In the hotel sector, a club deal is one of the most flexible ways to bring private capital together around a single investment opportunity.

It can allow family offices, entrepreneurs, professional investors and operators to participate in transactions that would otherwise exceed the investment capacity of any one participant.

But a club deal only works when three elements are properly balanced:

financial structure, governance and alignment of interests.

The challenge is not simply to raise capital.

It is to create a structure in which investors are aligned on:

  • objectives;

  • investment horizon;

  • risk profile;

  • distribution policy;

  • operating strategy;

  • exit criteria.

In hospitality, where value depends simultaneously on the real estate, the operating business and the capital structure, this alignment becomes even more important.

What is a hospitality club deal?

A club deal is an investment made by a limited group of investors who participate directly in the equity of a specific transaction.

Unlike a traditional investment fund, capital is generally not committed blindly across a diversified portfolio.

Investors assess a specific opportunity and decide whether to participate.

In hospitality, a club deal may involve:

  • the acquisition of an operating hotel;

  • the development of a new property;

  • the repositioning of an existing asset;

  • real estate conversion;

  • distressed acquisitions;

  • value-add transactions;

  • joint ventures with hotel operators;

  • sale-and-leaseback structures;

  • selective portfolio acquisitions.

The main advantage is the ability to tailor the transaction to the specific opportunity.

The main risk is that the capital structure may become overly complex and that the interests of the participants may not be fully aligned.

The financial structure

A typical transaction may be structured through an SPV, or Special Purpose Vehicle, established specifically to acquire or develop the asset.

The capital stack may combine:

  • common equity;

  • preferred equity;

  • shareholder loans;

  • senior debt;

  • mezzanine debt;

  • vendor financing.

The relationship between these instruments determines the transaction’s overall risk and return profile.

Common equity

Common equity represents the ordinary risk capital invested in the transaction.

Investors participate directly in:

  • operating performance;

  • distributions;

  • capital appreciation;

  • residual value at exit.

It is the first layer of capital to absorb losses.

In return, it also captures the greatest share of the upside.

Preferred equity

Preferred equity sits economically between common equity and debt.

It may provide:

  • priority in distributions;

  • a preferred return;

  • enhanced economic protection;

  • specific governance rights.

However, preferred equity is not the same as debt.

It remains risk capital and may still incur losses.

It can be particularly useful where different investor classes require different return profiles or priority rights.

Shareholder loans

A shareholder loan is financing provided by shareholders to the SPV.

Unlike equity, it generally creates:

  • a receivable against the company;

  • a defined return;

  • economic priority over common equity.

It can provide additional flexibility in the capital structure, but must be structured carefully from a tax, corporate and subordination perspective, particularly in relation to senior bank financing.

Senior debt

Senior debt usually represents the main external financing source in the transaction.

In hospitality, lenders will typically assess:

  • Loan-to-Value;

  • Loan-to-Cost;

  • DSCR;

  • EBITDA;

  • business plan assumptions;

  • operator quality;

  • seasonality;

  • cash flow stability;

  • financial covenants.

An overly aggressive debt structure can make even a strong asset financially fragile.

Mezzanine debt

Mezzanine finance can increase available leverage but generally carries a higher cost than senior debt.

It may include:

  • cash interest;

  • PIK interest;

  • equity kickers;

  • warrants.

Its use must therefore remain consistent with the asset’s ability to generate sufficient cash flow.

Higher leverage can amplify equity returns.

But it also amplifies downside risk.

The real issue: investor alignment

In a club deal, the quality of the structure depends less on the number of investors and more on the consistency of their interests.

Three investors may be perfectly aligned.

Ten investors may have conflicting objectives.

The key areas of alignment include:

  • investment duration;

  • target return;

  • risk appetite;

  • dividend policy;

  • reinvestment strategy;

  • use of leverage;

  • refinancing strategy;

  • timing of exit.

Investment horizon

An investor with a three-year horizon does not necessarily share the same objectives as an investor prepared to hold for ten years.

In hospitality, this issue is particularly relevant.

A significant repositioning programme may require:

  • 12 to 24 months of refurbishment;

  • a ramp-up period;

  • operational stabilisation;

  • EBITDA growth.

An investment horizon that is too short may force the club deal to sell before the value-creation plan has been fully executed.

Target return

Investors should agree from the outset which metrics will be used to assess performance.

The most relevant include:

  • IRR;

  • equity multiple;

  • cash-on-cash return;

  • dividend yield;

  • yield on cost.

The choice of metric can materially influence investment strategy.

An investor focused on cash yield may prefer periodic distributions.

A value-add investor may instead prefer to reinvest cash flows to increase asset value.

Distributions and reinvestment

One of the most common sources of conflict in club deals concerns the use of cash generated by the asset.

