What Independent Sponsors Need to Know

As an Independent Sponsor there are an almost limitless number of landmines to navigate to get a deal capitalized and across the finish line.  That said, one of the greatest challenges deal-by-deal investors face is how to land a great capital provider who will be a true partner, aligned to the same goals through the exit.

It all starts with an understanding of when it is an optimal time to begin showing your deal to a potential investor.

Digging a Dry Well

Bringing a deal to a capital provider at the pre-LOI stage can often be less effective. Robert Callahan, Head of Buyouts at ACE & Company, described it as “Digging a dry well”, because capital providers can be reluctant to invest much time on deals at such an early stage in the process – especially when many of those may not even get to the LOI stage.

As a family office, David Fang of Unity Hunt agreed and further added that their office prefers to see deals post-LOI to help give him a better feel for the dedication and thought an independent sponsor has put into the deal.

Michael Becker of Plexus Capital, LLC did offer a caveat – if the deal is seen as truly proprietary and there’s a good angle, like a seasoned operator, funds will invest the time earlier in the process. Further, in this type of situation, capital providers may write support letters to give the independent sponsor more credibility in negotiations. While those letters, he added, have no real teeth to them, they can help give the sponsor more support in their negotiations which can help in getting to LOI. As a family office, David Fang stated they don’t offer support letters as they are more protective, as many family offices generally are.

The group also discussed whether there is a point where, as a capital provider, the deal was brought to them too late.

The Urgency of a Capital Provider is Often Overestimated by Independent Sponsors

The panel was in agreement with Rob Callahan’s point that it’s never too late to bring a deal to them, but recognize they do require three to four weeks to be able to run through a proper process. They need time to meet the management team, assess the market, customer base and do their due diligence. Becker mused that the urgency of a capital provider is often overestimated by independent sponsors - capital providers are more patient than sponsors realize.

"Capital Providers always look at the quality of the company and deal before they vet the sponsor."

Ultimately, the capital providers concurred - they first always look at the quality of the company and deal before they vet the sponsor. If they like the company, then they’ll assess the quality of the sponsor. They reiterated there must be an angle to the deal – a good operator, a proprietary deal, etc. that will drive growth and value creation.

The Diligence Process is Telling

Thomas Kesoglou, Partner at Ice Miller LLP noted that in their practice they see comfort with the sponsor is essential for a capital provider to move ahead with a deal. One way he sees capital providers develop that confidence is through the sponsor’s approach to the diligence process. Are they transparent? Do they view the capital in a fiduciary way?

Callahan stated that if the negotiations focus predominantly on the economics versus the potential growth of the investment, that can raise red flags for the capital provider.

Fang remarked that being an independent sponsor is not a glamourous business – lots of motels and late nights. Is the sponsor able to deal with ambiguity? Will they be willing to roll up their sleeves and do the hard work? There will often be issues – management issues and others you don’t see coming at first.

Independent sponsors also have to understand and articulate what they need from a capital provider.

The Balance of Power is Shifting

Callahan noted that the balance of power is shifting as the independent sponsor community has become more important to capital providers.

"Be mindful of who will be in alignment and have the long-term interests of the company at heart."

As an independent sponsor, besides being reliable – you want to find capital providers who are experienced in independent sponsor transactions.  Independent sponsors should do their own reference checks on capital providers to see if they worked well with other sponsors. Why?

Because Things Bump

Lower middle market deals are less professionalized. Things will not go according to models when dealing with these smaller companies. They don’t often have sophistication that larger, more structured companies do. As a result, Independent Sponsors need flexibility in navigating all aspects of the deal, both pre and post close – capital providers will want to see that demonstrated in the approach to the deal/model.

"Things will not go according to models when dealing with these smaller companies."

Callahan stated that it all starts with the building of a good management team. These companies are often flat or down in year-one and show slight growth for a few years before spiking during years four through seven. Capital providers want to see independent sponsors building responsiveness to market and internal challenges in the beginning of their plan when they still have control to course correct. They will be more patient with sponsors who do so.

It's About the Best Partner, Not the Best Deal

David Fang closed the conversation by adding that deals aren’t linear – you also want a capital provider that is supportive, one who has been there before and understands those “bumps”. He stressed that while there are more family offices and other capital providers entering the space and they can be tempting when they offer good terms, you have to be mindful of who will be in alignment and have the long-term interests of the company at heart.

For more information on the Independent Sponsor Forum visit: https://sbia.org/independent-sponsor-forum/

Author: Stephanie McAlaine, Executive Director, Independent Sponsor Forum

May 30, 2025

The ISF Deal Series was held in Philadelphia earlier this month - with 150 attendees, the conference included a number of in-depth content sessions and roundtables on issues impacting the lower middle market. This article is a recap of a session moderated by Ice Miller's Tom Kesoglou, covering how independent sponsors choose the right capital provider that serve as partners in getting deals to the finish line. This session included Mike Becker of Plexus Capital, Rob Callahan of ACE and Company, and David Fang of Unity Hunt.