GUIDE TO

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GUIDE TOFrom the editors ofBuyouts, VCJ, Active LPsand The PE Hub Network

ponsorsIndicesDirectInvestmentIndicesSpecial Contributor:Patrick MulhollandResearch Editor:Joseph Weitemeyerjweitemeyer@buyoutsinsider.com(646) 356-4084Editor-in-Chief:Lawrence Aragonlaragon@buyoutsinsider.comEditorial Director:Philip Borelphilip.b@peimedia.comArt Director:Allison Brownabrown@buyoutsinsider.comSales Director:Robert Raidtrraidt@buyoutsinsider.com(646) 356-4502Customer Service:customerservice@buyoutsinsider.com(646) 356-4513M-F 9am-5pm ESTManaging Director - Americas:Colm Gilmorecolm.g@peimedia.com(212) 633-1075Buyouts Insider9 East 38th Street, 11th FloorNew York, NY 10016www.Buyoutsnews.com(646) 356-4513The Guide to Independent Sponsors and itscorresponding Independent Sponsor Mailing Listis published by PEI Media LLC. Entire contentscopyright 2019 by PEI Media LLC. All rightsreserved. Reproduction in any form is prohibitedwithout the express prior written consent of PEIMedia LLC. Copying of any of this material is inviolation of the Federal Copyright Law (17 USC01 et seq.). Violators may be subject to criminalpenalties as well as liability for substantialmonetary damages, including statutory damagesup to 100,000 per infringement, costs andattorney’s fees. The publisher represents that itdid its best to ensure the accuracy of the listingsand other directory contents but does notguarantee its accuracy.

GUIDE TO INDEPENDENT SPONSORS 20192 BUYOUTS VCJEXECUTIVE SUMMARYontheIndependent RiseSponsorsBYPATRICKMULHOLLANDSome private equity professionalsbelieve that independent sponsors—private equity firms that operate ona deal by deal basis—don’t operatethat way by choice. If they couldraise a blind-pool fund, they would.Whatever the reason, firms aresticking to the independent sponsormodel, championing what they seeas its superior deal economics andinvestment ethos.founded in 2014. “We’re not doingthis because we can’t raise a fund,”he added. “We’re proactively doingthis because we believe it’s the bestway to do business.”But if that was ever true, it’s certainlynot true today. Our survey ofindependent sponsors, conducted inFebruary and March of 2019, revealsthat just over half (51 percent) haveno intention of going on to raise afund.“THERE’S A HUGEAMOUNT OFLIQUIDITY IN THEMARKETPLACETODAY.”In recent years, there has been agrowing acceptance of independentsponsors among investment bankers,family offices, and other capitalproviders.Perhaps it’s due to a wave of newfirms in the market. Accordingto research conducted by CitrinCooperman, an accountancy andbusiness advisory firm, out of asample size of 245 firms, just underhalf of all independent sponsorssurveyed (46 percent) wereestablished between 2013-2018.—Howard Gurvitch,Gurvitch Family Office“If they have a deal, it doesn’tmatter if they’re a funded sponsoror a fundless sponsor,” said RyanMcGovern, managing director atcapital provider Star MountainCapital. “What matters is their abilityto get the deal done.”“We’ve always operated this way,”said David Mann, a partner atFirefly Group, an Indianapolisbased independent sponsor that wasINVESTMENT STRATEGIESDO YOU PLAN TO RAISEA COMMITTED FUND?(RESPONDENTS COULD PICK MORE THAN ONE)BuyoutGrowth EquityConsolidationDistressed Debt/TurnaroundsVenture CapitalMezzaninePrivate CreditDividend RecapsReal 4%Source: 214 Independent Sponsors41%Christian Albert, managing partnerat funds-of-funds manager BowsideCapital, has also seen the market“shift dramatically” from a position64%87%No51%Yes49%Source: 214 Independent Sponsors

