Independent Sponsors and their Growing Role in Private Equity

Independent Sponsors and their growing role in the private equity marketplace


The private equity marketplace is competitive and funds are looking for their next actionable investment. Independent Sponsors are providing unique opportunities for private equity and mezzanine debt investors. When an Independent Sponsor sources, signs up and brings a great deal to my colleagues and I at Tecum Capital (the “Partner Investor”), there is tremendous value in that. As such, successful Independent Sponsors are not dilettantes. Instead, this group has professionalized and is full of serious full-time investors, and their growth and popularity will continue for the foreseeable future.

What is an Independent Sponsor? How do they differentiate?

An Independent Sponsor searches out potential acquisitions and negotiates the recapitalization or leveraged buyout of a company, then works to find financing partners to supply the necessary debt and equity to close the transaction.

The Independent Sponsor is typically experienced in mergers and acquisitions, has a strong track record and financial network. This individual, entity or group may find and negotiate investment opportunities that we may not have otherwise sourced. This supplemental deal flow is of value to the Partner Investor because it provides us with additional mezzanine and equity investment opportunities to analyze and consider.

Independent Sponsors are encouraged to invest some of their own capital into the transaction. Sometimes they roll all or part of their transaction closing fee back into the transaction, and/or bring some of their own equity investors to help finance the transaction. This shows the Partner Investor that the Independent Sponsor has “skin in the game” (in both capital and relationships), and helps validate their confidence in the investment opportunity.

When the Independent Sponsors has relevant industry experience, it is extremely valuable to the Partner Investor. When the Independent Sponsor can bring investors who can serve as Operating Partners, it makes the opportunity more attractive for the Partner Investor. In other words, Operating Partners have operating expertise that complements the business being purchased. These Operating Partners can help professionalize and grow the Company, thereby increasing returns for the Partner Investor and all the stakeholders.

Independent Sponsors provide oversight and management of the Company. The Board is typically controlled by the Independent Sponsor, with representation by the seller (if they rolled over some of their equity, which is often the case) and the Partner Investor.

How are Independent Sponsors Compensated?

For their sourcing, negotiating, active management and oversight of the investment, the Independent Sponsor is remunerated in a number of ways which may include:

– Closing fee
– Management Fee
– Stock awards
– Promote / Carried Interest on the equity investment of the Partner Investor

The incentives earned are determined by a number of factors, which relate to the “value-add” of the contemplated transaction that the Independent Sponsor sources and negotiates. For example, this may include:

– The price being paid (i.e. did the Independent Sponsor negotiate a good deal?)
– How much work have they done on the investment opportunity?
– Is it a great company / investment opportunity?
– Strong return potential?
– Their role going forward
– Expertise, or operational partners being brought to the deal
– Strategic growth opportunities uncovered
– Do they have any “skin in the game”?

The economics earned by the Independent Sponsor depend on the deal terms and the variables that determine the aggregated “value-add” that an Independent Sponsor brings to any particular investment opportunity. As such, economics vary widely. The promote is typically 5-30% of the upside after a preferred return is achieved, and is often based on a stairstep that increases as the returns to the equity investor increase. Management fees, if the Independent Sponsor is active post-close, currently range between 3-7% of EBITDA. Closing Fees and common equity ownership are also common forms of earned economics for Independent Sponsors, and vary by deal.

Effort and preparedness pay

As the accomplished baseball executive Branch Rickey once stated,

Good luck is what is left over after intelligence and effort have combined at their best”… “Luck is the residue of design”

Mr. Branch is speaking of cause and effect, or course, which we can all learn from. In the same way, this can be applied to the foundation the Independent Sponsor constructs. Improving market position “creates” an environment for success. Independent Sponsors can differentiate through hard work and building their deal sourcing and investor contacts (such as rapport with Tecum), so that when their number is called, they are ready to play ball.

If you’re an Independent Sponsor, please consider reaching out to Tecum to discuss an opportunity. We have extensive experience providing flexible capital solutions to investors just like you.

Matthew L. T. Harnett
Tecum Capital Partners

Tecum’s investment criteria:

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