Whether you’re an operator with deep industry expertise, an investment banker or private equity professional interested in acquisition entrepreneurship, getting started as an Independent Sponsor isn’t easy. While there’s great promise for those with the ability to navigate the steps it takes to find success, it takes a great deal of motivation and persistence, and an array of investment skills.

Traditionally, Independent Sponsors don’t begin with a deep bench of teammates to help drive the work. From understanding how to source deals and raise capital, to the ability to conduct the necessary due diligence and implement a value creation strategy that leads to a successful exit, as an Independent Sponsor, much of the initial work and burden is yours to carry.

But the rewards can be great.

So, how do you start on the right path as an Independent Sponsor, and what are the big obstacles that stand in the way?

"Learn to Shave on Someone Else's Beard"

The Independent Sponsor Forum hosted a discussion with some of the most experienced investors in the space – Jacques Youssefmir, Ocean Avenue Capital Partners, L.P.; Franklin Staley, Exeter Street Capital Partners; and Omar Simmons, Exaltare Capital Management, LLC – to discuss just that: How to navigate those early steps as an Independent Sponsor and what it takes to succeed – from the point of view of Independent Sponsors and Capital Providers that work closely with them. Here are the central challenges you'll need to navigate from our Member Engagement and Business Development Director, Ron Lippock:

Staying Power

“You Often Need a War Chest to Make it.”

It can take 18 months to two years to lock up your first deal. Because of that, Independent Sponsors often need to build up a war chest to make it through those first couple of years – especially if you have a family to feed. You must have the support of family and the temperament to make it through that initial period.

Also, if your skills lean more heavily on the industry / operator side, it can be tougher to make it work unless you find a good partner or capital provider who can round out your deal skill set. Because this is an entrepreneurial pursuit, you need to be able to navigate the entire process to be successful. It takes a special mindset to handle this unique type of weight.

One way to get started is to gain experience as an operator that will allow you to build that personal brand and gain more experience – it is a slower start but it gives you the “street cred” needed as a value creator for Independent Sponsor deals.

Winning Over Capital Providers

“Have an edge – something that differentiates you.”

The biggest hurdle for most Independent Sponsors is in finding your edge – what differentiates you from others? There’s no barrier to entry as an Independent Sponsor so you need to show what makes you someone both a business owner and capital provider can trust and want to work with.

Capital providers want to see a special conviction to the deal from an Independent Sponsors – to see why you are uniquely able to lock up a deal others can’t and successfully grow a company. The work ethic, sacrifice and personal financial commitment shown to the deal is much of what wins over capital providers initially.

Independent Sponsors can also differentiate themselves in many other ways – sector expertise is important as well as having a good network of operators. Also, having a playbook of already executed deals is very helpful to prove your success in closing deals and ability as a value creator.

Working with Capital Providers:

“Alignment and chemistry will make or break a relationship”.

You have to be honest about your ability as an Independent Sponsor – can you be a stand-alone Independent Sponsor or do you need assistance? Do you need more seasoning first? And do you have the time needed to close and work on multiple deals or do you need more help in bringing deals home and creating company value? These are key questions in determining what kind of capital provider you choose to work with.

Control is also an issue. Choosing the right capital provider that aligns to your approach is essential. If you’re an Independent Sponsor that wants to be the quarterback and have more control, then you need to choose a minority equity or SBIC capital provider that doesn’t want to run the board and handle company operations, for example. Control Private Equity firms often will want to call more of the shots, so you have to be comfortable with that. SBICs can do debt and equity and often have aligned interests so are solid choices to work with if the deal size is right. Family offices can be either passive or want more control – they may go either way.

What is Your Structure?

“Keep it small and keep it all?”

Are you a team or an individual? For some capital providers, especially minority equity investors and many family offices, larger firms (two or more investment partners) are preferrable as there are more eyes on the deal and less key man risk. But larger firms can pose their own issues – they have more mouths to feed which can put undue pressure on the firm to do deals for the wrong reasons. Individual Independent Sponsors are often more nimble, but reliance on one person to carry the workload can be a concern, depending on the deal.

The three types of Independent Sponsors tend to be:

• Keep it small and keep it all - firms that are single individuals that do one or two deals a year.
• Band of Brothers/Sisters – two-to-three partners that work together on deals and compliment one another’s skills.
• Traditional larger firms with junior and senior staff.

Economics:

“There can be tradeoffs – alignment again is the key.”

Common economics include transaction fees when deals are done – these are often rolled into the equity of the deal, but some capital providers are flexible to a degree on the needs of the Independent Sponsors’ cash flow. Independent Sponsors will often also get portfolio company monitoring fees (3-5%) and carry that starts at 10%-20% and may tier upwards. Every negotiation is different – this is where tradeoffs are made depending on the role of the Independent Sponsor in the deal and the capital provider’s deal assessment.

Busted fees are a sticking point as well. If you get a big share of the ups, many capital providers expect Independent Sponsors to take a share of the potential downs as well. This again is all part of the alignment discussion Independent Sponsors need to have at the outset in choosing the right capital provider.

Market Direction:

“Bigger committed funds are now focused on in the Independent Sponsor market.”

The lackluster activity of the middle market is causing bigger funds to target the higher returns generated from the inefficient lower middle market including Independent Sponsor deals.  Given the slow rate of returns to LPs in the middle market, seasoned endowments are getting more interested as well. At the same time, there is an increasing supply of people moving into the deal-by-deal investment structure which has made it much more competitive.

Lastly, there’s also a growing degree of specialization. More Independent Sponsors are sector specialists rather than generalists, helping them to differentiate themselves in the market.

The bottom line – we anticipate continued and accelerated secular, not cyclical, growth in the independent sponsor asset class!

 

Author: Stephanie McAlaine, Executive Director, Independent Sponsor Forum

April 1, 2025