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@example.com.
Q: Why did you decide to become an independent sponsor?
Omer Cygler: I am originally from Israel but spent the past decade as a tech investment banker at J.P. Morgan in San Francisco, where I advised some of the world's most well-known tech companies through key "life events," such as mergers and acquisitions (M&A) and initial public offerings (IPO). Throughout the interactions with these companies and their investors, I felt like I was offering valuable perspectives and advice but was always "on the sideline," as opposed to being a true stakeholder. I wanted to evolve from being a trusted adviser to being a trusted investor.
After flirting with a few funds, I decided to build my own firm. Strategically, I knew the competition for deals in the tech market was fierce, so I decided to focus on companies with operations in Israel and the United States that may have raised venture funds in the past and now required other skill sets from their investors, such as M&A expertise, complex deal structuring and so forth. That was the genesis of my firm, Lion Investment Partners.
Q: How long have you been operating as an independent sponsor, and how long did it take you to close your first deal?
OC: I left J.P. Morgan toward the end of 2019 and was planning to raise a fund with two longtime friends. Within about six months of fundraising, COVID-19 hit. It became clear that raising a first-time fund was not going to be possible, so we went our separate ways. I continued to have a strong conviction that great deals were out there and that if I could find a great deal, the money would follow.
After another six months or so, a good friend of mine who founded a strong but somewhat misunderstood software company reached out to me and offered the opportunity to invest and join the board. The company's leadership was starting to contemplate strategic alternatives. I had known this friend and the company for years and jumped at the opportunity. I was able to convince my limited partners (LP) to invest about $30 million. Eight months after that initial investment, the company launched its IPO on the New York Stock Exchange at about three times our entry valuation.
That early success helped me with sourcing additional investment opportunities and capital. Since then, I have invested another roughly $100 million in four companies.
Q: How do you envision the independent sponsor model evolving in the future?
OC: Similar to other asset classes, I believe the independent sponsor model will expand over time to empower managers with more unique strategies. Today, I find most independent sponsors look for majority/control deals in the lower middle market and mostly in traditional industries. My strategy is quite different, as I am open to both minority and majority investments. I focus on well-run tech companies with more than $30 million of revenue that can scale efficiently, and rather than fully operating them, I focus on adding value across my areas of expertise, which can be very meaningful and value-accretive over time.
In the near future, I believe technology and tech-enabled companies will become more attractive for independent sponsors, and I hope to see more of these deals happening.
Q: What is the biggest challenge of the independent sponsor model?
OC: There are genuine structural challenges in the independent sponsor model that require mitigation. Juggling the investment sourcing and negotiation process while lining up LP capital for a deal that hasn't closed yet can be a logistical hardship at best and a deal breaker at worst. I think more innovation is required from both sponsors and capital providers to figure out ways to make this process more efficient for all sides — target companies, sponsors and capital providers. Examples of that could be managed accounts with clear parameters — such as the number of deals, time to deploy and target company metrics — or lines of credit that will allow sponsors to close the deal and syndicate it later. I'm confident this type of innovation will attract more top-notch managers to become independent sponsors and will result in more interesting types of investment opportunities for capital providers
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
OC: When I started out, my LP base was mostly family offices and individuals. Over time, it has evolved to include more institutional LPs. In my experience, great investment opportunities end up being oversubscribed by LPs, so when I choose to allocate to a capital partner, I focus on four areas. First is long-term alignment. I look for partners that buy into my strategy/target market, have conviction in my abilities as a manager and have the resources to reinvest with Lion.
Second is strategic capital providers rather than opportunistic providers. Strategic capital providers focus on long-term, recurring returns. They are fair on economics and don't get overly fussed when things don't go as planned. Opportunistic capital providers tend to be overly focused on economics and are harder to rely on in challenging situations.
Third is certainty and transparency. Given the already complex nature of getting deals done, it is critical to understand exactly how a capital provider operates, what it needs to know to make a decision and how the internal process works from an initial conversation to a firm commitment.
Finally, I focus on size. Given my average check sizes are $20 million-50 million, it can be logistically difficult to put a deal together with $1 million-5 million checks. Finding an "anchor" that can write a $10 million-15 million check — or greater — is often a priority
About Omer Cygler
Omer Cygler is the founder and managing partner of Lion Investment Partners, an investment firm focused on Israeli-related, mature technology companies. He is a technology investor with about 15 years of investment banking, advisory, capital markets and investing experience with disruptive internet and software companies. Cygler is the former head of J.P. Morgan's internet business-to-business division, where he originated and led the execution of $35 billion of IPOs, mergers and acquisitions, and financings for leading technology companies. Prior to J.P. Morgan, Cygler worked at UBS Investment Bank, executing M&A and financing transactions for digital media, entertainment and telco companies. He earned an MBA from Ross School of Business at the University of Michigan and a BA from IDC Herzliya.