The Case for Institutional LPs Supporting Independent Sponsors

By David Acharya, Partner

AGI Partners, LLC

Both the efforts of independent sponsors and traditional limited partners, or LPs (endowments, pensions, money managers, etc.), are making more of an impression in today’s deal business than ever before.  In addition to funded private equity firms working with independent sponsors to generate deal flow, more and more LPs want to invest directly into companies with independent sponsors.

What makes independent sponsors attractive to traditional LPs?

1. It’s the accessibility of differentiated deals not typically seen by a LP or even a funded private equity firm. The independent sponsor may have relationships stemming from an industry or geographical expertise that exposes a limited partner to previously unrecognized investment opportunities—possibly to companies that are not even officially for sale. In addition, the independent sponsor is motivated to hunt for differentiated deal flow and/or limited auction situations.

2. Independent sponsors can offer “day-to-day” operational and/or industry expertise that many limited partners try to find in the funded community, increasing the likelihood of market outperformance and an attractive exit. This can be of tremendous value in the case of a limited partner without people in-house to source, perform due diligence, complete the underwriting, and manage the post-closing of the investment.

3. As probably the most attractive feature in dealing with independent sponsors, LPs often avoid management fees from unused capital commitments that are waiting to be drawn down given the deal optionality structure, first sourcing and diligencing opportunities before offering them on a discretionary basis.

4. The independent sponsors’ interests are generally highly aligned with the LP’s interests because the independent sponsor’s profit participation typically derives from a much smaller portfolio than that of a typical fund manager, so that the value of mediocre performance or failure is unacceptably heavy.

Just how have independent sponsors grown in size?  According to a respected private equity media publication, $22 billion of non-fund private equity investments were executed in 2015.  A survey conducted with independent sponsors across the country stated that over 54% of participating firms have firm longevity of five years or more.  The market has recognized   presence because it is here to stay.

ACG New York has recognized the growth of the independent sponsor community and has actively solicited independent sponsors as panelists as well as ensured their participation at various deal-making conferences throughout the year involving funded private equity firms, family offices, and investment bankers.  The respect for the independent sponsor community is here in  the ACG New York community!

 

David Acharya is the President of the ACG New York board and Partner at AGI Partners LLC (www.agi-llc.com); a NYC based middle market private equity firm.  He has completed platform investments and executed numerous add-ons as an Independent Sponsor.

 

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