Independent Sponsors and Capital Raising: A Conversation With Greg Tobben at Access Capital Partners
To help businesses, investors, and deal professionals better understand the evolving M&A market, Robert Connolly – a partner in and leader of LP’s Corporate Practice Group – shares a series of conversations with M&A experts.
Below is his conversation with Greg Tobben, co-founder and managing partner at Access Capital Partners, a middle market investment bank focused exclusively on raising debt and equity capital for independent sponsors, executives, and family offices. Greg has over 15 years of experience in investment banking, capital markets advisory, turnaround advisory, and principal investing.
In this first of a two-part Q&A conversation, Greg talks about the evolution of the independent sponsor model, the ideal investment partner and the typical approach to raising capital for independent sponsor transactions. In part two, Greg discusses current trends and challenges, how capital providers evaluate independent sponsor transactions, and what’s on the horizon in the independent sponsor space.
The responses below have been edited slightly for brevity and clarity.
Can you provide some background on Access Capital Partners and how you became focused on working with independent sponsors?
My partner and I founded Access Capital Partners in November 2014. At the time, we were coming out of a generalist investment bank and weren’t actively seeking independent sponsors to work with us. We were raising capital. We were selling companies. We were doing turnarounds and restructurings, which was a little different than some.
In early-2016, we were approached by some better-quality independent sponsors than we’d seen historically with interesting deals, and for some reason, we turned the deals down. A few months later, we started seeing those deals close, forcing us to pause what we were doing and ask ourselves different questions. Ultimately, we reached out to our network of capital providers, lenders, investors, family offices, and other independent sponsors and asked them different questions than we had been asking historically.
There were a few interesting takeaways from that exercise. This was mid-2016, so it was interesting that the independent sponsor model had been around for 30+ years, and until that point, people hadn’t been talking about it. Today, there’s a massive ecosystem that developed around independent sponsors. Before that, they were known as “fundless sponsors,” which often had a bit of a negative connotation. And before that, they were just a person with a deal.
However, we saw more talented private equity professionals leaving traditional private equity funds to do something more entrepreneurial for various reasons. We also saw some common challenges. Number one was time. Most of these people, at least from our perspective, had raised capital before, so that wasn’t impossible for them to figure out, but to be successful as an independent sponsor, you have to wear ten or more different hats, each at a very high level, and often multiple hats at the same time. Capital raising is certainly one of those hats. Quite often, we would find that these independent sponsors were doing so many things well, but for whatever reason, they didn’t have the time or breadth of relationships to take their deals out to market to raise capital reliably– who to go to, how to develop structures to put these deals together, how to put different types of capital providers together, how to position themselves as a sponsor and their role in the deal, how to ask for economics, and what those should be.
We found that quite often the independent sponsors would end up with abysmal economics or partners who were the wrong fit. In many cases, it wasn’t that there weren’t potential alternatives; it was that they didn’t know where to go or didn’t have enough hours in the day to run a thoughtful process to raise the capital to uncover the best potential partners.
That was kind of an aha moment for us – recognizing that there was a pretty inefficient market at that point. There were talented independent sponsors who understood the function of capital-raising but didn’t have the horsepower or relationships to drive that process in a way that would optimize it in the way they would optimize any other part of their business, such as finding compelling companies to pursue or approaching diligence.
So, we stuck our toe in the water and, in mid-2016, did one deal and another and another. We quickly realized that raising capital for strong independent sponsors was a better use of our time than working with the family-held business owners. Since then, all we’ve done has been raising capital for independent sponsors. We raise debt. We raise equity. And in most cases, we raise the entire capital stack.
What is the typical profile of an independent sponsor?
There’s a huge spectrum of quality and profile of independent sponsors. I don’t know that there’s a right or wrong. I’ve seen many different profiles of individuals and groups be wildly successful. I generally put groups into a few buckets. First, there are the traditional private equity professionals. This is somebody who’s left a private equity firm, has led private equity transactions from start to finish, and has been classically trained as an investor.
The second bucket would be more of the traditional operator. Often, we find people coming out of an industry or we get calls from private equity-backed portfolio company CEOs who had a recent exit and are looking to be a bit more entrepreneurial and be more involved in the private equity model themselves versus being a hired operating partner.
Third, we also find many people coming out of various career paths, whether it’s investment banking or consulting, who are heavily involved in middle-market companies and growth or value creation transactions.
I don’t know that there’s a right or wrong profile of independent sponsor. What we have found to be the most successful tends to be the private equity professional who has brought in operating talent alongside them – whether it’s an operating partner or a member of their firm. In some cases, you have very dynamic individuals who might have both skill sets and can see the world from a few different lenses. At the end of the day, most good independent sponsors that rise to the top approach these deals with a very high level of thoughtfulness. They’re rigorous and transparent about how they think about the diligence of these companies, which is why I often find that the classically trained investor, who has been taught to professionally diligence a company, tends to add a lot of value on the deal-making, and front-end diligence.
Similarly, you don’t want to minimize the importance of the operational industry knowledge and relationships. When you can loop both of those together, it can be a very powerful combination.
