Independent Sponsor Economics
March 01, 2024
by a professional from Marquette University in Minnetonka, MN, USA
I represent a family owned long term patient co-investor seeking minority investment opportunities backed by management/founders for growth equity or high quality sponsors with skin-in-the-game for buyouts. Check size $5MM to $10MM for platform businesses with >$4MM EBITDA. We are considering situations led by Independent Sponsors. We can bring significant strategic expertise and network resources to any transaction as well as have a team to support due diligence and communication with seller and the marketplace. The economics are all over the board. I've found some good info on web and in discussions with professionals in the space but is there a definitive guide to standard market terms published out there? I'm sure it all depends on situation and quality of asset/management etc., our relationships and value-add too I suppose, but thought I would give a post here a shot.
from University of Maryland at College Park in Danville, CA, USA
What Gian Cavallini says above is the right way to think about this. Independent sponsor deals are different from traditional private equity deals because of the fact that independent sponsors need capital partners as much as they need capital providers.
We've seen value-oriented private equity firms with billions in AUM pay economics that would normally be considered way above market, and we've seen super high-quality independent sponsors agree to way below-market economics because of the unique circumstances of a situation.
Talking to a firm like Frisch Capital is a good way to get a sense of economics, but keep in mind that their job is to maximize economics for their clients. Our conference prohibits anyone who is not either an independent sponsor or capital provider, but the one time we made an exception to this was when we had a panel discussion on independent sponsors using placement agents, and Bob Frisch was one of the panelists (I was the moderator).
I maintain a list that now includes hundreds of independent sponsor deals and at any given moment have over a dozen high-quality independent sponsor deals that I can share. Feel free to email me at redacted if you would like to discuss.
A few other things to keep in mind:
- "Typical" IS economics include a diligence (closing) fee, management fee, and carry. Most sophisticated sponsors and investors agree to a tiered carry structure subject to return hurdles.
- We have seen IS close deals with all debt (and subsequently own a deal outright). It is incredibly rare, but it has happened.
- Management equity and salary in lieu of fees and carry is another fairly common outcome.
from York University in Toronto, ON, Canada
the deal fee range Jason mentioned is pretty market depending on the size of the deal, you could use Lehman formula too.
ongoing monitoring we’ve seen probably closer to the 5% mark. Where we differ as a fund is similarly we bring a lot of resources and direction so we split this fee, not necessarily equally in either direction.
Re: carry - deal structures are all over. Passive family offices are typically the most generous but I’ve seen it all. We offer carry based on MOIC hurdles. Where we differ is we offer the most opportunity to get in the common so our structure is slightly different.