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?
Adam Wise: My journey started in 2006 when I joined a lower middle market private equity firm that was investing out of a committed fund. That firm morphed into an independent sponsor — known at the time as a “fundless sponsor” — in 2011. This transition was driven by the desire for a more flexible model without the constraints of traditional private equity.
As time passed and the model became more widely accepted by deal intermediaries and the capital markets, I decided to leave that firm and pursue transactions on my own as an independent sponsor. This firm has completed four deals that were acquired with a long-term ownership strategy.
Since that time, a former colleague and I started Penstock Equity, which is a committed capital vehicle focused exclusively on providing minority equity capital to other independent sponsor-led transactions. We started this firm because of our own independent sponsor experiences. The philosophy at Penstock is “independent sponsors helping independent sponsors.”
Q: Why did you decide to take this distinct investing approach?
AW: The debt markets have become efficient in providing capital for independent sponsor-led deals. However, the equity side of the equation remains fragmented and inefficient. Sponsors have attractive deals worthy of equity investment. There are high-net-worth investors that want access to these deals, but there is no easy way for these parties to connect other than within their existing networks, which is inefficient..
Further, sponsors are often surprised by how many high-net-worth individuals they must converse with to secure an investment. By creating Penstock, we were able to pool capital from our historical investor base so we can write a $1 million to $5 million minority equity check into an independent sponsor-led deal to help them more quickly raise the capital needed to complete the deal. For some sponsors, we are also able to provide historical experience and expertise that increase their odds of success, all while the independent sponsor retains control of the deal.
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 for the future?
AW: The independent sponsor model has grown rapidly as it provides a unique and compelling alternative to selling to traditional private equity firms. The independent sponsor model lacks many of the constraints of traditional private equity. For example, there are no holding period constraints or capital concentration constraints. From a seller’s perspective, there is an option to sell to a party that has the capacity to own and make decisions for the business with the long term in mind. In addition, a growing number of experienced professionals have the capability to lead transactions and have access to capital.
Q: What are the most common misperceptions about the independent sponsor model?
AW: The most common misperception of the model is that the sponsor lacks the ability to “get the deal done.” There are certainly less experienced or capable sponsors, but the community is full of individuals who have experienced merger and acquisition backgrounds at private equity firms, investment banks, diligence advisers and other firms who can shepherd a deal through the process to a successful closing, and then provide oversight to the investment post-closing.
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
AW: Choosing the appropriate capital providers is one of the most overlooked components of the transaction process. Many sponsors believe a deal completed on any terms and with any capital providers is better than no deal getting done. Thus, they tend to focus on the near term rather than the longer term.
On the debt side, this usually leads to being too focused on small differences in interest rate rather than evaluating the culture and experience components of the potential lenders and who will be most supportive of any challenges faced in the business or any potential acquisition opportunities.
On the equity side, a near-term mentality usually leads to being too focused on who can provide the most equity capital at the time rather than governance terms. There is often a trade-off between raising equity from a one-stop or large investor who will want control, as opposed to building a capital table whereby no investor owns more than 50%, thus allowing the sponsor to maintain control. This approach usually requires many more conversations and investor interactions and is more challenging, but it keeps sponsors in the driver’s seat and helps them build and diversify their investor universe.
We formed Penstock to help independent sponsors raise significant minority equity and maintain control. For example, a large equity check from Penstock combined with an investment from a mezzanine equity firm can likely provide the same solution as a “one-stop” junior capital provider without sacrificing the governance that sponsors desire to maintain. Our investment approach allows sponsors to build a track record as the control lead.
About Adam Wise
Adam Wise is managing partner of Penstock Equity, a lower middle market committed fund with the explicit mandate to invest minority equity into independent sponsor-led buyout transactions. Prior to Penstock, Wise participated in dozens of transactions as a principal investor or co-investor over the past decade in the manufacturing, distribution and business services segments under the independent sponsor model. Born and raised in Michigan, Wise is a graduate of the Stephen Ross School of Business at the University of Michigan where he earned BBA, MAcc and MBA degrees.