GUIDE TO INDEPENDENT SPONSORS 2019BUYOUTS VCJ 3EXECUTIVE SUMMARY“THEY KNEW WEWERE ABLE TOPUT TOGETHER ASUITABLE CAPITALSTRUCTURE ANDBECOME A LONGTERM HOLDER.”—Drew McCuiston,Firefly Groupin which the investment communityshied away from managers without apool of capital to draw from. In fact,he sees independent sponsors asan important component of his firm’sbusiness strategy.ECONOMICSThe change in fortunes forindependent sponsors is no happyaccident. Alongside grit anddetermination in competitive dealsourcing, independent sponsors haveskillfully turned market conditionsand regulatory hurdles for privateequity to their advantage.“It’s all [about] deal economics andcontrol,” said Sylvie Gadant, apartner at Citrin Cooperman and theauthor of their 2017 IndependentSponsors Report. The main capitalproviders to independent sponsorstend to be family offices. These firmsoffer more money and control thanother sources of deal flow becausethey do not usually have a businessdevelopment officer seeking outtransactions. Instead, they look toindependent sponsors to pick outgood deals on their behalf.Steven Abernathy, principal at TheAbernathy Group II, said that it wasmuch easier for family offices like histo focus on one or two companies ata time as opposed to committing for aset number of years to a broader poolof investments, especially toward theend of the market cycle.INDUSTRIES TARGETED(RESPONDENTS COULD PICK MORE THAN ONE)Business ServicesManufacturingDistributionConsumer ProductsHealthcare ServicesFood and BeverageSoftware/SaaS/Cloud BusinessesAerospace and DefenseMaterials and n/KnowledgeCommunicationsMedical DevicesEnergy and UtilitiesPublishing/Digital MediaAgricultureRetailFinancial HospitalityComputer Hardware/ChipsOtherReal %18%15%14%14%13%10%9%60%54%70%Source: 214 Independent SponsorsENTERPRISE VALUE, TARGET COMPANIES(RESPONDENTS COULD PICK MORE THAN ONE)92%0 - 50 million60% 51 - 100 million22% 101 - 500 million 501 million - 1 billion5% 1.1 billion 1%Source: 214 Independent Sponsors

GUIDE TO INDEPENDENT SPONSORS 20194 BUYOUTS VCJEXECUTIVE SUMMARY“IT’S ALL [ABOUT]DEAL ECONOMICSAND CONTROL,”—Sylvie Gadant,Citrin CoopermanIn addition, independent sponsorsoffer lower management fees thanmanagers of dedicated funds.“Unlike the classic two and twentymodel, we don’t have a two, becausewe don’t have a fund,” said BenProcter, a partner at independentsponsor Watermill Group, thoughhe admitted the carried interest issomewhat higher. “We charge ourmanagement fee to the company upfront. They pay us a certain amounton a monthly basis, which then fundsour operation.”Independent sponsors also havea competitive advantage in thatthey cover broken deal costs. Thisis an attractive proposition forfamily offices, but it can come as achallenge for independent sponsors.Given that independent sponsors relyon receiving a cut of the profits in agiven transaction, to get paid, theysimply must close the deal.Another catalyst for the growth ofthe independent sponsor model,according to Albert, has been theregulatory constraints placed uponthe private equity industry afterthe 2007/08 financial crisis. Thesedisproportionately affected funds.But now, the current administration’stax reform package looks set togenerate a windfall in private equitymarkets. A reduction in the rate ofcorporate tax from a 35 percentmaximum tax to a 21 percent flat tax,as well as an increased remit for taxwrite-offs, and a three-year holdingperiod to qualify for the long-termcapital gains rate treatment, will helpstimulate activity.Reputation is everything forindependent sponsors. They live andWHICH REGION(S) DO YOU TARGET?(RESPONDENTS COULD PICK MORE THAN ONE)97%United States41%Canada11%Western EuropeAsia-Pacific6%Latin America5%Eastern Europe4%Middle East3%Source: 214 Independent SponsorsHOW MANY PLATFORM COMPANIES DID YOUR FIRM ACQUIRE IN 2018?Four15Three8Two32One47ZeroSource: 93 Independent SponsorsHOW MANY ADD-ON ACQUISITIONS DID YOUR FIRM MAKE IN 2018?Eight14FiveFourThreeTwo137OneZeroSource: 93 Independent Sponsors2155

