Independent sponsors are hot — but LPs must be careful: panel

  • Farol’s Kelly: LPs need to be “incredibly selective” when picking an independent sponsor
  • Cyprium’s Stone: LPs must understand GPs’ motivation to do a deal
  • Barner’s Anchor Point seeks deals in industrial, distribution and franchising

Once shunned, the independent sponsor space is flush with money.

But investors and GPs have some words of advice: Tread carefully.

“There’s a lot of people throwing money at the independent sponsor” sector, said Doug Kelly, a partner with Farol Asset Management, who spoke on a panel at Buyouts Insider’s PartnerConnect Texas conference. “It’s a disaster waiting to happen.”

Kelly advises potential investors to be “incredibly selective” when picking a GP to back. “You cannot approach the lower end of the middle market as a passive co-investor.”

Nicholas Stone, a principal with Cyprium Partners, who also spoke on the panel, said he doesn’t actively search out independent sponsors. “Ultimately, they find us.”

Stone said he’s looking for executives with a background in underwriting and managing a portfolio of investments.

Stone warned that at the other end of the spectrum are GPs with little experience who have no business getting a deal under LOI.

A few years ago, Stone said, an independent sponsor told him that he was buying a business for 7x and wanted Kelly to back him. Stone’s firm began working up a model.

“We kept asking for a letter of intent before going out to Madison, Wisconsin, in the middle of winter,” he said.

On the flight out, Stone finally got the LOI and realized the independent sponsor was not only paying 7x but was also assuming 5x of the company’s loans.

“We had to have a candid and frank conversation about enterprise value, which is equity plus debt. We all know this.”

The executive, Stone said, didn’t have any industry expertise but he did have a relationship with the company. He also offered more than anyone else for the business.

Stone warned an audience filled with LPs, GPs and placement agents that they should “understand the independent sponsors’ motivation to do a deal and their expertise.”

Independent sponsors generally invest on a deal-by-deal basis, raising capital from investors once they find a deal. Some independent sponsors have a select group of investors ready to commit as soon as a deal is signed, while others need to scramble to find capital to fund their deals.

Kevin Barner has 13 years of experience in private equity, including about six years at Lone Star Funds and seven at Halifax Group. He launched his own firm, Anchor Point Partners, this year.

“The cream doesn’t necessarily rise to the top,” he said of the independent-sponsor sector.

Barner, who spoke on the panel, told Buyouts that talent and experience in the independent sponsor community are widely dispersed.

There is lots of noise, and lots of individuals are “chasing deals,” Barner said. Some executives are trying to get transactions signed under LOI and then choosing to syndicate the equity later. “That creates a challenge on the sourcing front, too,” Barner said.

While Barner is careful, he is also excited about being an independent sponsor. “I’ve been encouraged by the deal flow,” the Dallas GP told Buyouts on the sidelines of the conference. “Part of me likes the flexibility of the deal flow.”

Barner hasn’t clinched his first deal — he focuses on industrial, distribution and franchising — but is optimistic. He said he’s looking at many late-stage transactions and hopes to close his first platform next year.

Asked why he chose to be an independent sponsor, Barner said he comes from an entrepreneurial background.

“My dad and several of my relatives have started their own companies. I worked at my dad’s business for a while. I like to think I can empathize with entrepreneurs.”

Correction: A prior version of this story incorrectly stated that Nicholas Stone made the comment “It’s a disaster waiting to happen.” Doug Kelly made that remark. The story has been changed.

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