The virtues of independence
Learn about three of the top trends in the growing space of independent sponsors
Once attractive mainly to family offices, other LPs are now starting to warm to the idea of backing independent (or fundless) sponsors. So what’s happening here? And what do LPs need to know?
The numbers of independent sponsors are growing in Europe as well as in the US. “The US independent sponsor market is sizeable compared with Europe,” says Marc der Kinderen, Managing Partner, 747 Capital. “It has done very well over the past 10 years and has become a serious part of the US small cap market.”But as individuals increasingly emerge from more mature private equity platforms, opportunities are increasing in Europe. “We are seeing numbers rise in Europe,” says Michelle Khong, Co-Founder and Partner at Opera Investment Partners. “As firms that previously raised mid-market funds attract larger amounts of capital, senior investment professionals are spinning out to continue on a more concentrated strategy and be more hands on.”
Not all independent sponsors go on to raise funds. While many people pursue deal-by-deal structures as a forerunner to raising their first fund, not all go down this route. “I often ask independent sponsors why they want to raise a fund,” says der Kinderen. “Under their existing model, every deal is financed separately and so carry comes in more quickly and securely because the deals are not cross-collateralised. It can also take two years to raise a first-time fund.”The fundraising market looks set to be challenging over the coming period and so remaining an independent sponsor may be the only option for some. And they may find this provides some deal sourcing advantages in certain corners of the market. “Some founder-owned businesses are a little hesitant to partner with financial institutions and may not want to be part of a portfolio with 30 line items,” says Khong. “Independent sponsors can position themselves as entrepreneurs with a concentrated portfolio, able to offer more principal-to-principal engagement. Absent this option, many of these founders may chose to sell to a trade buyer instead.”
Independent sponsors may need additional support from LPs. Deal-by-deal structures can offer LPs a means of conducting real-life due diligence on a future fund manager. Yet it’s also true that independent sponsors may need more hand-holding than funds – not to mention some level of commitment. “Independent sponsors are looking for a partner,” says Christiaan de Lint, Partner at Headway Capital Partners. “They need LPs they can rely on and that will be transparent with them. They don’t want to get to the deal signing only to find their backers are pulling out. This happens all the time.”He adds: “Many independent sponsors are from the deal side and they know how to find good deals and sell assets. Yet they may not know about fund administration or fundraising – LPs can help with this. We have an independent sponsor toolkit, for example.”
