Selecting the right capital partner is critical for independent sponsors. Unfortunately, we often hear horror stories from sponsors about capital partners that re-trade deals, back out at the last minute or become less than ideal partners after a transaction closes.
We often find our clients asking us: Which capital sources make the best partners for unfunded sponsors? What should fundless sponsors look for in a capital partner? What type of funding source would be the best fit for me and my deals?
Here are 3 traits shared by great independent sponsor funding sources:
1. They Offer Fair Independent Sponsor Economics
The proposed independent sponsor economics (transaction fee / promote, carried interest or ownership / ongoing management fee) are designed to reward the sponsor for the value delivered and to incentivize them to grow the business being acquired.
If you bring a proprietary deal, at an attractive valuation, with a solid management team and growth plan to the table, you should be rewarded with superior fundless sponsor economics. Why is anything less than that reasonable or acceptable?
Be careful not to fall into the trap of accepting below market economics if you can avoid it. Many of the long-time and well-known fundless sponsor capital providers often take advantage of their unfunded counterparts, particularly new sponsors or ones that aren’t running a tight capital raising process.
Any pushback from a capital source such as “Well, it’s a stretch deal for us” or “That’s not what we do” means they are probably not a good fit for you or your deal.
2. They Embrace the Independent Sponsor Model
The ideal funding source embraces the independent sponsor model because they want to, not because they have to.
Let’s face it, not every SBIC, family office or private equity fund really wants to invest with fundless sponsors, but as the independent sponsor market has grown, it has become harder for private equity firms to ignore as a viable source of deal flow.
You need to ask the right questions – how many independent sponsor deals have they done? What economics have they provided sponsors in the past? What are their criteria for fundless sponsor deals? How do they see your role after the transaction closes? Based on their responses, you can decide if they really want to work with you…
3. They Provide More than Just Debt or Equity Capital
A great funding partner brings more to the table than the capital to close your deal.
The best funding sources are strategic – they will enable growth by funding add-on acquisitions; they have helpful industry connections; they have insight on best practices to grow a business.