There once was a need for a fund,
to get a good deal or two done,
but the fundless became independent,
and closed deals until they ascended,
respected they are now bar none.
I wanted to present some thoughts on the primary reasons an independent sponsor (“IS”) would want to work with a private equity fund to get a deal closed. This is an important consideration in light of the increasingly established pools of capital available to fund IS deal flow. This relatively efficient array of options now includes family offices, SBIC funds, mezzanine lenders, special purpose funds raised to specifically invest alongside the IS community, and traditional PE firms.
The bottom line is that it comes down to what an independent sponsor is solving for when raising capital. Beyond the ever-critical certainty of close, an IS’s objectives can include things like maximizing economics, offloading the burden and expense of due diligence, and maintaining day-to-day governance control. So, here’s when you should place the call into your short list of trusted funds that you know have closed other IS-sourced deals.
You are a new independent sponsor and need to make efficient use of your time. Until you’ve closed a transaction or two and are generating fees to help keep the lights on, your highest and best use is finding the next deal to keep the pipeline full. The classic challenge in the deal business is that as soon as you start grinding through a transaction all new deal sourcing stops. This can leave you starting at square one as soon as your deal closes, or in pretty dire straits if it doesn’t. Best to let a dedicated fund with a fully-staffed diligence team run with the deal to let you get back to finding and structuring the next one.
You are looking for more capital than other channels can provide. Family offices and lenders can be a good option for the sub $5mm EBITDA deal, but what if you need more capital than they can provide? The good news is that some funds, like ClearLight, can and have funded both equity and mezzanine debt in their transactions to create a one-stop solution for larger deals. And, we can move faster than you think – from “hello” to “I do”, we’ve closed an IS-sourced transaction is 91 days.
You are not comfortable with the risk of dead deal costs. I don’t envy an IS trying to convince a family office or other capital source to absorb dead deal costs if the transaction doesn’t close. Dead deal costs aren’t fun for anyone, but if we commit to working through diligence on your deal, our commitment to you is that we will cover all approved transaction costs from the time of our involvement as well as any reasonable travel and legal expenses (up to a pre-negotiated cap) you’ve incurred alongside us. This is an issue we understand, and you won’t have to waste time getting us comfortable with the concept of dead deal costs.
You could benefit from a PE firm’s industry expertise. So, you’ve found your way to a deal that you’re excited about, but you don’t know the space as well as you’d like to. Chances are there’s a fund or two in your network with strong precedent experience that would be a great partner to help you evaluate the key risks and opportunities associated with the target company. If a fund has a current / former portfolio company in a related space, best to at least have a call to determine if there’s an opportunity to collaborate. Our portfolio company logos are up on our website for a reason.
You are not hung up on Board or day-to-day control over the investment. If you are trying to build a governance track record, perhaps going to a control-oriented PE fund isn’t the best strategy. You may just have conflicting interests, and that’s ok. However, if you are open to the idea of your capital partner being more involved than less, a fund with a proven track record for creating value through an active governance role might be a good option.
You want to partner with investors that are motivated to close. Nothing against the family office community, but they transact when they want to, not because they have to. An unfortunate reality about certain investors is that they are not motivated or compensated to close a transaction in the same way that a fund might be. If you have reservations about a family office’s conviction, you may want to reach out to your friendly neighborhood PE firm to avoid a deal falling apart at the one-yard line.
As you may have gathered, we’ve come to appreciate the independent sponsor community as an important extension of our investing activities and hope this provides some insights into when and why we’d like to hear from you. We’d be happy to discuss our experience and philosophy around working with independent sponsors further. Please call or email any time.
About ClearLight Partners
ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.
Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.