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Making the Most Out of the Independent Sponsor Model - Access Capital Partners

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For most independent sponsors, especially new ones, it’s helpful to get perspective on how different groups have implemented the independent sponsor model and learn what’s working for other groups and what’s not.

As advisors to this expanding group of investors, we speak regularly with both new and long-time sponsors, as well as independent sponsor capital providers. Here are 6 guidelines to help you get the most out of the independent sponsor model:

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Making the Most Out of the Independent Sponsor Model - Access Capital Partners

  1. 1. Making the Most Out of the Independent Sponsor Model: 6 Guidelines for Emerging Sponsors
  2. 2. First, let’s explain what an Independent Sponsor is…
  3. 3. What is an Independent Sponsor? Independent Sponsors, or fundless sponsors, are individuals or groups that buy, grow and exit companies, much like a conventionally funded private equity firms. Unlike their traditional private equity counterparts, however, independent sponsors raise debt and equity capital on a deal by deal basis, as they do not have a committed investment fund.
  4. 4. How does the Independent Sponsor Model Work? The independent sponsor model is a variation of the traditional private equity model. In exchange for putting the deal together, helping to grow the business and leading the company to a successful exit, the sponsor generally charges fees and participates in the value creation.
  5. 5. Independent Sponsor Compensation Packages Independent sponsor compensation packages generally include: • A deal fee or transaction fee • An ongoing management fee • A participation in the value created over the course of the investment; usually this is in the form of a promoted interest or carried interest, but may also be structured as common equity or some other profit sharing vehicle
  6. 6. Independent Sponsor Fees Independent Sponsor Deal Fee or Transaction Fee • Deal fees or transaction fees are fees paid at closing to the independent sponsor for putting a deal together. • In many cases, it will be expected that a portion of this fee will be rolled back into the transaction alongside the other equity investors. • Creative structuring may take place to minimize the tax consequences to the independent sponsor. • Although every transaction is different, we’ve seen independent sponsor deal fees range from 1% to 4% of the enterprise value of the business being acquired
  7. 7. Independent Sponsor Fees (continued) Independent Sponsor Management Fee • A fundless sponsor’s management fee is a fee paid on an ongoing basis for focusing on building and growing the portfolio company. • Generally, fundless sponsor management fees range from 3.5% to 7.5% of EBITDA, although depending on the size of the company, a floor or ceiling may be established.
  8. 8. Independent Sponsor Equity Participation An independent sponsor’s equity participation provides alignment of incentives, allowing an independent sponsor to share in the value creation of the business and capital appreciation of the other capital providers’ investments. Carried interest structures vary widely by situation and capital provider. The equity participation component should represent the largest portion of an independent sponsor’s compensation and is often a main point of negotiation between the sponsor and capital partners. Historically, this has been the area that Access Capital Partners has been able to add tremendous value for its independent sponsor clients. Email ACP to learn more. Independent Sponsor Carry, Promote or Upside Participation
  9. 9. Making the Most Out of the Independent Sponsor Model: 6 Guidelines for Emerging Sponsors
  10. 10. For most independent sponsors, especially new ones, gaining perspective on the independent sponsor model is invaluable.
  11. 11. By learning what’s working for other groups and what’s not, emerging sponsors can refine their focus and approach to accelerate their success, or at least avoid some of the missteps that many new fundless sponsors experience.
  12. 12. As advisors to this expanding group of investors, we interact regularly with both new and long-time sponsors, as well as independent sponsor capital providers. Here are 6 guidelines to help you get the most out of the independent sponsor model:
  13. 13. 1. Acting like a funded private equity firm with discretionary capital is a fruitless exercise. We see a lot of independent sponsors, particularly new ones, who expect their deals will come from investment banking led auction processes. As an independent sponsor, unless there is a compelling strategic reason to compete in an auction against funded private equity firms and strategic buyers, save your time or choose your spots wisely –e.g., having an almost proprietary strategic relationship or management capability to bring to the table, or, simply revisiting an auction if it fails.
  14. 14. 1. Acting like a funded private equity firm with discretionary capital is a fruitless exercise. Remember, if you are the winning bidder in an auction, you’ll need to explain to prospective capital partners why you believe an asset is worth more to you than what other funded private equity firms and strategic buyers were willing to pay. Every situation is different, but this argument usually doesn’t go over well.
  15. 15. 2. There’s usually an inverse relationship between complexity and success. It’s hard enough articulating to capital partners why a particular acquisition target represents an attractive opportunity. If you develop an excessively elaborate or theoretical growth strategy that requires everything to go right, chances are that it will be challenging to convince an institutional investor to follow.
  16. 16. 2. There’s usually an inverse relationship between complexity and success. That doesn’t mean that growth strategies can’t be dynamic or there’s no room for creativity, but they should be practical, insightful and reasonably straightforward.