The alternatives may include:

  • paying dividends;

  • reducing debt;

  • funding CAPEX;

  • making further investments;

  • retaining liquidity reserves.

The policy should be defined before the transaction closes.

Leaving these decisions to future discretion can create tension among shareholders.

Sponsor and co-investment

The role of the sponsor is central.

The sponsor originates the transaction, structures the deal and coordinates the investor group.

To reduce conflicts of interest, the sponsor should have genuine economic alignment with the investors.

One important tool is sponsor co-investment.

When the sponsor invests its own capital alongside investors, its financial interests become more closely aligned with theirs.

The sponsor should not be rewarded solely through fees.

It should also participate in the success of the transaction.

Fee structure

Typical fees may include:

  • acquisition fee;

  • management fee;

  • asset management fee;

  • development fee;

  • transaction fee;

  • performance fee.

Fees are not inherently problematic.

The key issue is their size relative to invested capital and actual value creation.

A structure that is too fee-driven may create misalignment.

Carried interest

Carried interest is one of the principal mechanisms used to align the sponsor with investors.

The sponsor receives an additional share of profits only after investors have achieved predefined return thresholds.

The principle is straightforward:

the sponsor earns more when investors earn more.

An illustrative waterfall

A simplified distribution waterfall might operate as follows:

Step 1 — Return of Capital
100% of distributions are paid to investors until their contributed capital has been fully returned.

Step 2 — Preferred Return
100% of further distributions continue to be paid to investors until, for example, an 8% annual preferred return has been achieved.

Step 3 — Sponsor Catch-up
A portion of subsequent distributions is allocated to the sponsor until the agreed economic participation has been reached.

Step 4 — Profit Split
Remaining profits may then be split, for example:

  • 80% to investors;

  • 20% to the sponsor.

Additional hurdles may provide for increasing carried interest once higher IRR thresholds are exceeded.

For example:

  • up to 12% IRR: 80/20;

  • above 12% IRR: 70/30.

These figures are purely illustrative.

The principle matters more than the specific percentages.

The waterfall should be:

  • readable;

  • transparent;

  • modelled in advance;

  • fully understood by all investors.

Preferred return

A preferred return is a return threshold allocated to investors before the sponsor participates in excess profits.

It is an effective alignment mechanism.

But it must not be confused with a guaranteed return.

Risk capital does not come with guaranteed returns.

Governance

Governance is one of the pillars of a successful club deal.

It should clearly establish:

  • who makes decisions;

  • which decisions remain within sponsor authority;

  • which require a simple majority;

  • which require a qualified majority;

  • which require unanimity;

  • what rights investors retain.

Reserved matters may include:

  • sale of the asset;

  • refinancing;

  • increase in leverage;

  • extraordinary CAPEX;

  • material changes to the business plan;

  • replacement of the operator;

  • related-party transactions;

  • issuance of new equity;

  • admission of new investors.

Majority or unanimity?

Governance that is too rigid can paralyse the transaction.

Governance that is too weak can deprive investors of meaningful control.

Unanimity should generally be reserved for truly extraordinary decisions.

Day-to-day operations must remain sufficiently flexible.

Deadlock: what happens when shareholders cannot agree?

One of the most delicate issues is deadlock.

A club deal should define in advance what happens if two shareholder groups are unable to reach agreement.

Possible mechanisms may include:

  • escalation to an investment committee;

  • mediation;

  • Russian roulette clauses;

  • Texas shoot-out mechanisms;

  • buy-sell arrangements;

  • sale of the asset.

The objective is not to use these mechanisms.

It is to ensure that disagreement does not become paralysis.

Anti-dilution

Another critical issue concerns future equity raises.

If additional capital is required, the shareholders’ agreement should specify:

  • pro rata subscription rights;

  • exercise periods;

  • treatment of investors who do not participate;

  • potential dilution;

  • admission of new investors.

Anti-dilution mechanisms may also be considered, particularly where new equity is issued on terms that are more favourable than those offered to existing investors.

However, the structure should not become so restrictive that it prevents the SPV from raising new capital when needed.

The role of the hotel operator

In hospitality, governance must also take the operator into account.

Asset value depends heavily on the quality of operations.

The club deal must determine whether the hotel will be operated through:

  • direct management;

  • a management agreement;

  • franchising;

  • a lease agreement;

  • a white-label operator.

HotelManagementGroup.it examines the operating models and management structures that directly influence hotel performance and asset value.

CAPEX and reserves

One of the most dangerous mistakes is to underestimate post-acquisition capital requirements.

The financial structure should therefore provide for:

  • acquisition cost;

  • transaction costs;

  • CAPEX;

  • working capital;

  • contingency reserve;

  • ramp-up losses.

