An investor's notes from the McGuireWoods Independent Sponsors Conference

Below are my notes from this year's McGuireWoods Independent Sponsor Conference, which are based on the public panels and my one-on-one discussions with sponsors. I sent these out earlier to Main Street Capital Network investors (a syndicate of 140+ SMB investors—individuals, family offices, and funds) and am sharing them below with the Searchfunder community in case others find them helpful.

If you're a searcher or independent sponsor who expects to raise equity in the future, don't hesitate to contact us here if you believe your deal will fit our investment criteria. We like to connect with acquisition entrepreneurs at all stages (currently searching, preparing an LOI, or an accepted LOI).

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During the conference, McGuireWoods released their updated independent sponsor deal survey, which you can find here.

Finding & Closing Deals

Deal Flow: This past summer was especially slow for deal flow, and while things have picked up post-Labor Day, deal flow is still generally light. The potential reasons cited included buyers and sellers waiting on Fed rate decisions and the election (my personal opinion: people may be overcomplicating this. A few intermediaries have mentioned to me that SMB earnings in many b2b sectors were weak this year, so sellers are holding off until they have an up year).

LOIs: I heard very mixed responses from sponsors on their ability to get LOIs accepted without committed funding. The general pattern I saw is that those focused on auctions/shopped deals can have trouble competing against funded PE and strategic buyers. Those finding proprietary deals do not have as much trouble getting exclusivity, particularly when the sponsor has relevant operating experience.

Deal Structure: Be careful about earnouts! Several investors and sponsors mentioned this. Disagreements over technical accounting issues can create divergent views on whether hurdles were met and cause problems down the road.

Sponsor / Investor Relationships

One-Stop Shops: Experienced sponsors were nearly unanimous in saying that, if possible, they'd prefer to avoid receiving all of their debt and equity funding from the same source. There are just too many conflicts of interest. First-time sponsors are understandably less choosy here and seemed more comfortable taking significant equity checks from an SBIC.

When to Approach Investors: Lead investors expect to form relationships before signing an LOI. If the sponsor relies on a syndicate to close a deal, though, it often makes sense not to reach out to the other investors until exclusivity is in place.

Prioritizing Investors: The #1 focus should be on investors who have done co-investments in the past and have a reputation for fulfilling their capital commitments (the latter is a big issue for sponsors, particularly among family offices). After that, things like industry experience and resources provided should be taken into account.

Control / Governance: It was surprising to hear that while most first-time sponsors were very concerned about control, the more experienced sponsors were generally less concerned and mentioned that they were consistently on the same page with their investors (my personal opinion: presumably, there was some selection bias here. I'd imagine sponsors who are having deals go poorly are finding control and governance issues more salient).

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