The interview below is part of a series from McGuireWoods that features interviews with impressive independent sponsors as part of our ongoing commitment to the independent sponsor community. To recommend an independent sponsor for a future interview, email Jon Finger at [email protected].
Q: Why did you decide to become an independent sponsor?
Nathan Chandrasekaran: My partner and I became an independent sponsor at the end of 2019. I was previously at a larger private equity firm where I had a great experience, but my partner and I believed there were opportunities to invest in smaller companies and bring my investing experience and his technology experience to them. My partner doesn’t come from private equity. He is a technologist at heart. He built two software companies and a global solar farm platform. We discussed raising a fund but decided that the independent sponsor route would be a good first step given we were a new firm, didn’t have a track record together and the fundraising market is not easy for a first-time fund.
Q: How long did it take you to close your first deal?
NC: Fortunately, our first deal took us just under five months to complete. It was a carve-out. I would not recommend carve-outs as a first deal. They are more complex than a traditional recapitalization. We had to stand up the business entirely on its own once we left the corporate parent. Today, we have five companies, of which two were carve-outs and three were recapitalizations.
Q: What are some of the most impactful reasons you think the independent sponsor model has grown so robustly, and what changes do you envision in the future?
NC: Two of the largest drivers are the growth and availability of capital and the supporting ecosystem for independent sponsors. Every day, more capital providers are becoming interested in investing and supporting independent sponsors. More and more limited partners — i.e., investors — are becoming less interested in the committed fund model because they don’t want to pay the annual management fee but want more discretion in deciding which deals they invest in.
In our most recent transaction, which we closed in September 2022, we saw a significant increase in the number of capital providers interested in the transaction. This includes firms we had never interacted with before.
Another important change is that investors entering the independent sponsor model are quickly aligning around market terms. As an independent sponsor, we are happy to earn our economics and believe that is the right way. Scaled economics are more aligned with the investors. The better the return, the better the economics to the independent sponsor. We still sometimes run into potential investors that claim their capital is different and won’t pay or pay significantly below market economics. We simply say thank you and share with them the McGuireWoods report on independent sponsors.
As for Columbia River Partners, we’re experiencing our own changes. We’re investing in our platform as we continue to scale, adding team members and investing in resources. We continue to refine our investment thesis — we are becoming more and more subsector-focused — and always building our network of capital resources.
Today, we focus on building our portfolio and supporting our management teams. At some point, we will revisit the fund-versus-nonfund discussion, and we are in constant discussions with limited partners and placement agents. I’ve been through the fundraising process several times and it’s not easy. In addition, the market is very crowded today and that is unlikely to change anytime soon.
Q: What are the most common misperceptions about the independent sponsor model?
NC: Many investors and advisers initially believed that independent sponsors were not capable of closing a transaction and that many independent sponsors had little experience. However, this perception is changing. I know many independent sponsors with significant transaction experience, and I have a lot of respect for what they have accomplished. We are seeing more experienced investors pursue the independent sponsor model, including those that previously had raised funds. What is really attractive about the independent sponsor model is not having investments cross-collateralized.
There is also an opportunity for an independent sponsor to do one investment and drive growth in that one investment. I’ve seen independent sponsors focus on a niche sector, such as auto repair or cold storage. Instead of trying to do multiple deals across industries, they focus on building the one platform investment.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
NC: Choosing a capital partner is extremely important, for both debt and equity. Independent sponsors must be very careful when choosing a capital partner. Don’t always choose the term sheet with the most attractive economics. That’s my biggest piece of advice. We’ve learned this the hard way, and it’s a lesson I hope other independent sponsors can learn from. If you take away anything from this article, learn from our mistakes, which I’m happy to describe to you.
We had a transaction where we put together the investment thesis, found an initial platform, signed a letter of intent and recruited a CEO and several industry executives to be on the board. We put it all together. We went under exclusivity with a capital partner to do the transaction. We had a non-circumvent for six months, which in hindsight was too short. On the day immediately following the expiration of the non-circumvent, the capital partner called us and said they no longer needed us. The capital partner used our investment thesis, completed a transaction and took the CEO we had recruited. This capital partner was a large, well-known private equity firm that does direct deals. The explanation we received was that the head of the investment committee — whom we never met — decided at the last minute they didn’t want an independent sponsor involved.
This was a truly gut-wrenching experience, and one we hope never happens to any other independent sponsor. Key lessons learned: Vet the capital partner, understand their internal approval process, speak with someone on the committee if you can, do reference checks and move fast. Time kills all deals. And sometimes the most attractive proposal is not necessarily the right proposal.
We are now even more careful in choosing our partners. If the capital partner does direct deals, we have a higher threshold to work with them. We want to make sure they don’t take our thesis and our relationships and then do the deal themselves. There are a few firms that are still active in the independent sponsor community that we will never call again.
The most critical thing to vet is whether the capital firm has a history of working with independent sponsors as one of its core business lines. You want to work with capital firms that have completed a lot of independent sponsor deals. It should be core to their strategy and represent a majority of their deals rather than just being a one-off strategy.
About Nathan Chandrasekaran
Nathan Chandrasekaran is a co-founder of and partner at Columbia River Partners (CRP). He has been in private equity and finance for over 15 years.
Prior to starting CRP, Chandrasekaran spent more than 10 years at a New York-based middle market private equity firm with $2 billion of assets under management. He was a board member of numerous companies, including Lift Brands, Neighborly, DLT Solutions and BQ Resorts. Earlier in his career, Chandrasekaran spent several years at Merrill Lynch in the media and telecom investment banking division, served as a telecom strategy consultant at inCode Wireless (now a subsidiary of Ericsson) and started his career as a business analyst at Deloitte Consulting.
Nathan holds an MBA from the Kellogg School of Management, Northwestern University, and a bachelor’s in neuroscience from Bowdoin College. He is based in Seattle.