Exclusivity Matters….A lot

One of the biggest risks in choosing a capital provider centers on what happens once you grant them exclusivity! As an independent sponsor, the risk of losing control over the deal is a great concern - and it's most prominent once you grant exclusivity to a capital provider. You need to choose a partner who genuinely values and understands what you are contributing to this deal and lets you remain in control versus one that just wants a close.

The Tip of the Spear

Each type of capital provider has pros and cons.  Some family offices and high net worth individuals may have greater challenges working on a tight turnaround because family offices do not have the same time pressure to deploy capital as a committed fund.  That said, they can often write sizeable minority equity checks so are highly valued players in the market.  SBICs tend to value what independent sponsors do more since they’ve played the GP role and understand it. They are usually willing to play more of a complimentary role to the independent sponsor as a result and can diligence and close a deal fairly quickly.

If private equity is the sole check writer – it's worth noting that, by definition, they are used to having control! So, it might be a learning curve for a PE firm to cede control to an independent sponsor or you'll need to get comfortable with this capital provider as a true partner. Many Independent Sponsors work successfully with control PE firms.

SBICs on the other hand don’t have the bandwidth or DNA to try and control a deal. They need the independent sponsor to be tip of the spear and can be excellent partners as they lead with debt, yet think like equity investors. On the other hand, if a deal is too large or requires too much equity this match up may not work for you.

If you do work with a family office – especially as an emerging independent sponsor – be cognizant that you may need to protect your financial exposure to broken deal costs. Family offices who are not deep into this space, don’t usually cover broken deal expenses.

Less Capital Sources are Better

Be weary of putting too many capital partners together to solve for retention of control – you just need the right capital providers. For some, going broad and being so fragmented feels like a path to more control. But the biggest investor will still want guardrails, so pick the right partner.

At the micro end of lower middle market it can be hard to find capital, hence that desire at times to piece work together the capital stack. It’s a tougher part of the market to get debt. So you need to be creative. Seller rollover is one idea to help solve for some issues.

It is also a good signal to capital providers if an independent sponsor brings friends and family more into the deal – it shows you are committed to the deal, trustworthy with a good network and people who will fight for you.

Navigating Turbulence

Lastly, considering the current turbulence in the market with tariffs and DOGE, SBICs and equity investors can make for good partners during uncertainty. Control investors are more likely to solve problems with an owner point of view, not as a debt provider. You want to pick a partner who is willing to be patient, supportive and understanding when things don’t go according to plan.

 

By Stephanie McAlaine, Executive Director, Independent Sponsor Forum

April 17, 2025

This article is based on a conversation from SBIA’s March 12th Independent Sponsor Forum held in Nashville was a big success - with over 150 attendees and 650 meetings held between Independent Sponsors and Capital Providers. It also included content sessions covering issues of great interest to Independent Sponsors.

This discussion was hosted at the ISF Nashville Deal Series with Bryan Bylica of Bass Berry, Adam Gates of North Creek Mezzanine, Michael Kornman of Align Collaborate and Bruce Lipian of Stone Creek Capital.