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Independent Sponsor Financing: 6 Common Misconceptions


Raising capital as an independent or fundless sponsor can be challenging and time consuming, especially for those who lack a long private equity track record or who don’t have hundreds of existing relationships with capital providers that focus on investing with independent sponsors.


Based on our own experience raising capital on behalf of independent sponsors, as well as countless other conversations with new and established independent sponsors, we've highlighted six common misconceptions about raising capital as an independent sponsor, providing guidance to help you improve the probability of a successful independent sponsor financing process and achieve better economics.


Misconception #1:

“The Independent Sponsor should accept below market deal fees, management fees or upside participation (carried interest / promoted interest or common equity ownership) as a new independent sponsor.”

When capital providers tell an independent sponsor that they should tolerate significantly below-market economics because they’re a new sponsor, it’s a self-serving negotiating tactic.

Being a new independent sponsor is certainly one dynamic that capital providers will factor into a transaction, but, by itself, is not enough for a capital provider to low-ball the sponsor, especially before reviewing the opportunity.

Other, often more important, elements include: the attractiveness of the target business, the sponsor’s industry or situational expertise, deal valuation, transaction structure, capital structure, ability for the sponsor to provide management support and development of a thoughtful growth strategy

In practice, transactions are almost always evaluated independently, based on a variety of factors, and the sponsor’s economics rarely come down to a single factor.

As a sponsor, be weary of any capital provider that tells you that you should simply accept below market economics, just because this is your first time using the independent sponsor model.

Furthermore, the private capital markets are extremely inefficient. Experience has shown us that independent sponsor economics offered by funding sources vary widely, regardless of the deal characteristics and sponsor experience.

Key takeaways: How do you avoid below market economics as a first-time sponsor?

  • Talk to as many funding sources as possible to understand the market and how you and your deal are perceived

  • Have the discussion about economics early in the conversation to signal you won’t just accept any offer.

  • Focus on adding value to the opportunity- source and develop attractive acquisition candidates and, if appropriate, bring industry or operational expertise to the table, along with the acquisition target, itself.

  • Utilize an advisor, such as an investment bank, focused on the independent sponsor space that knows what’s market and what isn’t and which groups will be the best fit for you and your deal.

Misconception #2:

“The Independent Sponsor should select a capital partner before finalizing the letter of intent.”

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