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The value of Independent Sponsors to capital sources, such as Private Equity firms like Boyne, is their focused knowledge of specific industries, the relationships they have within those sectors, their ability to identify and bring deals to the table that have already passed an initial vetting process, and the exclusivity that usually attends these deals.
Independent Sponsors allow PE firms to cover more industries, in greater depth, and uncover more deals. PE market makers can’t be everywhere, and the lower middle market covers a broad swath. Additionally, the exclusivity that the Independent Sponsor enjoys creates a clear path, obviating the likelihood of other bidders. So, it’s only logical that Independent Sponsors should become trusted, “go-to” partners for sourcing new deals and providing professional operations guidance to portfolio additions.
1. Quick Access to Capital – Faster Time to Funding
2. Proof of Funding Capability
3. A Partner, Not a Competitor
4. The PE Assumes Responsibility for Due Diligence
5. Access to Additional Management, Financial and Operational Expertise
The benefits are obvious to a PE firm looking to grow its influence in the lower middle market through affiliation with Independent Sponsors, but what’s in this relationship for the Independent Sponsor? Why should he or she partner with a PE group rather than turn to more traditional capital sources, such as family offices or investment bankers?
Here are some thoughts:
By its very nature, a PE firm has available capital, ready to deploy, and the ability write a bigger check, if needed. Today, PEs in general have a great deal of capital awaiting the right investment, and the mandate from their investors to make it. The Independent Sponsor won’t find his or her PE funding partner looking for co-investors to off-load risk, as family offices and investment bankers are likely to do, prolonging the fund-raising process while the deal ages.
In this era of rising valuations – valuations that are often unreasonably high and unsustainable – the right PE also provides the valuable expertise necessary to calculate a realistic valuation that will support the long-term financial viability and success of the acquired organization, while also accommodating the economic returns required of the investors.
Having established relationships with PE partners provides proof to the acquisition target of the Independent Sponsor’s ability to fund the deal. Demonstrating this ready source of investment funds from the outset confirms to the prospect that the Independent Sponsor is ready to move forward, strengthening the Independent Sponsor’s negotiating position and justifying the value of exclusivity to the client. And with a funding partner already in place, the Independent Sponsor can be confident that the exclusivity clock won’t run out before the deal can close. Strong capital partnerships with PE firms transform Independent Sponsors from fund-less to fund-able.
“With its origins as an Independent Sponsor, Boyne Capital possesses a unique knowledge of what is required to forge a successful partnership between the Independent Sponsor and a PE firm.”
Typically, PEs are highly specialized, sometimes lacking expertise in the Independent Sponsor’s area of concentration. Therefore, PE firms represent collaborators with rather than competitors to Independent Sponsors. When an Independent Sponsor brings a deal to the right PE firm, he or she can be assured of playing a leading role in the deal, both pre and post. In fact, a smart PE firm will require it.
The Independent Sponsor leverages specific industry knowledge, operations expertise and personal relationships to drive the acquisition process — a skillset and market awareness that the PE may not have. Bringing value to the process puts the Independent Sponsor on equal footing and justifies a continuing role post acquisition.
Once brought into a deal by the Independent Sponsor, the PE puts its own expertise to work conducting the due diligence necessary to bring the deal to a successful close. From this point, many PEs will assume the burden of due diligence costs, even for dead deals. Specifics on who pays how much, when and for what should be explored up front. For PE firms, it is a classic risk-reward, investing their time, talent and resources in exchange for a reasonable return.
Additionally, by handling the nitty-gritty of financial and operational audits, market analyses and the like, the PE frees the Independent Sponsor to pursue other deals while the investigation and valuation stage plays out so the Independent Sponsor can keep his or her deal pipeline flowing.
“As a fund-less deal negotiator, the Independent Sponsor must rely on others for the capital to close deals.”
Just as the PE firm is leveraging the sector knowledge and contacts of the Independent Sponsor, the Independent Sponsor can leverage the resources and management, financial and operational expertise of the PE group to close the deal more quickly and assist in the post-close management and guidance of the acquired company.
The right PE firm has the ability to evaluate the risk as well as the post-funding opportunity to determine the true value and viability of the deal. This may include risk mitigation strategies, efficiency and productivity assessments, business expansion planning, growth modeling and similar revenue and cost-benefit analyses.
In the highly competitive M&A arena, having an able partner at its side increases the Private Equity firm’s reach, allowing it to tap into new market sectors, helping to discover and acquire its next portfolio winner, and finally put “dry powder” into play. For the Independent Sponsor, this relationship can speed time-to-close, reduce the risk and cost of dead deals, assure a continuing role post acquisition, provide additional expertise and resources to turn-around an ailing company or prepare one for growth and expansion, and ultimately position the Independent Sponsor to pursue more deals.
Having a working relationship with a PE firm provides the Independent Sponsor with an ally and leverage while negotiating the best deal possible.