On Oct. 5, McGuireWoods hosted its inaugural Independent Sponsor Conference in Dallas, attended by more than 300 independent sponsors and capital providers from more than 30 U.S. states. At the conference — the largest of its kind — McGuireWoods’ private equity team, alongside independent sponsors and capital providers, shared insights on industry trends and best practices for structuring and executing transactions.
Here are some of the top takeaways
- Good Deals Are King: With the abundance of cash waiting to be put to work, the ability to originate attractive investment opportunities is the most critical component to independent sponsor success. Whether due to the important role of the independent sponsor post-closing, the inclusion of an experienced operating partner or CEO, a well-defined growth and/or acquisition plan, or the valuation of the underlying acquisition, the independent sponsor is having an increasingly easy time getting the attention of capital providers.
- Sooner Rather Than Later: Independent sponsors often wonder about the best time to bring an opportunity to a capital provider. In many cases, a capital provider asks the independent sponsor if it has an opportunity under exclusivity and may not “engage” until that time; meanwhile, capital providers can focus on the difficulties of being presented with an opportunity already under a letter of intent. As the deal market continues to heat up, this conundrum for the independent sponsor seems to be subsiding. Many capital providers at the conference ask the independent sponsor to bring them opportunities early, allowing capital providers to help shape the terms, avoid “recutting the deal” and get in the mix early for an edge securing the opportunity.
- Align With the Capital Provider: Don’t focus solely on the best economic terms when aligning with a capital provider, particularly with an independent sponsor’s first deal. It is critically important to close that first deal and establish a track record. Focusing excessively on the promote and fee economics can impede the ability to close a transaction and launch a platform. Once the track record is established, be mindful of other factors, such as the quality of the partnership and the ability to arrange capital and execute multiple transactions quickly, instead of merely maximizing the economics in any one transaction.
- Evolution of Independent Sponsors: The independent sponsor community continues its evolution from a “fringe” idea into a large and fully credible market participant. Independent sponsors are a regular feature in the deal market. Despite concerns that a broader market correction could shift the dynamics from a seller’s market to a buyer’s market, the independent sponsor community is entrenched in the permanent asset class of private equity. Its position in the marketplace will only continue to expand and solidify over time. Some panelists believe that the independent sponsor transaction might actually become more prevalent during a recession as proprietary deal sourcing and a true “angle” on a target will be even more valuable.
- Be Prepared: Potential funding partners look for opportunities that meet their stated deal metrics and that offer financial opportunity for the independent sponsor and its partners. But the age-old Boy Scout motto may be the best advice for sponsors seeking partners to fund their deals — be prepared. Ideally, potential capital partners want to engage with those who have thoroughly vetted opportunities and are prepared to engage in meaningful discussion about the risks and rewards of a possible transaction. Independent sponsors who invest the time and do the legwork in analyzing an opportunity provide value that potential funding partners seek and cherish.
- Access to Untapped Deal-Flow Networks: Many times, the independent sponsor has access to transactions that are not on its capital partner’s radar — including deals emerging from a particular industry, geography or operational expertise. At a base level, the independent sponsor can serve an “outsourced BD” function for the capital partner. More often, the expertise of the independent sponsor increases the attractiveness of the opportunity at the outset, and when leveraged post-closing, provides efficiencies that can expedite and enhance the return on investment.
- Handle Economics Up Front: When engaging with potential capital partners for a transaction, independent sponsors should not wait until late in the process to have conversations about the economics for the independent sponsor. It is important to have these discussions early in the process to ensure there is a meeting of minds before the parties get too “engaged.”
- Manage Launch Expectations and Engage With Service Providers: It often takes longer than expected and is much harder to launch an independent sponsor platform and get the first deal done. The typical advice is to plan on two years of runway. Spend that time establishing mutually beneficial partnerships with experienced service providers. Set expectations early about what is needed in terms of rate and billing flexibility, identify clear scopes of work, create long-term incentives and build lasting partnerships.