When an independent sponsor is raising capital for a new acquisitions, economics and compensation packages often vary widely based on the background of the sponsor, the deal dynamics and the capital providers involved.
We’ll explain some of the basic components of a typical compensation package, as well as describe six ways to improve your ability to credibly negotiate better independent sponsor economics.
1. Focus on acquiring businesses that fall in industries or situations where you have extensive experience, relationships or a track record. Unless there’s a lengthy track record across multiple industries or types of situations, it can be difficult for a private equity firm or family office to get behind an independent sponsor with no experience in the industry of the business they’re raising capital for. Negotiating better economics will be a lot easier if you can demonstrate why a capital partner should support you over someone else, or a management team directly.
2. Bring a veteran operating partner or executive with deep industry experience to the table. If you don’t have a deep background in the industry of the target company, bringing in an industry executive who will either augment the company’s leadership team or serve in a strategic operating partner capacity is a great way to add value to debt and equity capital partners.
3. Find a proprietary opportunity at an attractive valuation. Bringing an opportunity to a capital provider that’s been widely marketed by a capable investment bank is usually a non-starter. In many cases the private equity firm or family office will have seen the opportunity directly. Unless there is some legitimate reason why the capital partner should back the independent sponsor directly, save yourself the time and look elsewhere. Focus on direct opportunities or situations that haven’t been widely auctioned to the free world.
4. Develop a thoughtful growth and value creation strategy. There’s nothing worse than fundless sponsor who throws a lot of deals against the wall, hoping one sticks. It wastes capital partners’ time and damages the credibility of the independent sponsor. If you intend to discuss an opportunity with a debt or equity financing source, you should be able to articulate why you feel the acquisition is compelling and what specific strategies could be implemented to grow the business and create value.
5. Identify and possibly tee-up other complimentary add-on acquisitions. Under the right circumstances, making add-on acquisitions can be a great way to grow the size of a company, achieve scale and unlock value. For an independent sponsor, having a possible follow-on acquisition opportunity or two available can be a great way for capital partners to increase the value of the initial investment, and potentially, put out larger dollar amounts. Having other opportunities lined up may put you in a better position with capital partners when negotiating fundless sponsor economics.
6. Run a coordinated and systematic process to raise the capital. We see independent sponsors or executives frequently who partner with the first capital provider that agrees to do the deal. While this sometimes makes sense because of time constraints, it usually leads to the independent sponsor getting squeezed on economics, such as a carried interest, management fee or deal fee. Running a more formal process allows the independent sponsor to both: a) find the capital partner that is the best fit with the sponsor and the business and; b) determine what “market” economics are for that particular situation.
If you don’t have time to run a coordinated capital raising process, or you don’t have the breadth of relationships with debt and equity capital partners to know whether or not you’re being offered market-based independent sponsor economics, reach out to an investment bank that focuses exclusively on independent sponsor financing.
In most cases, the private capital markets for fundless sponsor led transactions are extremely inefficient. Very often, there are multiple ways to structure a transaction and specific types of capital partners that make for more complimentary partnerships.