Once an Independent Sponsor commits to looking for a Private Equity partner to fund a deal, what’s next? How do they choose the right partner? Not all Private Equity firms are the same. A PE firm’s size, geographic location, industry focus, desire to partner, and other factors help determine the right candidate. So, what should an Independent Sponsor look for in a potential Private Equity funding partner?
Here is a view from the PE side…
While it may sound overly simple, the first question to ask is: How much experience does the PE firm have in working with Independent Sponsors? This should give the Independent Sponsor a good idea of how willing the PE is to partner with others in sourcing, closing and managing deals. It’s also indicative of the PE firm’s understanding of the relationship between Independent Sponsor and the PE firm, and its appreciation of the importance of the Independent Sponsor’s role in the process. PE firms that have experience working with Independent Sponsors likely already are convinced of the value the Independent Sponsor brings to the deal.
Working with an Independent Sponsor(s) on multiple deals is a sure sign that the PE firm values the Independent Sponsor’s contribution and is comfortable working with a partner in the M&A process. Independent Sponsors involved in previous deals with the same PE firm have derived value from the relationship. They are comfortable with how the firm operates, they know what type of deals the firm looks for and view the relationship as a collaboration one.
Lastly, due diligence while selecting a funding partner is as important as evaluating an acquisition. It is imperative that prospective funding partners be willing to share contact information of Independent Sponsors they have worked with in the past.
Independent Sponsors leverage their specific industry knowledge, operational expertise and personal relationships to secure acquisition targets and drive the closing process. These unique traits can also play a pivotal role in the future growth and success of the acquired company. Many Independent Sponsors desire an active role, and thus are willing to reinvest their acquisition fees back into the transaction in return for equity, thereby putting “skin in the game”.
Independent Sponsors looking to be involved in daily management or as board members will want to know that their PE partner supports ongoing participation. PE firms may seek this involvement, allowing the firm to dedicate those resources to other portfolio companies. The prospective PE partner’s history in similar situations will reveal what roles their Independent Sponsor partners have post-acquisition.
“There are two key indicators that Private Equity firms are willing and able to work with Independent Sponsors:
1) They have done so before, and
2) They have worked with one or more Independent Sponsors more than once.”
If the PE firm has no background in the Independent Sponsor’s industry, the Independent Sponsor may have to educate the PE on the size, scope and competitive make-up of the sector. The industry awareness, experience, and network that the Independent Sponsor brings to the deal would have substantial value.
However, if the PE firm is experienced in the sector, the Independent Sponsor’s credentials and pedigree are readily understood and may sway the PE firm’s decision to partner on the deal as it looks to leverage the Independent Sponsor’s market expertise.
Either way, the Independent Sponsor’s industry knowledge, operational experience, and relationships will determine whether a funding partnership is forged.
Post-transaction, the PE firm may not have the bandwidth to become actively involved in the acquired company. Direct participation post-close depends on: the number of portfolio companies the PE firm currently manages, the type of management oversight required (e.g., finance, operations, technology, etc.), availability of relevant people and resources, and perhaps most importantly, the firm’s confidence in the abilities of its Independent Sponsor partner. What degree of active, hands-on support will be required of the PE firm? Are there additional resources or services (e.g., IT, marketing, sales, CRM, etc.) which are beyond the scope or capabilities of the Independent Sponsor?
All deals are different. Some need funding to position a company for expansion and growth, while others need more hands-on management expertise to “right the ship” and turnaround an underperforming operation. Typically, PE firms such as Boyne Capital have access to a variety of resources to aid their portfolio companies, ranging from financial, accounting and HR services to technology, IT and operational expertise. It’s worth knowing up front just what types of resources a prospective PE partner can bring to bear.
“The PE firm will rely on the Independent Sponsor for insight into the overall market opportunity, in addition to the merits of the acquisition.”
An Independent Sponsor with proven management skills and operational abilities could be a valued asset to other companies the PE partner portfolio. Becoming involved in a PE partner’s other portfolio companies could further enhance the relationship and open other opportunities.
“PE firms such as Boyne Capital have access to a variety of resources to aid their portfolio companies.”
Having started as an Independent Sponsor, Boyne Capital knows the value that Independent Sponsors bring to making sound M&A deals, and what Independent Sponsors should consider when evaluating Private Equity funding partners. Above all, an Independent Sponsor should look for PE partners who have:
• Worked successfully with Independent Sponsors
• Done multiple deals with the same Independent Sponsor
• Involved their Independent Sponsor partners in the post-close management of the acquisition
• Demonstrated the necessary financial, management and operations resources to help assure the ongoing success of the acquired company
Meeting these criteria will go a long way to ensuring that this deal-making partnership delivers value for all.