GUIDE TO INDEPENDENT SPONSORS 2019BUYOUTS VCJ 5EXECUTIVE SUMMARY“WHAT MATTERS ISTHEIR ABILITY TO GETTHE DEAL DONE.”—Ryan McGovern,Star Mountaindie by their ability to forge longlasting business relationships withtheir clients.“You ought to have worked with thembefore and gotten to know them on aprofessional basis before investing,”said Abernathy.MARKET CHARACTERISTICSThere is no such thing as an‘archetypical independent sponsor.’Firms differ by a range of factors,from deal structure and sector focusto the firm’s key target companiesand the size of its active portfolio.What independent sponsors hold incommon, according to our survey,is an appetite for deals in the lowermiddle market and a willingnessto take on co-investors. Around 92percent of firms surveyed targetcompanies worth up to 50 million,while about 60 percent reportedthey would pursue transactionsworth between 51 to 100 million(respondents could pick more thanone desired target range).Howard Gurvitch, chief investmentofficer at Gurvitch Family Office,has a clear idea of what makesfor a great independent sponsoropportunity, and it “can’t be justanother run-of-the-mill private equitytransaction.” Gurvitch looks foropportunistic, off-the-beaten-track,bespoke transactions that offersomething unique, something thatcannot easily be achieved with afund.Founded in 1978, Watermill Groupis a well-established independentsponsor based out of Lexington,Massachusetts. Procter has beenWHAT CARRIED INTEREST DO YOU CHARGE?(STARTING RATE)23%Varies30% 1%50%20% - 30%26%10% - 20%Source: 103 Independent SponsorsWHAT IS THE HURDLE RATE BEFORE YOU CAN TAKE CARRIED INTEREST?(STARTING RATE)20%Varies/Negotiable10% 3%63%8% - 10%10%5% - 8% 5%4%Source: 97 Independent Sponsorssponsoring what he calls “valueindustrial deals” for over thirty years,since 1987.“Value industrial deals arebusinesses that have some sortof story about them,” said Procter.Typically, these include out-of-favorindustries, management transitionissues, deal process checks, orpension plan issues.In August 2017 Watermill acquiredCooper & Turner, a British familyowned business that has been atthe forefront of structural boltingmanufacturing for more than 160years. The Sheffield-based company,owned by two brothers, wantedto buy out a minority partner andenlisted the services of Watermillto see a smooth transition in itsmanagement structure.Over at independent sponsor FireflyGroup, the partners saw that fewfirms were investing in 1 millionEBITDA companies in the Midwest,and seized the opportunity. Theyenjoy the “hands-on approach” ofpartnering with companies and beinga strong presence in the day-to-dayrunning of their businesses.

