What is an independent sponsor and why are they relevant?
The independent sponsor business model combines the rigor of traditional private equity with deal-by-deal investments and economics. Many independent sponsors pitch that their model has stronger limited partner investor alignment on issues such as fees, carry, and discretion to review each investment opportunity when highlighting the attributes of their model.
Independent sponsor’s limited partner capital generally comes from four sources: private equity firms, friends and family, hedge funds, and family offices. Depending on the deal, some sources may be more suitable than others. For instance, established private equity firms with capital ready for deployment will be more likely suited for larger deals, play an integral role in the deal closing, and insert a representative of the firm in the acquired company in an operational function. However, most family offices are more likely to participate in smaller deals, permit the independent sponsor to run the deal, and expect the independent sponsor to handle the operational role post-closing.
What makes independent sponsors attractive to financial partners? First, they provide exposure to deals that the financial partner may not have otherwise come across. The independent sponsor may have relationships stemming from an industry or geographical expertise that exposes a financial partner to previously unrecognized investment opportunities and possibly to companies that are not even officially for sale. Second, independent sponsors can offer operational and industry expertise that many investors, established private equity firms or otherwise, find attractive. The skill set the independent sponsor brings to a deal post-closing may increase the attractiveness of the investment and provide abilities that ultimately contribute to the success of the investment.
Why does the independent sponsor business model continue to gain momentum?
There are few barriers to entry for the independent sponsor business model which is why today’s experts believe there are about 1,000 firms acting as independent sponsors. Any deal professional willing to take the risk to start their own independent sponsor platform can do so. Technology and outsourced service providers will continue to make it easier and cheaper to start a platform.