Three Characteristics of Great Independent Sponsor Funding Partners

Choosing the right capital partner is crucial for independent sponsors. Unfortunately, we often hear horror stories from sponsors about equity partners who re-deal deals, back out at the last minute, or become less than ideal partners after closing a deal.

We are often asked by our clients: what are the best sources of capital for unfunded sponsors? What should fundless sponsors look for in a capital partner? Which funding source suits me and my deals best?

Here are 3 characteristics shared by major independent sponsorship funding sources:

1. They offer fair independent sponsorship economics

The independent sponsor’s proposed economics (transaction fee/promotion, carried interest, or ownership/ongoing management fee) are intended to reward the sponsor for the value delivered and encourage them to grow the acquired business.

If you bring a proprietary deal to the table at an attractive valuation with a solid management team and growth plan, you should be rewarded with superior unsponsored funding. Why is anything less than that reasonable or acceptable?

Be careful not to fall into the trap of accepting the market economy if you can avoid it. Many of the long-established and well-known sponsored funders without funding often benefit from their unfunded counterparts, particularly new sponsors or those who do not go through a streamlined fundraising process.

Any backlash from a source of capital like “well, that’s a stretch deal for us” or “that’s not what we do” means they probably aren’t a good fit for you or your business.

2. They welcome the independent sponsorship model

The ideal funding source includes the independent sponsorship model because they want it, not because they have to.

Let’s face it, not every SBIC, family office, or private equity fund really wants to invest with fundless sponsors, but as the independent sponsor market has grown, it has become more difficult for private equity firms to view them as a viable source of deal flow to ignore.

You need to ask the right questions – how many independent sponsorship deals have they secured? What economics have they sponsored in the past? What are your criteria for fundless sponsorship deals? How do you see your role once the transaction is complete? Based on their answers, you can decide if they really want to work with you…

3. They offer more than debt or equity

A great financing partner brings more to the table than capital to close your deal.

The best sources of funding are strategic – enabling growth by funding add-on acquisitions; they have helpful industry connections; You have insight into best practices to grow a business.