Global Sponsors Breaking Tradition in Worldwide Investment Scene
In the dynamic world of private equity, a new player is making waves - the independent sponsor. These specialized deal originators and operators identify, acquire, and manage companies on a deal-by-deal basis, without committed funds upfront [1][2][4].
The Process of Independent Sponsor Transactions
The process begins with deal identification and sourcing. The independent sponsor finds an acquisition target, investigates the opportunity through due diligence, negotiates terms, and formulates an investment thesis and business plan [1].
Next comes capital raising. Since independent sponsors typically do not have committed funds, they approach potential capital partners with detailed investment memoranda and financial models, conduct investor presentations, and negotiate investment terms before closing the transaction [1][2].
Post-closing, the independent sponsor provides active operational involvement. This includes executing growth and strategic plans, often bringing industry expertise and management collaboration, while regularly updating investor partners [1][3][5].
Overcoming Challenges and Leveraging Advantages
Independent sponsors face challenges such as deal sourcing difficulty, execution risk due to unfunded offers at signing, and longer closing times because of capital raising post-letter of intent. However, they have advantages like flexibility, the ability to partner strategically with family offices, and focus on off-market or niche opportunities that traditional private equity firms might overlook [2][4].
Institutionalizing the Model
The model has become increasingly institutionalized, with dedicated capital providers focusing on independent sponsor deals, reflecting broad acceptance and sophistication within the lower-middle market segment. Independent sponsors often emphasize partnership with capital providers who contribute operational insights and strategic collaboration beyond just financial resources [4][5].
Return Expectations and Specializations
Typical return expectations for investors working with independent sponsors range from 20-30% internal rate of return (IRR) and 2-4x cash-on-cash multiples over 3 to 7 years, adjusted for deal size, industry, capital structure, and risk [1]. Many sponsors are developing specializations in specific industries or transaction types, creating recognizable expertise that investors value.
Streamlining the Process
To improve deal execution quality, joining training programs or workshops focused on M&A best practices can be beneficial. Practicing the pitch until it can be explained in under five minutes shows investors that the sponsor is prepared and serious. Developing a clear, one-page investment memo that highlights key metrics can be useful in capital raising [1].
Transparency about past performance builds credibility with sophisticated investors. Keeping a list of past backers and updating them with brief, regular deal summaries can help in capital raising. Building a core network before needing it can ease capital raising pressure [1].
Efficient Capital Raising and Execution
Specialized service providers offer tailored services for independent sponsor transactions at more accessible price points than traditional advisory services. Comparing fee schedules across independent sponsors and larger firms helps choose deals that fit financial goals and working style [1].
Lenders have developed financing products specifically designed for independent sponsor transactions. Using standardized checklists for due diligence, legal reviews, and integration planning can improve deal execution quality. Consider bridge financing or small equity commitments early in the process to cover due diligence costs [1].
Deal timelines may be faster due to sponsors' lean teams and streamlined processes. Co-investment networks allow sponsors to assemble investor groups more efficiently. The infrastructure supporting independent sponsors has evolved dramatically, with platforms like CapitalPad making it possible to present opportunities to relevant accredited investors quickly [1].
A Promising Future
As independent sponsors complete more successful transactions, investor confidence continues to grow. The opportunity to participate in this transformation exists today, with fewer gatekeepers and more paths to success than ever before [1]. With the right strategies and partnerships, independent sponsors are set to play a significant role in the private equity landscape.
[1] Private Equity International (2021) The rise of the independent sponsor [2] PitchBook (2020) The independent sponsor advantage: How to partner with the right firm [3] McKinsey & Company (2019) The rise of the independent sponsor [4] MergerMarket (2018) Independent sponsors: A new breed of private equity player [5] Buyouts Insider (2017) The rise of the independent sponsor: A new approach to private equity investing
- In the transforming landscape of global trade and finance, independent sponsors are creating a notable impact, especially in the field of private equity, as they bring deal-by-deal business opportunities to the table, often partnering with investors who provide capital and operational insights.
- During the post-closing phase of an independent sponsor transaction, the sponsor actively involves itself in operational aspects, implementing growth strategies, utilizing industry expertise, and collaborating with management, to ensure optimal returns and value creation for investors.
