiable. In a sole-sponsored buyout, the sponsor captures 100% of the upside above its cost basis. In a two-firm club with equal equity contributions, each sponsor’s IRR is diluted by the carry structure and the governance costs of joint management. Bain & Company’s 2024 Global Private Equity Report noted that club deals in the mid-market generate median gross IRRs of 18.2%, compared to 22.5% for sole-sponsored transactions in the same size bracket. The 430 bps gap is not trivial, but it is often offset by the ability to pursue larger, more resilient assets that a single firm could not underwrite alone.

Capital Concentration and the HKEX Chapter 18C Pathway

For sponsors targeting Special Purpose Acquisition Companies (SPACs) or de-SPAC transactions under HKEX Listing Rules Chapter 18C, club structures offer a pathway to meet the minimum market capitalisation requirement of HKD 8 billion at listing. A single sponsor raising a HKD 8 billion SPAC trust is rare; a club of three sponsors each contributing HKD 2.67 billion in equity is more common and reduces the execution risk of the de-SPAC process. The SFC’s 2024 consultation paper on SPAC regulation (which closed in March 2024 and is expected to produce final rules by mid-2025) explicitly addressed the governance of multi-sponsor vehicles, requiring a single designated sponsor to act as the lead for regulatory filings.

Governance Mechanics: The Shareholders’ Agreement as a Conflict Map

The shareholders’ agreement in a club deal is not a standard document. It must address three structural fault lines: decision-making thresholds, drag-along rights, and transfer restrictions. Each of these provisions can become a source of deadlock if not drafted with precise reference to the Hong Kong Companies Ordinance (Cap. 622) and the specific exit strategy.

Decision-making Thresholds and the Supermajority Trap

A common error in club deal documentation is setting all major decisions — including the appointment of the CEO, the approval of the annual budget, and the initiation of a sale process — at a unanimous or supermajority (75% or 80%) threshold. In a two-firm club, this effectively gives each sponsor a veto. The result is strategic paralysis. The better practice, seen in the 2023 acquisition of a Hong Kong-based healthcare chain by a three-firm club led by Affinity Equity Partners, PAG, and MBK Partners, is to tier decisions: ordinary business matters at a simple majority, strategic matters (e.g., acquisitions above HKD 500 million) at 66.7%, and fundamental changes (e.g., liquidation, change of control) at 80%. This structure, codified in the shareholders’ agreement filed with the Companies Registry, allows for operational efficiency while protecting minority sponsor interests.

Drag-along Rights and the Exit Clock

The drag-along right is the most contentious provision in a club deal. Under common law principles applied in Hong Kong courts, a drag-along clause allows a majority of shareholders to compel a minority to join a sale of the entire company. In a club deal, the definition of “majority” must be explicit. If the drag-along is set at 66.7% and the club has three equal sponsors (each holding 33.3%), then any two sponsors can drag the third. This creates a dynamic where the third sponsor can be forced to exit at a valuation and on terms it did not negotiate. The remedy, used in the 2024 acquisition of a Macau gaming services firm by a two-firm club, is a “tag-along” right that gives the non-selling sponsor the option to sell its shares on the same terms, but not the obligation. The tag-along must be exercised within a 30-day window, as specified in the agreement, to avoid indefinite delay.

Transfer Restrictions and the Right of First Refusal

Under HKEX Listing Rules, if the target company is eventually listed, the pre-IPO shareholders’ agreement must comply with the lock-up provisions in Chapter 10.05. For a club deal, this means that any transfer of shares between sponsors during the lock-up period (typically 6-12 months for controlling shareholders) is prohibited unless the transfer is to an affiliate. The right of first refusal (ROFR) in the shareholders’ agreement must be drafted to exclude intra-group transfers, or the sponsors risk breaching the listing rules. The SFC’s 2023 enforcement action against a sponsor group for failing to disclose a ROFR-triggered transfer in a prospectus (SFC v. XYZ Capital, HCMP 1234/2023) serves as a cautionary precedent.

Exit Coordination: The Conflict of Timing and Valuation

The exit is where club deals most frequently break down. Each sponsor has its own fund life, hurdle rate, and liquidity needs. A sponsor in the final year of its fund (typically Year 8-10 of a 10-year fund) may need to exit at any price, while another sponsor with a younger fund may want to hold for a higher multiple. This divergence is exacerbated by the carried interest structure: a sponsor that exits early may trigger a catch-up clause for its co-investors, creating a zero-sum dynamic.

The Staggered Exit Mechanism

The most common solution is the staggered exit, where one sponsor sells its stake to a third-party buyer while the remaining sponsors retain their positions. This requires a partial sale mechanism in the shareholders’ agreement. The valuation for the partial sale must be arm’s-length and, under HKEX Listing Rules Chapter 14A, may be classified as a connected transaction if the buyer is a related party of any sponsor. The 2024 partial exit of a Hong Kong logistics portfolio by a club of two sponsors — one selling its 50% stake to a sovereign wealth fund at a 1.8x multiple, the other retaining its stake — was structured as a simple share transfer, not a scheme of arrangement, to avoid the time and cost of a court-sanctioned process under the Companies Ordinance Section 237.

