[Reporter’s Notebook] The Boomerang Effect of 'Club Deal'... Time for Principled Investment

[Asia Economy Reporter Kwangho Lee] In the investment industry, a ‘Club deal’ refers to a joint investment. It is mainly used when multiple investment institutions invest simultaneously at a specific valuation (company value). Deals are often finalized in private settings such as golf outings among close investment firms. It is essentially regarded as the exclusive domain of the industry’s ‘Inner Circle.’

So far, major venture capital (VC) firms have strived to participate in club deals. They actively utilized industry networks and listed themselves as co-investors in various deals. By continuing large-scale fund executions through club deals, they have consecutively produced promising startups known as ‘baby unicorns’ or ‘pre-unicorns.’ They paid no heed to controversies over high company valuations (high valuations).

Such investments have been prevalent in recent years. This is why the main portfolios of so-called successful VCs often overlap. Until recently, these investments were evaluated as playing a role in accelerating growth for specific companies while also contributing to expanding related markets. They focused on exit (investment recovery) results while envisioning a rosy future, but the investments have now come back like a boomerang.

There are increasing complaints as company values frequently fall below the valuations at the time of the club deal. With exits through initial public offerings (IPOs) virtually impossible, investors are rushing to sell existing shares, but transactions are not happening. They are stuck, unable to do anything but pace anxiously.

In a liquidity-driven market, club deals were a kind of privilege. They were not deals anyone could join. There was a widespread perception that these were deals guaranteed to succeed. However, as the true nature of major platform companies struggling with deficits has been revealed, club deals have also faced criticism. Limited partners (LPs) who provided funds to VCs are also sighing.

During the boom, principled investment officers who shunned club deals did not follow trends but managed funds according to their beliefs. While many shouted about platforms, they paid attention to industries left in blind spots such as materials, parts, and equipment. They also put great effort and sincerity into investment review reports. As a result, unlike club deals, they have achieved exit results even in difficult markets.

The difficult situation cannot be blamed solely on the market. It is necessary to establish a sound investment culture that avoids network-centered, thoughtless investments and aims for substantial, well-grounded investments.