  17. 17. 3. Be disciplined about the acquisition targets you pursue, even if it means walking away from a deal. No one likes turning down an opportunity with a motivated seller, or even worse, walking away from a deal that you’ve invested a lot of time and money in, but to potential capital partners, maintaining a reasonable amount of discipline and not chasing subpar opportunities is a good indicator that you won’t take unnecessary risks with their money.
  18. 18. 3. Be disciplined about the acquisition targets you pursue, even if it means walking away from a deal. That’s not to say that you shouldn’t work like crazy to avoid, structure around, or mitigate potential risk points when they present themselves, but a good independent sponsor is able to objectively look at a deal and determine: a) if it is a compelling opportunity that doesn’t require a small miracle to be successful or require assuming too many unnecessary risks; and b) if there is enough investor appetite so that there’s a reasonably good chance of being able to raise the capital for the transaction. In other words, a good sponsor can evaluate whether a deal is likely to get funded and if there’s a good chance the investment will be successful.
  19. 19. 4. Focus on adding value and success will follow. We can’t emphasize enough how essential it is to focus on adding value as an independent sponsor. If you’re simply passing along an investment bank’s CIM without putting much effort into the evaluation of the potential acquisition and development of a growth strategy, you’ll generally be perceived by capital partners as a glorified broker and compensated as such. For specific ways independent sponsors add value, read our guide on Negotiating Better Independent Sponsor Economics.
  20. 20. 5. The private capital markets are inefficient- be methodical about selecting a capital partner. SBICs, alternative debt providers, private equity firms and family offices each have different operating models and behave differently- they do different types of deals, utilize different capital structures, offer different independent sponsor compensation packages and they evaluate/process transactions differently. It is important to understand which capital providers make the best partners for fundless sponsors, which ones are best suited for the situation and which ones to avoid at all costs.
  21. 21. 5. The private capital markets are inefficient- be methodical about selecting a capital partner. If you aren’t sure who the best partners are for your acquisition or you don’t have enough bandwidth to simultaneously pursue and close deals and raise capital, hiring an investment bank focused on raising capital for independent sponsors can be a turn-key solution that helps you achieve better fundless sponsor economics. If you have the free time and enough relationships to run a capital raising process yourself, be thoughtful about which firms you approach and how you present the opportunity.
  22. 22. 5. The private capital markets are inefficient- be methodical about selecting a capital partner. Whether you choose to hire an advisor or raise capital yourself, saying yes to the first capital provider that agrees to fund the deal without qualifying them as a good partner or determining what market economics are for a particular situation can be a costly mistake. Remember, you’ll be partners with these groups in the years ahead.
  23. 23. 6. Sourcing compelling, proprietary acquisition opportunities is difficult and takes time, but is the best way to succeed as a new independent sponsor. Most sponsors would be well served if they spent the vast majority of their time sourcing proprietary or opportunistic deals. It’s definitely not the easiest or most linear path to generating deal flow, but investing the time on the front end will pay off over time. Don’t get discouraged if it takes a year or more to find the right opportunities. Ultimately, buying a good company, at a compelling valuation will help make it easier to raise capital and put you in a better position to create value after the transaction closes.
  24. 24. SAVE TIME, FOCUS ON WHAT MATTERS Focus on Deal Sourcing, New Deal Evaluation, Target Company Diligence and Value Creation of Existing Portfolio Companies ACCELERATE THE CAPITAL RAISING PROCESS CREDIBILITY WHEN NEGOTIATING WITH SELLERS IMPROVED FUNDLESS SPONSOR ECONOMICS ALIGNED INTERESTS Our Acquisition Financing Process Aims to Accelerate the Time to Structure, Source Negotiate and Close the Financing in a way the Aligns with the Fundless Sponsor Model Once the Proposed Financing Structures Have Been Vetted by Some of Our Capital Partners, We’ll Issue a Support Letter or Discuss Financing with the Seller or Seller’s Advisor LEVERAGE OUR NETWORK & RELATIONSHIPS Our Independent Sponsor Financing Process has historically exceeded Market- Based Sponsor Economics Success-Based Fee Structures and Co-Investment Opportunities Maintain Alignment with Our Independent Sponsor Partners We’ve Spent Years Identifying and Developing Relationships with Debt and Equity Capital Partners- Use Them to complete more acquisitions on Better Terms. Partnering with Access Capital Partners
  25. 25. $8.0B+ 100+ 35+ 1000+ In total transaction experience Completed transactions Years of middle market experience Relationships with debt and equity capital providers across the globe Access Capital Partners is an Investment Bank Focused on Providing Independent Financial Sponsors and Executives with Unmatched Capital Raising Services. We’ve Leveraged Years of Experience in Raising Capital Across a Wide Variety of Situations to Develop a Focused Effort Tailored to the Unique Needs of Independent or Fundless Sponsors. ABOUT ACCESS CAPITAL PARTNERS Access Capital Partners 7733 Forsyth Blvd., Suite 1151 St. Louis, MO 63105 314.783.9550 www.accesscappartners.com Securities offered through StillPoint Capital LLC, Member FINRA and SIPC Tampa, FL 33626. StillPoint Capital is not affiliated with Access Capital Partners. Greg Porto 312.339.2857 gporto@accesscappartners.com Greg Tobben 314.458.8186 gtobben@accesscappartners.com CAPITAL RAISING FOR INDEPENDENT SPONSORS

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