Back to School: Independent sponsor model matures in high-multiple environment

  • Most respondents are independent sponsors 5+ years
  • Lack of a fund creates challenges but strategic flexibility
  • 43 pct got into business to do deals, 10 pct to eventually raise a fund

With independent sponsors growing in number and respectability, accounting firm Citrin Cooperman recently conducted what it says is the first wide survey of the profession.

Two hundred forty-five independent sponsors took part, a majority (54 percent) of whom have been in the business for more than five years. Sylvie Gadant, partner at Citrin Cooperman, says that’s surprising, given that the life of an independent sponsor isn’t easy: “You have no committed capital; you can’t get management fees if you don’t have portfolio companies. When you start from scratch, you have no money, potentially, until your first transaction. It takes a lot of work to be successful.”

Gadant said it was encouraging to find so many committed independent sponsors. “Most of them are really happy with the model. It does provide a lot of flexibility.” While a PE fund has to stick to the strategy presented to LPs, an independent sponsor can do two consecutive deals in completely different industries. And without so much pressure to put money to work, “you can do deals whenever you want. You can keep the same portfolio company for many, many years,” maybe recouping some money through a dividend recap.

Perhaps reflecting these positive aspects, a plurality of respondents (43 percent) said they became independent sponsors purely to do deals, with 10 percent citing a desire to raise a fund eventually. Given the difficulty of first-time fundraising, some young PE professionals start their own independent sponsor firms to establish a track record.

The increased popularity of independent sponsors is being driven by well known market dynamics. “We’re in a sellers’ environment, and valuation multiples are high,” said Gadant. “There’s a lot of money available to do deals in the middle market, so it’s tough to find a good deal.” Independent sponsors can provide an attractive solution, sourcing lower-middle-market deals at lower multiples for family offices and wealthy individuals.

And they’re looking at lots of companies: Half the respondents reported reviewing 100 or more investment opportunities in a typical year. The most significant source of deal flow was boutique investment banks or business brokers, mentioned by three-quarters of respondents; 47 percent said they relied on company owners/management, and 42 percent named service providers. (Multiple responses were allowed.)

“The key thing is you have to share the deal economics,” Gadant observed. “The No. 1 topic of any conversation is: How much can you ask for when you bring a deal to the table, what’s market and what’s fair?”

Action Item: Read Citrin Cooperman’s Independent Sponsor Report 2017 here.

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