Key Takeaways From McGuireWoods’ 2025 Independent Sponsor Conference

Secrets to Success as a Sponsor

For independent sponsors today, partnership quality and trusted relationships are the ultimate differentiator to successful execution. Selecting flexible, trusted capital partners — rather than simply chasing the best economics — consistently delivers better outcomes over the hold period. Successful sponsors focus on creating and maintaining a network of trusted partners who can be counted on to close deals on terms consistent with the original offers and add value in difficult situations. The right partner generates incremental value and creates a more streamlined investment lifecycle. In addition, it is also important to create a growth plan as part of the pre-closing works, including developing market studies and detailed value creation plans. Another best practice is planning for variance — recognizing that an investment’s resilience requires foresight. Actual costs are often higher and timelines longer than projected, so often times successful deals are overfunded to help maintain liquidity. Finally, it is encouraged to take a proactive approach to strengthening the management team. The most effective leaders are self-aware and excited to add to the team or develop new skills to address weaknesses.

Capital-Raising: Getting to Yes in a Difficult Market

With tighter markets and investors becoming increasingly selective, independent sponsors need to lean into the fundamentals that truly move deals across the finish line. It’s important to build relationships with potential investors well before the LOI. A simple investment thesis often resonates most with investors, especially when paired with relevant experience in the space. Investors also want to hear a practical plan to create value. From a due diligence perspective, sponsors should be open about key risks in the target company and how they will price them — transparency builds trust. Effective capital raising also requires tactical precision, such as securing anchor equity early and focusing outreach on the right investors.

Talent Strategy: Building the Right Team From an Independent Sponsor and Capital Provider Viewpoint

Talent remains a main value lever in the lower middle market. Firms that invest early in assessing their CEOs and CFOs and design organizational structures around a five-year plan set the stage for smoother execution. Adding an independent chair or promoting from within can strengthen leadership continuity. Parties should have candid conversations about founder roles and succession plans, supported by structured assessments and scorecards. Addressing these dynamics head-on can prevent the misalignment that often delays growth. In today’s market, the sponsors who win are the ones who view talent as a deliberate and strategic part of the investment process.

When, How and Why to Partner With an SBIC Fund

Due to their ability to offer flexible capital, Small Business Investment Company (SBIC) funds continue to offer independent sponsors a compelling capital option. A key component for successful relationships is for parties to align on post-closing governance structure early in the process, particularly when one or more SBICs are providing debt and equity financing. While certain investments, such as those involving exposure to “vice” industries or material international operations, can present regulatory hurdles, the notion that SBICs’ tie-in to a government funding program puts pressure on them to liquidate their investment “early” has been largely debunked over time. In practice, sophisticated independent sponsors and SBICs are finding that early alignment creates durable partnerships.

Long-term Capital Relationships: Blind Pool Funds, “Soft Commit” LPs and More

As capital tightens and investor expectations climb, strong sponsor–capital provider relationships are often the deciding factor in whether deals get done. Long-term partnership dynamics — not just terms — drive outcomes. Building a successful long-term relationship extends far beyond legal terms, with key elements including trust, transparency and consistency across deals and cycles. Proactive and candid communication — especially when delivering bad news — is crucial, as it avoids compounding surprises and deepens trust over time. Other essential factors include upfront alignment on core expectations, such as targeted hold periods, sector focus, check size, investor return expectations and the investment decision process. The key is to not assume there is a “one size fit all” approach to these relationships, but to learn and address the unique needs and desires of each capital provider. While some prefer engagement only after a letter of intent is signed, others value earlier dialogue during thesis development and the search for appropriate investment opportunities, requiring sponsors to tailor their approach. Ultimately, how a sponsor consistently handles challenging situations and maintains professionalism significantly influences future capital commitments and long-term partnership success.

Co-Sponsorship: Considerations and Best Practices

As transactions grow more complex and investors expect deeper specialization, co-sponsorship continues to be a powerful tool for sponsors to expand capabilities and strengthen their competitive position. It allows firms to scale, build track records, and accelerate value creation by solving critical capacity constraints and adding essential domain expertise. To ensure a successful partnership, co-sponsors should have complementary strengths and proactively define roles, responsibilities, governance representation and time commitments early in the process. Partners should unify their structure and present a single, coherent economic front to capital providers, resolving any internal disagreements behind the scenes, and allowing the co-sponsor team to present a seamless and unified front to management and investors throughout the deal lifecycle. While internal economics may differ based on each sponsors’ objectives, outward alignment is important to present a united front. When executed with clear vision and cohesion, co-sponsorship can materially enhance execution and value creation, positioning the partnership to deliver strong returns.

Pre-Exit Liquidity Transactions and Strategies

Historically more common among larger sponsors, continuation vehicles are increasingly becoming a go-to strategy tool in the lower middle market. These vehicles help firms maintain exposure to their strongest assets while giving investors flexible liquidity options. But with broader use, comes the need for greater discipline. Successful sponsors prioritize disciplined, transparent valuations — often benchmarked at 80–95% of “day one” value — and reinforce them with market testing and structured terms such as delayed payments or earnouts. Clear governance frameworks, negative covenants and defined exit timelines help keep everyone aligned and minimize potential conflicts. Done right, continuation vehicles offer flexibility and can deliver enduring value.

QSBS: Bigger Opportunities, More Complexity

The 2025 legislative changes to qualified small business stock (QSBS) drew plenty of attention, for good reason. The One Big Beautiful Bill Act expanded the asset threshold to $75 million and raised the exclusion cap to the greater of $15 million or 10x basis, with tiered exclusions (50% after three years, 75% after four and 100% after five). While the benefits of qualifying for QSBS treatment can be substantial, it is important note that QSBS remains technically nuanced. Questions persist around profits-interest eligibility, the active trade or business subsidiary look-through rules involving operating partnerships, and risks of issuing new shares in certain add-on transactions. These nuances underscore the importance of careful structuring from the outset. Anyone seeking QSBS treatment should consult with their tax advisers or a member of the Business Tax Team at McGuireWoods.