Independent sponsor compensation?

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December 02, 2024

by a searcher in Montreal, QC, Canada

What does your compensation structure looks like as an independent sponsor?

I know the 3 main elements are: closing fees, management fees, and carry.

But more precisely:

1. How are closing fees paid?
Most are rolled over, but let's say that only 50% of the fee is rolled over - how is the other 50% paid out as cash? Is it simply added to the company total cost as added fees, and then financed in the total acquisition price, then distributed? (i.e., the same way you'd pay your deal team?)

2. How do you ensure that you have enough cash flow to pay for the management fees?
Management fees are usually based on a floor and ceiling, and then a % of EBITDA. Is there anything important here to keep in mind to make sure that Sponsors can get this fee? Do you just model it out in the financials of the company when you acquire it, and use a capital structure that allows for the distribution of this management fee?

Thanks!

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commentor profile
Reply by a searcher
from University of Richmond in New York, NY, USA
Re: #2 - Yes, you would model this out formulaically in the projections to make sure the company is generating enough cash flow to cover this (as well as interest, debt service, etc., etc.). Also note that the management fee is usually heavily subordinated, so if you are in breach of one or more covenants or don't have the cash to cover your fixed charges, this will usually be one of the first things you will have to pause payments on (though your fee will continue to accrue while you are out of compliance). All of this is negotiated with your investors/lenders.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
The Sponsor is counting on increasing equity value. Closing fee is part of sources of capital or paid from the OpCo later. Managment fee is paid from OpCo unless CF is tight in which case it is accrued. Again, closing fees and management fees are, should be, less important than the value growth.
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