Independent sponsor deals can be an attractive way for family offices to invest in the lower middle market. But the process can be complex, and there is increased competition. In an independent sponsor deal, the sponsor raises capital on a deal-by-deal basis, as opposed to through a fund.
Finding independent sponsors
The first challenge for family offices that want to pursue independent sponsor deals is connecting with the right independent sponsor at the right time.
“A very significant amount of my time over the past few years has been spent building relationships with independent sponsors, because that connectivity is mutually beneficial,” says Sam Goodman, president of Five Points Family Ventures, a single-family office established to manage the assets of the Hawkins family, which owns Crown Automotive Group.
Jason Beren, CEO of single-family office the Eastbridge Group, has found other investors to be a good source.
“The best channel is other like-minded family offices,” Beren says. Beren has a deep network of other family offices in New York and across the country. There are also conferences and events set up specifically to match sponsors and investors.
“You are building your natural network through these channels,” Beren says. “There’s not any single repository where you can look up independent sponsors.”
Vetting independent sponsors
It’s also important to determine, before making an investment, whether the independent sponsor has the skills to see the deal through. This makes it especially important to evaluate the independent sponsor before investing.
Goodman uses the process of evaluating a deal to help determine if the independent sponsor would make a good partner.
“Doing diligence is eye-opening and gives us a real sense of how people work,” Goodman says. “We oftentimes will pass on deals the first time, but if we like the group and we see the world similarly, we may invest in another deal with them in the future.”
An efficient process
Goodman has created a process to quickly winnow the list of possible deals and then vet the independent sponsors along with the potential investments. Speed is important.
“We have a very efficient diligence and investment committee process, and it allows us to move quickly,” Goodman says. “We can triage a high volume of deals, eliminate, and narrow the list down to those that we want to take a deeper look into very quickly. Then we have a very standardized diligence and approval process that allows us to make decisions quickly and decisively.”
It’s important for a family office that is considering independent sponsor transactions to eliminate drawn-out approval processes.
“We have a very clear process for how we make decisions. We don’t have committees upon committees. We just have a very structured process,” Goodman says. “We use a quantitative scorecard to score deals on the front and back end. If the deal doesn’t make it past a certain score, we’re out. If it’s in a middle range, we’ll have a brief discussion with our investment committee to gauge interest. We’re meeting weekly, so we have an ability to move fairly quickly. We have an investment committee that we report to that has to approve the deal at the end. But because we meet weekly, we always have an idea of where things stand.”