Again, there’s not a profile of an individual who can’t be successful. I’ve seen people who’ve been investment bankers become successful independent sponsors or people who are pure operators become very successful. But generally, if you’re looking at the private equity model and best practices, and subsequently what investors will find value in, it tends to have an element of both the private equity professional investor skill set as well as the operator or industry knowledge skill set. We have found the private equity sponsor and operating partner model to be very functional.
That’s consistent with my experience and observations as well. The space is becoming more crowded. It’s not only a success factor; it’s also a differentiating factor.
The independent sponsor model has been around for a long time, but it’s been under a microscope for the last 4-6 years. The ecosystem and number of debt and equity investors and independent sponsors flooding into the space is voluminous. With that, many more independent sponsor deals have been done and reviewed by investors.
There’s an interesting evolution of this market, with people becoming more discerning about the quality of the independent sponsors they’re backing. Years ago, somebody may have an interesting deal, and a sponsor may not have a huge value-add other than bringing in the deal. However, that’s evolved to the point where the people choosing to back independent sponsors are looking for talent, rigor, thoughtfulness, and experience. At the end of the day, they’re entrusting millions and millions of dollars in support of these people and their strategies. And they want to know that this person or group knows what to do and how to operate and execute in good times and in bad.
Times aren’t always perfect, so we’re finding more capital partners using sponsor quality as a filtering mechanism to assess whether a particular independent sponsor transaction is worthy of pursuit. These groups are asking themselves if they can see the independent sponsor as an extension of their team or whether they trust them to operate and execute on their behalf.
This is a nuance that you might not see in any individual deal, but when you take a step back and survey the field to see what’s getting done and why, this is something I would call out. Groups are much more discerning about picking the independent sponsors they really want to work with.
What are the strategies and approaches you use to maximize the economics for the independent sponsor vis a vis the capital providers?
That’s an interesting topic and, to be fair, every deal looks different from an economic standpoint. At a very basic level, the independent sponsor should have the deal under their control (i.e. under letter of intent) and they should run a meaningful process to raise the capital.
Interestingly, when we started working with independent sponsors at Access, I think we felt our value-add was really going to be maximizing economics and, to be fair, people are hiring us for more than just getting a deal done. They’re hiring us to get something better than they could on their own.
What I failed to appreciate before was the importance of fit in these partnerships. Most independent sponsors, particularly those who’ve had some success, usually get to a place in life where life is too short. If you’re pushing people too hard to maximize economics and not being mindful of the relationship elements at play, often, that can set up a potentially contentious partnership. No independent sponsor deal is perfect; there’s always some level of complexity that must be figured out or solved for. If you push people too far, too hard, too soon, and a deal hits a speed bump – and almost every deal hits a speed bump along the way – the investors ask themselves, why are we doing this?
What I’ve come to appreciate as I’ve gotten to know many successful independent sponsors is that the economics are certainly important – people are doing this to create value for themselves – but they don’t want to partner with a group that is not the right fit or not aligned with them regardless of the economics. Life is too short; you don’t want to spend the next 3-7 years in a partnership where nobody likes each other.
At a basic level, my advice to independent sponsors is to control the deal yourself. Run a thoughtful process to raise the capital or hire somebody who really understands independent sponsor deals to run a real process to do it. It’s been my experience that the capital partners who are the right fit for the opportunity tend to be more flexible on the economic front.
Finding the right balance of fit and economics is important. I wouldn’t tell anyone to just go with the right fit and not get paid fairly. Similarly, I wouldn’t say to go to max economics to the point that you risk jeopardizing the partnership. Even if everyone has to make some sacrifices along the way, these deals should truly feel like a win-win for everyone involved.
Do you think some of this is a function of how the segment has matured over the years such that there’s an accepted economic package?
There are some conventional norms, but the gaps in those norms are still large enough that they can make a material difference in the economics of the independent sponsor.
But yes, it’s probably less of the Wild West today or a little bit less of a black box, although every once in a while, somebody approaches us and says that they really want to max economics on a deal.
What are you seeing with newer independent sponsors to get the deal done?
With newer independent sponsors, we often see them being more accommodating to get a deal done. The nuance I would throw in is it depends on what the independent sponsor envisions their life as an independent sponsor looking like. Do they want to raise a fund? If so, doing a deal in a reduced economic framework may be more advantageous to get up and running. If somebody only wants to do one, maybe two deals, then they’re probably less willing to accommodate to get a deal done and more willing to be aggressive on the economic ask. But I certainly see more new independent sponsors, particularly younger ones, who are saying, I have another 20-30 years where I want to be doing this, and I have to start somewhere.
How are you making capital providers and independent sponsor introductions?
Most of the connections we make between independent sponsors and debt and equity providers are in the construct of a traditional engagement where we’re hired to raise the capital for a deal. We generally do all the outreach and initial conversations and then introduce the independent sponsors to the capital providers when it becomes appropriate.
