McGuireWoods recently hosted its third annual Independent Sponsor
Conference in Dallas, drawing more than 800 independent sponsors and
capital providers from more than 40 U.S. states and three countries. At
the conference, McGuireWoods lawyers joined independent sponsors and
capital providers to share insights on industry trends and best
practices for structuring and executing transactions.
Here are some of the key takeaways from this year’s conference.
“Truths” about independent sponsor economics are consistent.
For the third year, McGuireWoods’ panel on independent sponsor economics
detailed what fees actual capital providers are paying through independent
sponsor-led deals. Many of the caveats remain the same (attractiveness of
the investment, “skin in the game” from the independent sponsor, and
going-forward roles and responsibilities), with the closing fee, management
fee and carry structure tending to gather around consistent ranges. We
continue to see growing support for the advice succinctly provided by one
panelist: “Don’t chase money; chase relationships.”
Independent sponsors and capital partners are implementing new “hybrid”
structures combining the benefits of committed private equity
structures and deal-by-deal structures.
As the independent sponsor model continues to mature, some of the more
experienced independent sponsors and capital partners are finding ways to
implement structures that provide the independent sponsor with a level of
“committed capital” while offering the capital partner significant
co-investment opportunities, more consistent transaction flow and an
agreed-upon sponsor-economics package. Illustrating the reality that
committed private equity structures and deal-by-deal structures each have
their own advantages, these hybrid structures are an evolving and important
theme in today’s environment.
Shared-control structures can take on myriad forms and vary among
capital providers and independent sponsors.
What is perhaps most important in situations with shared control is that
the parties engage in candid discussions early in the process to gain a
full understanding of expectations. That understanding will foster the
relationship needed if the parties later face unanticipated challenges in
the business. Also, shared financing arrangements with multiple capital
providers are becoming more commonplace and necessary, adding a layer of
complexity to structuring rights among the various stakeholders.
Family offices recognize the emergence of the independent sponsor model
as a lasting, viable investment structure.
These capital sources realize that independent sponsors source deals to
which the capital sources would not otherwise have access, allowing
investors with limited internal resources to leverage the deal flow
provided by independent sponsors to expand the capital sources’ own
internal capabilities. This structure provides opportunities for
diversification, especially for family offices that have historically
invested in the industry in which the family generated its wealth. After
closing, independent sponsors can be a valuable extension of the capital
providers’ management capabilities, and the partnership between an
independent sponsor and a family office can provide significant strategic
value to a company. To capture these benefits, these capital providers are
altering their investment theses and getting creative with economics to
properly align interests.
When navigating a deal from letter of intent to closing, relationships
Independent sponsors play a unique role in facilitating a partnership among
the target company management, rollover sellers, new equity investors and
lenders. Term sheets set out non-binding rules of the road, but successful
independent sponsors spend months (even years) cultivating deep
relationships with the target company and also with capital providers. When
timing or due diligence hiccups occur, these relationships can be key to
holding the deal together.
The most highly sought-after capital providers are firstly great
Independent sponsors highlighted being trustworthy and reliable first, as
specific roles and responsibilities of the capital providers can range from
being relatively uninvolved to very involved in structuring, diligence,
deal negotiations and day-to-day management of the investment. The most
seasoned independent sponsors tend to value great partners over a few extra
points of carry.
Lower-middle-market deals dominate, but size doesn’t matter.
Some independent sponsors are long-time and well-capitalized investors with
sophisticated investing strategies and proprietary origination channels
focused on deals requiring equity checks exceeding $100 million, while
others are pursuing the model with companies at or under $1 million of
EBITDA. The majority of independent sponsor-led deals have enterprise
values between $20 million and $75 million.
The universe of independent sponsors continues to expand.
While many investors look for independent sponsors in the form of proven
private equity professionals who have departed such firms, independent
sponsors have varied backgrounds including operations expertise, investment
banking, consulting and more. Regardless of background, great independent
sponsors create value through the hard work of finding compelling deals,
making them investable, and running the investment from origination,
through diligence, closing and all the way to the ultimate exit.
McGuireWoods continues its leading role in supporting the independent
sponsor community. If you are an independent sponsor or family office,
please join one of our peer networking groups around the country. If you
are an investor interested in getting to know independent sponsors, we want
to know you. Thank you to all of those who attended ISC 2019, making it
another huge success!