GUIDE TO INDEPENDENT SPONSORS 20196 BUYOUTS VCJEXECUTIVE SUMMARYIn the summer of 2018, Buyoutsreported that Firefly Group hadacquired EOS Worldwide, a leadingprovider of systemized concepts,tools, and training that helpentrepreneurs get the most from theirbusinesses.Drew McCuiston, another partnerat Firefly Group, said that EOS’sfounders, Gino Wickman and DonTinney, were encouraged to do thedeal because they felt that Fireflywould “take a long view” of itspotential.“They knew we were able to puttogether a suitable capital structureand become a long-term holder,”said McCuiston, who is not opposedto hanging on to a company for tenyears to see the job through.Our survey showed that roughly 75percent of respondents had a staffcount of five or less, which meansthat investors are placing faith in theresolve of small, but effective, teamsto get the job done. For example,Firefly Group has four employeesHOW DO YOU CALCULATEYOUR CLOSING FEE?“WE’RE NOT DOINGTHIS BECAUSE WECAN’T RAISE A FUND.WE’RE PROACTIVELYDOING THIS BECAUSEWE BELIEVE IT’S THEBEST WAY TO DOBUSINESS.”circles, it is still a burden to raisecapital while committing to build adeal.”—David Mann, Firefly GroupFor these reasons, the mostsuccessful independent sponsorswork with repeat capital providers.Watermill has 75 long-standingclients, and more than half of themcome into every new deal the firmmakes. Firefly Group’s recentlycompleted EOS deal required capitalfrom New Canaan Funding, withwhom a partner at the firm, MarkSneider, had a relationship that wasmore than a decade in the making.on their payroll, but together, theyhave decades of business experiencefrom both a financial and operationalstandpoint. Two of their partnerspreviously worked for family offices.One was a venture capitalist, andanother was an investment bankerand management consultant.“There’s a huge amount of liquidityin the marketplace today,” saidGurvitch, “but if you’re not somebodywho has a reputation in private equityHOW DO YOU CALCULATEYOUR MANAGEMENT FEE?Percent of transaction valueAbsolute dollar amountDepends on TransactionOtherNo closing fee% of EBITDA with a floor and cap% of EBITDA with no floor or cap% of capital investedVariesOtherAbsolute yearly amount5%5%7%9%9%11%58%19%Source: 115 Independent Sponsors54%10%13%Source: 115 Independent SponsorsThe structure of a fund allows for analignment of interests between theindependent sponsor and its capitalproviders. Similarly, whereas fundshave the benefit of ‘hedging theirbets’ across several companies,independent sponsors are on thehook for a lot of money if they havedone a couple of bad deals.With so much at stake, being anindependent sponsor is not forthe faint of heart. The road tobuilding a successful practice is aschallenging and tough as it is excitingand rewarding. Gadant of CitrinCooperman warns new entrants tothe market that they should thinkahead. If they want to succeed, theywill have to save up and prepare fora “two-year runway” when they willhave to pay out of pocket for thecosts of running their offices whilewaiting for their management fees torise to a self-sustaining level.Firefly Group’s Mann agrees. Theneed to be able to go two yearswithout compensation is the first offive pieces of advice he gives to newindependent sponsors that are juststarting out. The others are: havea quantifiable value you can bringto an opportunity, be in the know ofbusiness opportunities, bring yourown capital to a project, and be ableto find a proprietary investment.

Sample Entry from Guide to Independent Sponsors, 2nd EditionAGI PARTNERS, LLC419 Park Avenue South, Suite 704New York, NY 10016Phone: 646-220-4096https://www.agi-llc.com/KEY INVESTMENT PROFESSIONALSDavid Acharya, Partnerdacharya@agi-llc.comNew York, NYOVERVIEW/INVESTMENT STRATEGYAGI is a lower-middle-market buyout firm thatfocuses on controlled positions in business andmarketing services and TMT companies.YEAR FOUNDED: 2011STAFF WORLDWIDE: 5ASSETS UNDER MANAGEMENT: 40 millionPORTFOLIO COMPANIES: 2Shop.PEHub.comINVESTMENT STRATEGIES OF INTEREST: Buyout Growth Equity Consolidation Private Credit Mezzanine Dividend RecapsTARGET INDUSTRIES: Business Services Communications Publishing/Digital Media Software/SaaS/Cloud BusinessesENTERPRISE VALUE OF TARGET COMPANIES: 0 - 50 millionTARGET REGIONS: United States CanadaARE YOU ACTIVELY SEEKING INVESTMENTS? YesWILL YOU SEEK NEW CO-INVESTORS? YesDO YOU HAVE PLANS TO RAISE A COMMITTED FUND AT SOMEPOINT? Yes

to the firm’s key target companies and the size of its active portfolio. What independent sponsors hold in common, according to our survey, is an appetite for deals in the lower middle market and a willingness to take on co-investors. Around 92 percent of firms surveyed target companies

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