An undercapitalised club deal may be forced to request additional shareholder funding at a later stage.

That is often precisely when investor conflicts emerge.

Follow-on capital

The shareholders’ agreement should define what happens if additional capital is required.

Possible solutions include:

  • pro rata equity contributions;

  • shareholder loans;

  • external financing;

  • admission of new investors;

  • dilution of non-participating shareholders.

These rules should be agreed in advance.

Not during a liquidity crisis.

Exit strategy

Exit strategy is another fundamental component of the structure.

Before investing, shareholders should agree on:

  • target holding period;

  • conditions for launching a sale process;

  • approval thresholds;

  • drag-along rights;

  • tag-along rights;

  • any pre-emption rights.

Hotel investment markets can change rapidly.

The structure should therefore retain enough flexibility to take advantage of favourable exit windows.

Drag-along and tag-along rights

Drag-along rights allow the majority shareholder group to require minority shareholders to sell on the same terms.

Tag-along rights allow minority shareholders to participate in a sale on the same terms.

Both can be essential in avoiding blockage at exit.

Lock-up

In some club deals, it may be appropriate to introduce a minimum holding period during which investors cannot freely transfer their interests.

The purpose is to provide stability to the shareholder base.

The risk of an unaligned investor

A financially sound club deal can still become inefficient if one shareholder is fundamentally misaligned with the others.

The risk increases where:

  • some investors want immediate liquidity;

  • others want to reinvest;

  • some are comfortable with higher leverage;

  • others want to reduce debt;

  • some want to exit;

  • others want to hold the asset.

For this reason, selecting the right investors is just as important as selecting the right asset.

Information transparency

Investors should receive clear and regular reporting.

A professional reporting package should include:

  • performance versus budget;

  • ADR;

  • occupancy;

  • RevPAR;

  • GOP;

  • EBITDA;

  • cash flow;

  • debt service;

  • CAPEX;

  • covenant compliance;

  • progress against the business plan.

Transparency reduces both conflict and information asymmetry.

Sensitivity analysis

Club deal returns should always be assessed under alternative scenarios.

Investors need to understand what happens if:

  • ADR growth is lower than expected;

  • occupancy declines;

  • CAPEX increases;

  • debt costs rise;

  • opening is delayed;

  • the exit multiple compresses.

A club deal should never be built solely around the upside case.

It must remain financially resilient under less favourable assumptions.

A possible capital structure

A theoretical transaction might involve:

A hotel SPV

financed through:

  • 50-60% equity;

  • 40-50% senior debt;

  • potential shareholder loans;

  • a contingency reserve.

Investors may receive:

  • return of capital;

  • preferred return;

  • profit participation;

  • potential periodic distributions.

The sponsor may receive:

  • operating or management fees;

  • return on its co-investment;

  • carried interest above predefined hurdles.

The objective should remain simple:

investors receive economic priority, while the sponsor earns more only when genuine value is created.

Club deals and origination

A successful club deal does not begin when the capital is raised.

It begins earlier.

It begins with selecting the right opportunity.

A professional process should include:

  • origination;

  • screening;

  • underwriting;

  • due diligence;

  • financial structuring;

  • governance;

  • exit strategy.

Investhotel.it provides analysis on hotel due diligence, financial structuring and value creation.

InvestimentiAlberghieri.it focuses on hospitality investment markets, acquisition opportunities and the main drivers of hotel value creation.

For further analysis of hotel economics and investment strategy, see also RobertoNecci.it.

Conclusion

A hospitality club deal is not simply a group of investors buying a hotel together.

It is a financial and corporate structure whose success depends on aligning capital, governance and strategy.

Asset quality is essential.

But it is not enough.

A successful structure also requires:

  • sustainable financial leverage;

  • aligned investors;

  • clear governance;

  • genuine sponsor alignment;

  • adequate capitalisation;

  • predefined follow-on funding rules;

  • anti-dilution provisions;

  • deadlock mechanisms;

  • transparent reporting;

  • a clearly defined exit strategy.

The real objective is not simply to raise capital.

It is to create a structure in which all parties benefit when the asset genuinely creates value.

Hotel investment analysis and structuring

InvestimentiAlberghieri.it supports investors, family offices, property owners and operators in the economic, financial and strategic analysis of hospitality transactions.

The scope of work may include:

  • investment analysis;

  • business planning;

  • underwriting;

  • financial structuring;

  • CAPEX analysis;

  • sensitivity analysis;

  • debt analysis;

  • governance;

  • exit strategy;

  • asset value enhancement.

For enquiries:

info@investimentialberghieri.it

Further insights:

InvestimentiAlberghieri.it
Investhotel.it
HotelManagementGroup.it
RobertoNecci.it


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