Once you’ve picked the capital providers you’re partnering with, we try to be mindful of allowing a relationship to develop organically between the sponsor and the investors they’re partnering with. At the end of the day, I may have great relationships with these investors or lenders, but they’re not backing me necessarily. I may be an investor in the deal, but I’m along for the ride. We deliberately try not to over-intermediate a situation that doesn’t need to be intermediated. When it’s appropriate, we try to let the independent sponsor and the capital provider interface directly. We’re still actively involved in the process to help navigate through challenges and ensure we’re moving forward in a productive manner, but we try to allow an organic relationship to develop between the sponsor and the investors that are backing them. I think that’s part of the reason our model has been successful. By the time a deal gets done, the investors know the independent sponsor well and have a level of comfort.
If we try to over-intermediate throughout the process, the relationship between the independent sponsor and the investors doesn’t really get a chance to solidify, and if a level of trust and respect hasn’t already been formed, it can make navigating challenging situations down the road more difficult. My experience is that if the relationship is strong, transparent, and fluid on the front end, after the deal closes, it’s much easier to be transparent and fluid once you’re leading the investment or running the company.
This has been an evolution of our own model: we like to make sure that by the time the deal closes, the independent sponsor and the capital providers feel like there’s a closeness amongst them and they trust each other.
What does a typical engagement look like for you?
At the very beginning, independent sponsors reach out with opportunities. In some cases, the deals are under LOI. In some cases, they’re pre-LOI. Time is the enemy of the independent sponsor, so we try to get a running start and learn about the deals pre-LOI, although that’s not always possible. It’s also helpful for us because we can make some recommendations on how they might want to structure the deal to open pathways for different types of capital providers that perhaps they hadn’t thought about. This approach often expands the capital universe relevant for the transaction, can improve the probability of getting it done and put the sponsor in a position to get better economics or find a more complimentary partner.
If the deal is something that we want to work on and the sponsor wants to hire us, we’ll give guidance about the various capital structures and approaches that we would pursue. After the sponsor gets the deal under letter of intent, we get engaged and start running a process to raise the capital. Raising capital for an independent sponsor is a lot more nuanced than a traditional debt placement or working for a founder business, but the process itself isn’t too dissimilar. We’re putting together marketing materials, taking out teasers, preparing NDAs and non-circumvents, and introducing investment memos to the lender and investor set. We’re having the initial conversations with the lenders and investors to describe the opportunity and qualify their interest.
When it becomes appropriate, we’ll set up a call with the independent sponsor and the capital provider so they can start asking questions directly and getting to know each other. The capital provider goes back to their team and if they want to pursue the deal, we have them put together a proposal. Once we’ve got proposals, we negotiate them as appropriate.
At that point, it’s about picking a lead partner, or if you’re putting a syndicate together, circling the wagons and making sure everything is organized. From that point, you’re often working through any outstanding business diligence the capital partners need to complete and coordinating whatever third-party diligence still needs to be done. Quite often, if you’re partnering with an institutional capital partner, they will likely have some level of additional third-party diligence that the independent sponsor hasn’t already done. Once the main third-party diligence items are done, the deal is kicked on to the legal team.
We often see more experienced independent sponsors who’ve had some wins under their belt be willing to take the risk and front-load some of the diligence expenses. On the one hand, that can speed up the deal timing or calm a finicky seller. On the other hand, the sponsor may be at risk for those expenses if the deal falls apart. That said, there’s often some element of dead deal expense-sharing or maybe a capital partner absorbs dead deal costs, which can be helpful for an independent sponsor. From a process standpoint, timing of third-party diligence items can slide around quite a bit depending on the wants and needs of the independent sponsor.
How do you approach negotiating the terms of the deal?
We typically negotiate the entire deal, including economic and partnership frameworks with the input of our clients. Still, occasionally, we have a client who uses us less from a negotiating standpoint and more as an advisor or sounding board on how they should think about an economic or governance framework. Usually, these clients have done numerous deals and prefer negotiating them on their own behalf. But most often, we’re negotiating and advising on behalf of the independent sponsor with their input.
We may also interface with independent sponsors’ legal counsel to make sure we’re being thoughtful about picking our spots and ensuring we’ve got the right mechanisms to promote the alignment we seek without making it so obnoxious that we’re going to turn a group off.
It is a delicate balance. As lawyers, we certainly appreciate being able to provide input into the term sheets because there are some key items, such as making sure that the deal is done in a tax-efficient way and managing governance issues.
I couldn’t agree more. You must do it in a thoughtful way, and you should definitely have the right sets of eyes. What you think are little mistakes can become major mistakes, and nobody wants that. That’s another element of the independent sponsor model’s evolution. The investor and legal community surrounding the independent sponsor world is much more sophisticated about the nuances in these deals than they were 5-6 years ago. You have more data points and more smart minds figuring these things out.
For more information on Greg Tobben, view his bio. For more information on Access Capital Partners, visit their website.
Interested in participating in a future interview series? Please contact Robert Connolly at rconnolly@lplegal.com.
To read other articles in this series, please see here: Insights | LP (lplegal.com)