In recent years, the Independent Sponsor business model has become quickly accepted in the industry. This hybrid model pairs the rigor of a traditional private equity firm and stronger LP investor alignment to create a successful and popular model. With the onset of these models however, there is an opening for new and less established players in the market.
An Independent Sponsor’s goal is to buy successful companies at a fair price, however, they will fund each company independently. Different from a private equity firm who invests from a committed capital fund, an Independent Sponsor does not have a committed fund, but rather raises the equity after they have executed a Letter of Intent. Independent Sponsors also differ from traditional private equity firms in that they take on fewer investments and sell them back in a unique way. By raising the funds for each separate deal, this allows smaller companies to compete for a deal with the larger private equity firms.
Since 2008, these Independent Sponsors have become extremely popular and are now selling portfolio investments to private equity firms. With the independence to act from their own networks, these Independent Sponsors can provide deal flow to established private equity groups.
This change is allowing Independent Sponsors the ability to work in more of a niche industry and acquire smaller deals that go under the radar of larger, private equity firms. Similarly, this type of relationship allows for experienced industry professionals to develop a relationship and then function as a relationship link for private firms.
These companies are also changing the way in which investors target new clients. Traditional Private Equity Firms utilized a traditional blend of cold calling as well as reaching out to contacts within their sphere-of-influence in order to locate their next opportunity. Independent sponsors, however, are using Internet research, social media, as well as developing expert networks to locate a deal that are best for their company.
Organizations no longer need to rely on being bought by large investment firms, and are instead seeking Independent Sponsors. Similarly, Independent Sponsors offer the expertise of a large firm with the strong relationship of a small company. In short, Independents Sponsors may be the way of the future.