Club Deals and Co-Investments

Step 1: Equity Ownership Split

Ownership % = Participant Equity Cheque / Total Equity Cheque

In a club deal, two or more sponsors write the equity cheque side by side rather than one sponsor taking the whole position. The split matters far beyond the arithmetic: it usually determines board seats, veto rights and who runs the exit process. Here Sponsor A at 45.0% is the lead sponsor and typically controls the process, but with 35.0% Sponsor B is large enough to demand meaningful minority protections. The co-investment vehicle at 20.0% is a passive participant — it takes the same economics per euro as the sponsors but almost never gets a vote.

Step 2: Exit Equity Value

Exit Equity Value = (Exit EBITDA × Exit Multiple) - Net Debt at Exit

Using the exit EBITDA of €140.0m, the exit multiple of 8.5x, and net debt at exit of €250.0m:

Exit Enterprise Value = €140.0m × 8.5 = €1,190.0m

Exit Equity Value = €1,190.0m - €250.0m = €940.0m

The equity value at exit is what the club actually has to divide. It is driven by three levers at once: EBITDA growth (€100.0m to €140.0m), multiple expansion (8.0x to 8.5x) and deleveraging (€460.0m of debt drawn at close down to €250.0m of net debt). Interviewers like this step because it forces you to show that equity value, not enterprise value, is what investors are paid out of.

Step 3: Gross Proceeds and Gross Returns per Participant

Gross Proceeds = Ownership % × Exit Equity Value

MoM = Gross Proceeds / Equity Invested

IRR = MoM^(1 / Holding Period) - 1

Working the total through explicitly: MoM = €940.0m / €360.0m = 2.61x, and IRR = 2.61^(1/5) - 1 = 21.2%.

Gross return is the return the asset itself produced, before any fund-level charges. Note that it is identical for all three participants — every euro of equity in a club deal ranks pari passu and shares the same instrument, so the deal cannot favour one sponsor over another at the asset level. Any difference in what participants ultimately keep therefore has to come from the fee and carry layer sitting above the deal, which is exactly what the next step isolates.

Step 4: Fee and Carried Interest Drag on Fund Capital

Take the LP's €50.0m committed through Fund A. Its share of the deal earns the same 2.61x gross, but it pays management fees and carried interest on the way out.

Gross Proceeds = €50.0m × 2.6111 = €130.6m

Cumulative Management Fees = 2.0% (0.020) × €50.0m × 5 years = €5.0m

Pre-Carry Proceeds = €130.6m - €5.0m = €125.6m

Distributable Profit = €125.6m - €50.0m = €75.6m

Preferred Return = €50.0m × [(1 + 0.080)^5 - 1] = €50.0m × 0.4693 = €23.5m

Because the distributable profit of €75.6m comfortably exceeds the preferred return of €23.5m, the hurdle is cleared and the GP catch-up runs to completion, so the GP ends up with a full 20.0% (0.200) of the profit. The European waterfall then distributes as follows:

Carried Interest = 20.0% (0.200) × €75.6m = €15.1m

Net Proceeds to Fund LP = €125.6m - €15.1m = €110.4m

Net MoM = €110.4m / €50.0m = 2.21x

Net IRR = 2.2089^(1/5) - 1 = 17.2%

The gap between gross and net is the fee and carry drag: €5.0m of management fees plus €15.1m of carried interest, together €20.1m, converts a 2.61x gross into a 2.21x net. In IRR terms that is a loss of roughly 400 basis points. This is the single number that explains why institutional LPs push so hard for co-investment allocation — the drag is not a rounding error, it is about one-sixth of the profit.

Step 5: Blended Net Return Across Fund and Co-Investment Capital

The co-investment vehicle charges no management fee and no carried interest, so for that pool gross equals net.

Net Co-Investment Proceeds = €50.0m × 2.6111 = €130.6m (net MoM 2.61x, net IRR 21.2%)

Blended Net MoM = (€110.4m + €130.6m) / €100.0m = €241.0m / €100.0m = 2.41x

Blended Net IRR = 2.41^(1/5) - 1 = 19.2%

Splitting exposure half and half lifts the LP from a 2.21x / 17.2% fund-only outcome to a blended 2.41x / 19.2% — a pick-up of 0.20x on money and roughly 200 basis points of IRR, on exactly the same underlying asset. That arithmetic is the whole reason co-investment programmes exist, and it is also why the GP/LP alignment question is genuinely hard: the GP is handing away economics on a deal it sourced, diligenced and will manage for five years.

Final Results

• Exit Equity Value: €940.0m
• Gross return to every participant: 2.61x MoM / 21.2% IRR
• LP net return on fund capital: 2.21x MoM / 17.2% IRR
• LP net return on co-investment capital: 2.61x MoM / 21.2% IRR
• LP blended net return across both pools: 2.41x MoM / 19.2% IRR

These numbers are what an investment committee actually decides on: the gross figures justify the asset, while the net figures determine whether the LP hits its own return target and how much co-investment allocation it needs to negotiate to get there. The same framework feeds directly into fund-level performance reporting, where gross-to-net bridges are the standard way of showing where value leaked between the deal and the investor.

Would you like to explore further complications, such as what happens when the two sponsors disagree on exit timing, how a deadlock provision or a buy-sell shotgun clause is priced, or how the calculation changes when the co-investment vehicle is offered on "half and half" terms (1% fee, 10% carry) rather than genuinely free?