Selecting the right capital partner is critical for independent sponsors. Unfortunately, we often hear horror stories from backers about equity partners renegotiating deals, pulling out at the last minute, or becoming less than ideal partners after a transaction closes.
We are often asked by our clients: What sources of capital are the best partners for unfunded sponsors? What should unfunded sponsors look for in an equity partner? What type of financing source would be the most suitable for me and my agreements?
Here are 3 characteristics shared by great independent sponsor funding sources:
1. They offer a fair economy for independent sponsors
The economics of the proposed independent sponsor (transaction / promotion fee, accrued interest, or ongoing ownership / management fee) are designed to reward the sponsor for the value delivered and to incentivize them to grow the business being acquired.
If you bring a property deal, with an attractive valuation, with a strong management team and a growth plan on the table, you should be rewarded with a superior economy of unfunded patronage. Why is anything less than that reasonable or acceptable?
Be careful not to fall into the trap of accepting a below-market economy if you can avoid it. Many of the long-standing and well-known sponsoring unfunded capital providers often take advantage of their unfunded counterparts, particularly new backers or those who are not running a strict capital-raising process.
Any rejection of a source of capital like “Well that’s a tough deal for us” or “That’s not what we do” means they are probably not a good fit for you or your deal.
2. Adopt the independent sponsor model
The ideal funding source adopts the independent sponsor model because it wants to, not because it has to.
Let’s face it, not every SBIC, family office, or private equity fund really wants to invest with unfunded sponsors, but as the market for independent backers has grown, it has become more difficult for private equity firms to ignore it as a source. viable flow of transactions.
You need to ask the right questions: How many independent sponsor deals have they made? What economics have provided sponsors in the past? What are your criteria for unfunded sponsor deals? How do you see your role after the transaction is closed? Based on their responses, you can decide if they really want to work with you …
3. Provide more than just debt or equity
A great financial partner contributes more than capital to close your deal.
The best sources of financing are strategic: they will enable growth by financing complementary acquisitions; they have useful connections to industry; they have knowledge of best practices for growing a business.