Making the Most Out of the Independent Sponsor Model
Updated: Nov 28, 2018
For most independent sponsors, especially new ones, it’s helpful to get perspective
on how different groups have implemented the independent sponsor model and
learn what’s working for other groups and what’s not.
As advisors to this expanding group of investors, we speak regularly with both new
and long-time sponsors, as well as independent sponsor capital providers.
Here are 6 guidelines to help you get the most out of the independent sponsor model:
1) Acting like a funded private equity firm with discretionary capital is a
fruitless exercise. We see a lot of independent sponsors, particularly new
ones, who expect their deals will come from investment banking led auction
As an independent sponsor, unless there is a compelling strategic reason to
compete against funded private equity firms and strategic buyers, save your
time or choose your spots wisely –e.g., having an almost proprietary strategic
relationship or management capability to bring to the table, or, simply
revisiting an auction if it fails.
Remember, if you are the winning bidder in an auction, you’ll need to explain
to prospective capital partners why you believe an asset is worth more than
what other funded private equity firms and strategic buyers were willing to
pay. Every situation is different, but this argument usually doesn’t go over
2) There’s usually an inverse relationship between complexity and success. It’s hard enough articulating to capital partners why a particular acquisition target represents an attractive opportunity.
If you develop an excessively elaborate or theoretical growth strategy that
requires everything to go right, chances are that it will be challenging to
convince an institutional investor to follow.
That doesn’t mean that growth strategies can’t be dynamic or there’s no
room for creativity, but they should be practical, insightful and reasonably
3) Be disciplined about the acquisition targets you pursue, even if it means walking away from a deal. No one likes turning down an opportunity with a motivated seller, or even worse, walking away from a deal that you’ve invested a lot of time and money in, but to potential capital partners, maintaining a reasonable amount of discipline and not chasing subpar opportunities is a good indicator that you won’t take unnecessary risks with their money.
That’s not to say that you shouldn’t work like crazy to avoid, structure
around, or mitigate potential risk points when they present themselves, but a
good independent sponsor is able to objectively look at a deal and determine:
a) if it is a compelling opportunity that doesn’t require a small miracle to be
successful or require assuming too many unnecessary risks; and b) if there is
enough investor appetite so that there’s a reasonably good chance of being
able to raise the capital for the transaction. In other words, a good sponsor
can evaluate whether a deal is likely to get done and if there’s a good chance
of being successful.
4) Focus on adding value and success will follow. We can’t emphasize
enough how essential it is to focus on adding value as an independent
If you’re simply passing along an investment bank’s CIM without
putting much effort into the evaluation of the potential acquisition and
development of a growth strategy, you’ll generally be perceived by capital
partners as a glorified broker and compensated as such. For specific ways
independent sponsors add value, read our guide on Negotiating Better
5) The private capital markets are inefficient- be methodical about
selecting a capital partner. SBICs, alternative debt providers, private
equity firms and family offices each have different operating models and
behave differently- they do different types of deals, utilize different capital
structures, offer different independent sponsor compensation packages and
they evaluate/process transactions differently.
It is important to understand which capital providers make the best partners
for fundless sponsors, which ones are best suited for the situation and which
ones to avoid at all costs.
If you aren’t sure who the best partners are for your acquisition or you don’t
have enough bandwidth to simultaneously pursue and close deals and raise
capital, hiring an investment bank focused on raising capital for independent
sponsors can be a turn-key solution that helps you achieve better fundless
If you have the free time and enough relationships to run a capital raising
process yourself, be thoughtful about which firms you approach and how you
present the opportunity.
Whether you choose to hire an advisor or raise capital yourself, saying yes to
the first capital provider that agrees to fund the deal without qualifying them
as a good partner or determining what market economics are for a particular
situation can be a costly mistake. Remember, you’ll be partners with these
groups in the years ahead.
6) Sourcing compelling, proprietary acquisition opportunities is difficult
and takes time, but is the best way to succeed as a new independent
sponsor. Most sponsors would be well served if they spent the vast majority
of their time sourcing proprietary or opportunistic deals.
It’s definitely not the easiest or most linear path to generating deal flow, but
investing the time on the front end will pay off over time.
Don’t get discouraged if it takes a year or more to find the right
opportunities. Ultimately, buying good a good company, at a compelling
valuation will help make it easier to raise capital and put you in a better
position to create value after the transaction.
Save Time. Get More Deals Done. Get Better Independent Sponsor Economics.
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