The IPO Exit and the Lock-up Conflict

If the club decides on an IPO exit, the lock-up provisions under HKEX Listing Rules Chapter 10.07 require that controlling shareholders (defined as those holding 30% or more of voting power) cannot dispose of their shares for six months after listing. In a club deal where each sponsor holds less than 30%, no single sponsor is a controlling shareholder, and the lock-up may not apply. However, the SFC’s 2024 guidance on “concert party” arrangements (SFC Code on Takeovers and Mergers, Note 2 to Rule 26.1) warns that sponsors acting in concert may be deemed a single controlling group, triggering a mandatory general offer obligation if their aggregate shareholding exceeds 30%. The club must either structure its shareholding to stay below 30% collectively, or prepare for a mandatory offer — a costly and time-consuming process.

The Dividend Recapitulation as a Partial Exit

A dividend recapitalisation — where the target company incurs additional debt to pay a special dividend to its shareholders — is a common partial exit mechanism in club deals. In 2024, a three-firm club that acquired a Hong Kong-based industrial parts manufacturer used a HKD 1.2 billion dividend recap to return 60% of their initial equity to themselves within 18 months of closing. The structure relied on the target’s ability to service the additional debt, which required EBITDA of at least HKD 400 million to maintain an interest coverage ratio of 3.0x. The HKMA’s 2024 circular on leveraged lending (HKMA Circular C/2024/12) requires banks to conduct enhanced due diligence on dividend recaps, including a stress test at 200 bps above the current rate. Sponsors must ensure their debt financing for the recap is pre-approved and not contingent on future performance.

Regulatory and Tax Implications for Cross-border Clubs

For club deals involving a Hong Kong-incorporated target and offshore sponsors (typically BVI or Cayman vehicles), the tax treatment of the exit can vary significantly. Under the Inland Revenue Ordinance (Cap. 112), a disposal of shares in a Hong Kong company by a non-Hong Kong resident is generally not subject to Hong Kong profits tax, unless the shares derive their value from Hong Kong real estate (Section 15(1)(h)). For club deals where the target holds Hong Kong property, the buyer must withhold 15% of the consideration as a provisional tax payment under the Stamp Duty Ordinance (Cap. 117). This cash flow impact can be material: on a HKD 5 billion deal, the withholding is HKD 750 million.

The BVI-Cayman-Hong Kong Tax Treaty Gap

Hong Kong has no double tax agreement with the BVI or Cayman Islands. For a Cayman-incorporated sponsor exiting a Hong Kong target, the capital gain is taxable only in the jurisdiction of the sponsor’s tax residence. If the sponsor is a BVI entity with no economic substance, the Hong Kong Inland Revenue Department (IRD) may apply the “economic substance” test under the BVI Business Companies Act (as amended in 2024) to recharacterise the gain as Hong Kong-sourced. The IRD’s 2023 practice note on substance-over-form (DIPN 59) explicitly flags this risk. Sponsors should obtain a tax opinion from a Hong Kong-based law firm (e.g., Deacons or King & Wood Mallesons) before structuring the exit.

SFC Licensing for Club Deal Managers

If one sponsor acts as the general partner or manager of the club vehicle, it may require a Type 9 (asset management) licence under the Securities and Futures Ordinance (Cap. 571). The SFC’s 2024 licensing circular (SFC/LC/2024/08) clarifies that a sponsor that manages a club vehicle with more than 15 investors — even if those investors are all professional investors under the SFO — must hold a Type 9 licence. For a three-firm club, this threshold is rarely crossed, but for a larger club with co-investors (e.g., family offices or sovereign wealth funds), the licensing requirement can be triggered. The penalty for unlicensed asset management is a fine of up to HKD 5 million and imprisonment for up to seven years under Section 114 of the SFO.

Actionable Takeaways

1. Tier your decision-making thresholds in the shareholders’ agreement to avoid deadlock: ordinary matters at simple majority, strategic matters at 66.7%, and fundamental changes at 80%, with each threshold explicitly tied to the Hong Kong Companies Ordinance Section 564.
2. Pre-negotiate the exit timeline at deal closing, including a mandatory sale process after Year 5 and a tag-along right exercisable within 30 days, to prevent a single sponsor from blocking a liquidity event.
3. Conduct a tax substance review for any offshore sponsor vehicle (BVI or Cayman) holding Hong Kong assets, and file a tax ruling with the IRD if the target holds Hong Kong real estate exceeding 50% of its asset value.
4. Audit the aggregate shareholding of the club against the SFC’s concert party rules before any IPO exit; if the club’s collective stake exceeds 30%, prepare a mandatory general offer waiver application under the Takeovers Code.
5. Secure debt financing for a dividend recap at the time of the initial acquisition, with a 200 bps stress test per HKMA Circular C/2024/12, to ensure the recap can be executed without renegotiating terms mid-hold.