Can Independent Sponsors structure a deal for equity instead of carry?
September 05, 2024
by a searcher in Montreal, QC, Canada
Question regarding the deal structures for independent sponsors ("IS"):
- Usually, IS will get paid in 3 ways: closing fee, management fee, and carried interest
- Carry interest is not equity, but an agreement to pay out a split of the total returns generated at the exit of a company
- Is there a way to structure a deal where an IS would get a part of the equity instead of some carry?
The Search Fund model allows for the searcher to get some equity - can we replicate some of this with the IS model?
Curious to get your thoughts on this.
from University of Pennsylvania in St. Louis, MO, USA
from IESE Business School in Cluj-Napoca, Romania
1. In some cases you can roll over your closing fee into the equity of the deal, in some cases it can pe a condition from the investors that you do so (at least a portion of it). That will give you a (albeit small) stake in the company.
2. If the IS has some capital and participates in the equity of the deal as an investor.
3. I've also heard of instances where at exit, the sponsor could roll over part or all of it's carry into the deal (effectively becoming a shareholder with the buy-side investor) and continue in the capacity of a sponsor for the new set of investors as well.
Since IS deals are conducted on a deal-by-deal basis, as your deal track record improves you could gain more flexibility in negotiating terms with some investors. But as Tony mentioned above, who you will be raising money from will weigh in big into that conversation.