Navigating Waterfalls and Tax Distributions in Independent Sponsor Deals

Scott Fisher has been in the independent sponsor field for quite some time, and has learned a lot along the way. 

As the Managing Director at Pleasant Bay Capital Partners, a private equity firm focused on investing in lower-middle market companies in the healthcare, technology, business services, and industrial products & services sectors, he has helped bring value to both sellers and capital providers.

“We think sellers value [our vertical focus]. We understand the sector they’re in, we understand their business, and I think we can convince them we can be helpful post-close,” Scott says of Pleasant Bay’s standout strategies to close deals.

“And I think [capital providers] look to us because we do have deep sector expertise and a lot of these folks don't have that,” he says on this episode of Deal-by-Deal. “Healthcare is a tricky field, and if you haven't spent a lot of time in it, it can be a little bit of a nerve wracking place to invest. So I think that's important. And at the end of the day, we are bringing value and are able to provide value post-close and I think that's what a lot of capital providers are looking for.”

Tune into this episode to hear Scott’s tips for people interested in starting as an independent sponsor field. He offers strategies for how to cultivate strong relationships with businesses and potential capital providers as well as get the most juice out of a deal.

The episode also covers the pros and cons of doing deals with multiple capital providers and the importance of carving out a niche for yourself as an independent sponsor.

The last 10 minutes of the episode preview findings from the Independent Sponsor Deal Survey, which will be fully released at the fourth annual Independent Sponsor Conference. 

Meet Your Host

Name: Jeff Brooker

Title: Partner at McGuireWoods 

Specialty: Jeff focuses his practice on advising private equity funds, venture capital funds and other institutional investors and strategic acquirers. He specializes in mergers and acquisitions, early- and late-stage investments, leveraged buyouts, recapitalizations, management buyouts and secondary transactions.

Connect: LinkedIn

Meet Your Guest

Name: Scott Fisher

Title: Managing Director at Pleasant Bay Capital Partners 

Specialty: Scott has more than 17 years of experience in private equity, M&A, and corporate strategy and has worked primarily in the healthcare and life sciences sectors. 

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Deal-by-Deal episode 

★    Find a niche and distinguish yourself instead of aiming for huge transactions right off the bat. As the interest in independent sponsorship increases, there is more of a supply of investors that a business might choose to work with — so you’ll need to stand out. You don’t need to get the biggest deals right away: it will look better to pick and choose transactions you think you actually have a chance at. Choose to chase transactions in the areas you can carve out a niche for yourself, and you’ll experience more success. 

★    Expand your Rolodex of capital providers. Over the course of Scott’s career in independent sponsorship, he’s acquired quite a collection of potential capital providers to call on depending on the specifications of the deal. He knows what these partners want and what businesses they will be interested in, and he spends time cultivating relationships with these groups. If you have an idea of who might be interested in a particular opportunity and you’ve stayed on top of your relationship with them, it will be easier to seal the deal. 

★    Think about how to negotiate with capital partners. Your capital partners will look at their models and returns to figure out their budget and forecast models, so you should be doing the same. Work with your providers on a forecast that seems reasonable to all of you — providing realistic return projections and taking into account business growth, profit margin, and a fair rate of return.

Episode Insights 

[08:31] Put yourself out there: Scott says the Pleasant Bay team spends a lot of time doing proactive outreach, looking at their investment thesis and then making cold calls to find businesses that meet the criteria and are interested in independent sponsorship. 

[12:24] Connect with capital providers pre-LOI: Pleasant Bay starts to socialize potential capital providers before a letter of intent is signed, giving them information about the opportunity so they can get a running start if the deal goes through.

[16:58] Be strategic about how many capital providers you need: The number of checks you want to cobble together to fund a business really depends on the situation. There are situations when one capital provider is enough, and times when you’ll want more. Scott says it’s important to weigh the pros and cons and make sure you’re finding the right partner for you to get the deal done. 

[19:36] Look at the general set of economic parameters of most deals: Every deal will bring with it its own economics, but Scott says there is a general set of guardrails that most deals fall between and you can take as a guideline. 

[26:21] Sponsor economics are here to stay: Scott says the current state of sponsor economics seems to be working well for all parties. We aren’t expecting any seismic shifts in how deals are structured anytime soon, but if there is a downturn in the state of M&A, some independent sponsors might have to put more skin in the game.

[28:19] It’s all about the people: At the end of the day, you need to have a good set of people around you — from your team, to the capital providers, to the people working on the companies you’re backing. There will always be good and bad times, and other people are your best tool for success as an independent sponsor.

[31:01] Meet and learn in Dallas: McGuireWoods Partner Greg Hawver joins the podcast to discuss the fourth annual Independent Sponsor Conference, which will be in Dallas in October. Greg and Jeff also share some early findings from the Independent Sponsor Deal Survey.

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