Investing with an Independent Sponsor
Private equity firms are having their busiest six months since records began four decades ago - with over $500 billion in deals over six months - sending the number of mergers and acquisitions skyrocketing. Private equity is on everyone’s mind and for good reason. But the traditional private equity model is running into its own issues: so-called “dry powder” or committed but unallocated money that is just waiting to be invested. To anyone who is looking at getting the most out of their dollar, this can seem – quite simply – like a wasted opportunity. This is where the independent sponsor model can seem quite a bit more enticing for investors who want to have more control over their investments.
Independent sponsors are a growing model within private equity that allows for more focus to be spent on investments and approaches investments with a more hands-on attitude. Most traditional private equity groups use the committed capital model of investments, but independent sponsors function on a more deal-by-deal basis. Without the need to allocate time and energy between different deals, independent sponsors can focus their whole effort on finding the best deals and have greater control over the terms of the deal. This allows for both more involvement in the deal – as the independent sponsor can spend a great amount of time focused on one particular deal – and also offers greater financial incentives as well. Without focusing at a pool of companies that are being dealt with as a whole, independent sponsors can focus on the needs of each individual company. This independent decision-making allows for the right choices to be made at the right time.
Unlike more traditional models, independent sponsors want to take an active management role in the company to help grow and expand the business, allowing for the hands-off capital partners to act more as strategic advisors than bother with the day-to-day operations.
Why are independent sponsors so invested in day-to-day operations? Most independent sponsors are usually interested in businesses that they have prior industry experience in. This previous involvement allows for greater insight into the market, allowing them to utilize their experience and valuable connections that give them a much closer understanding of the business than traditional investors. This hands-on experience provides a safe way for current owners an exit opportunity, knowing that the company is in qualified hands.
With all of the focus on the positives, of course the largest drawback of the independent sponsor model is most apparent: can the sponsor raise the funds necessary to close the deal? It’s always worth knowing if the sponsor you’re investing in has a solid history of deal-making.
About Four Pillars
Four Pillars Investors is a Kansas City-based investment firm that believes that the foundations of success are built on relationships, leadership, challenging the status quo, and persistence. We partner with entrepreneurs and investors to purchase and operate small, middle-market businesses that have an untapped potential for growth. It is our intention to work together to achieve shared success. We pride ourselves in finding creative solutions to build businesses that last far into the future.