Finding the Right Capital Provider for a Transaction

The independent sponsor model of investing is becoming more popular with investors and businesses looking for a more flexible partnership than what the private equity model allows.

But for those interested in getting started as an independent sponsor, getting to the point where you have the capital to invest and businesses that are willing to partner with you can seem daunting.

“The fact is, this is a tough world to go out and get your first few deals done, and it takes time,” says John Huhn, Managing Partner at Compass Group Equity Partners, St. Louis-based independent sponsor focused on middle- and lower-market transactions in niche manufacturing and consumer services.

But with help from people like John, would-be independent sponsors can get a leg up in the field.

On this episode of Deal-by-Deal, John talks to hosts Rebecca Brophy and Jon Finger about how he got involved in independent sponsorship and where he thinks the investing model is going.

Tune in to hear about how to get started as an independent sponsor, what kind of financial and legal terms you should keep in mind when making deals, and how to find the partners and capital providers: the “right people, with the right appetite, the right check size, and the right time.”

You’ll also hear about the different ways an independent sponsor can partner with a business, and how to harness the power of the independent sponsor community to learn and grow in your field.

Meet Your Hosts

Name: Rebecca Brophy

Title: Partner at McGuireWoods 

Specialty: Rebecca focuses her practice on corporate transactions, including mergers and acquisitions, equity and debt offerings, venture capital financings and strategic collaborations. 

Connect: LinkedIn

Name: Jon Finger 

Title: Partner at McGuireWoods 

Specialty: Jon Finger's practice focuses on private equity and corporate transactional matters, including mergers and acquisitions, securities offerings and corporate governance initiatives.

Connect: LinkedIn

Featured Guest

Name: John Huhn 

Title: Managing Partner, Compass Group Equity Partners 

Specialty: John has 25 years of experience in private equity, entrepreneurism and strategic consulting that he brings to his work as an independent sponsor.

Connect: LinkedIn

Acquired Knowledge

Top takeaways from this Deal-by-Deal episode 

★    Get clear on your preferred role in an investment partnership. Some independent sponsors are okay with a more hands-off approach once they’ve set their financial and legal terms with the business, while others are really intent on being a part of that business’ executive team, making sure strategic initiatives are implemented and providing oversight. There’s a spectrum there, and anywhere on the spectrum is okay — but you should know that before going in.

★    Identify the right capital providers. When you’re starting out as an independent sponsor, you might just be happy to have the capital to close out a deal, and that’s completely understandable. But eventually, you want to be able to select investors who are worth more than just the capital they can provide. How many investors do you want? Can they provide industry insight? And once you’ve found some partners who you trust and have worked with in the past, consider going back to them in the future: a good partner can be hard to find.

★    Find deals in areas you know, and work to establish trust. As an independent sponsor, you have the opportunity to shape and improve businesses over time, so you’ll want to look for those deals in areas where you have contacts and expertise — this will also make you more attractive to capital providers. Do the hard work to find these deals, and if brokers and bankers are hesitant to work with independent sponsors, it’s good to have a financial partner by your side to show them that you’ll be able to finance their business.

Episode Insights

[03:42] Independent sponsor backgrounds: John says independent sponsors can come from all kinds of professional backgrounds — investment banking firms to recent college grads. There’s a spectrum of involvement in the business these different independent sponsors will have depending on their experiences, but there’s no right or wrong way to be one.

[05:35] Negotiating financial terms: Independent sponsors make money through transaction fees, management fees and carry, and the specifics of these deals will vary depending on who you’re working with. But John advises why you should put a minimum on your management fees.

[08:45] Different sponsors, different management strategies: John values playing a very active role in managing the companies his team invests in, but not everyone might want that kind of role.

[11:16] Adding advisors: Look for third party advisors on the investment team with expertise in the sector to help guide companies forward, ensuring the businesses you’re sponsoring continue to thrive.

[13:44] If it ain’t broke, don’t fix it: When you find a formula that works for your transactions, it’s not always wise to change directions, John says. If you mess with industry-accepted terms, you might see people backing out or different challenges.

[14:53] There’s plenty of capital out there: Talk to a handful of potential capital providers to find out what they offer before accepting just any check.

[21:14] Look at what you know: John says the Compass Group goes all in on a theme to find and secure deals, reading trade publications and going to trade shows to make contacts.

[27:06] Follow through is critical: Sometimes brokers are hesitant to make deals with independent sponsors because of a fear that you won’t follow through on financing. It’s helpful to have a potential financing partner present when making these deals, even if that’s not the capital provider you’ll end up using.

[31:51] 2020 was good for independent sponsors: As unusual 2020 was, the COVID-19 pandemic and subsequent financial crisis allowed independent sponsors to show how a hands-on approach to financing businesses can really help these companies weather tough situations.

[39:03] Leverage the community: The independent sponsor community isn’t competitive, they want to help you. You can count on the community to help with the questions you’re bound to come across in your journey.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.