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 private equity 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 processes.
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 well.
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 straightforward.
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 sponsor.
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 Independent Sponsor Economics.
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 sponsor economics.
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 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.
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Common Misconceptions about Raising Capital as an Independent Sponsor
About Access Capital Partners Access Capital Partners is a middle market investment bank focused exclusively on raising debt and equity capital for independent sponsors, executives and family offices.
Assisting with both new acquisitions, as well as recapitalizations, ACP has become a trusted partner in the independent sponsor community. Save Time. Get Better Economics. Find the Right Capital Partners.
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