An independent sponsor also referred to as a fundless sponsor, is an individual or capital group seeking to acquire a company without the possession of equity financing needed for the transaction in advance. The independent sponsor recognizes a target company and later seeks investors that can provide equity to acquire the company. The independent sponsor structure avoids using a private equity fund such as pension or family funds and directly invests in the project. They will operate the company, receive project equity and fees, and distribute profits made to the investor.
Commonly, independent sponsors are private equity experts or investment bankers who want equity ownership and involvement in the growth and operations of a company. The limited partner capital of an independent sponsor usually comes from hedge funds, private equity firms, family and friends, and family offices. The choice of the source of capital will depend on the nature of the deal.
For instance, larger deals will require reputable private equity firms with ready capital since they can play a vital role in the process of closing the deal as well as provide a company representative to take an operational function in the acquired company. However, smaller deals may need just family offices to participate in. An independent sponsor may be given the mandate to handle the deal as well as run the operational role.
The following are some of the reasons why investors prefer the structure of independent sponsor to the private equity structure:
Making an investment in a private equity fund generally implies that you need to accept the investment terms that the fund proposes, except when the investor wants to invest in a majority of the fund’s shares. An independent sponsor structure often involves one investor who can negotiate the terms of investment.
The environment for private equity funds is usually challenging since there are few opportunities to pursue. They may be forced to invest more in small deals with less competition. However, investment in small deals is usually labor-intensive. For such a reason, private equity funds like to invest in such deals by using an independent sponsor.
Unlike investors in a private equity structure who don’t possess control over the investments made by the private equity fund, investors in an independent sponsor structure exercise control over the investments. Investors in private equity funds usually give up all control over the company’s investment decisions after choosing the fund.
However, in an independent sponsor structure, the acquisition target will be well known by the investors even before the investment. The investors will receive full knowledge of where the money will be used. Sometimes the independent sponsor will share a purchase agreement with the investor to understand the potential investment better.
Unlike for an investor in a private equity fund who lack any say in the operations of the purchased company, an independent sponsor investor can choose to either have control over the project or not.
Below are some of the reasons why the structure is liked by independent sponsors.
The process of raising capital from several investors necessitates that federal and state securities laws are complied with. An independent sponsor’s project with a single investor will reduce or eliminate filings for state security laws, depending on the structure of the deal and location of both the investors and the independent sponsor.
The process of raising funds from third parties such as through crowdfunding or a traditional private placement usually takes a lot of work. Even rounding up just a few investors can be a hassle. Less energy and time is needed when dealing with a single investor. It is more efficient to find one investor and negotiate a single term sheet with them than to pitch and negotiate with several prospective investors. Having fewer investors gives them more negotiating leverage.
Being an independent sponsor can be quite financially rewarding. There are many ways in which they can financially benefit from a transaction, both short term, and long term. Here are the main ways in which independent sponsors get paid in a deal.
The fee is typically a certain percentage of the total price of the deal that the independent sponsor is paid at closing. Depending on the size of the transaction, this percentage normally ranges from between 2%-3%.
Ownership or equity in the business generally comes in the form of carried interest or a promote. It refers to equity on the basis of how the company performs. An increase in the company value by a certain amount will grant the independent sponsor a percentage of equity.
The independent sponsors get paid management fees because of their involvement in the organization after closing. The management fee, however, does not depend on them playing a daily role in that company. Many independent sponsors usually operate as strategic advisors that help the management team.
An independent sponsor seeks to acquire a business with no equity financing needed for the transaction in advance. It is after finding a target company that they will seek investors. Independent sponsors are often private equity experts or investment bankers that desire to acquire equity in the company and gain control over the operations of the acquired company. Depending on the nature of the deal, they may acquire capital from hedge funds, private equity firms, family, and friends, or family offices.
The independent sponsor structure provides benefits for both the independent sponsor and the investors, making it a possibly lucrative option. Investors may want to be involved in an independent sponsor structure due to the controlling powers they acquire over the company’s investment terms, investment decisions and projects. Investors also gain access to more deals.
On the other hand, the independent sponsor will face less hassle in raising funds and also enjoy an easier securities law structure. Moreover, the independent sponsor will gain financially from the structure in a number of ways, including the closing fee, equity, and management fee.
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