If you’re an independent sponsor or a capital provider, you won’t want to miss the upcoming Independent Sponsor Conference…
Featuring one-on-one networking meetings with people hand-selected to match you…
This is an unbeatable opportunity to connect with someone and lay the groundwork for deals…
In this episode, Jeffrey Brooker, an organizer of the conference, is here to give you all the details on what to expect.
Jeffrey also gives insight into the role of an independent sponsor and how it differs from private equity.
Mentioned in this episode:
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Jeff Brooker, partner at the law firm McGuireWoods. Jeff’s practice focuses on private equity and corporate transactional matters from McGuireWoods’ Dallas office.
It is in the area of independent sponsors where McGuireWoods was the first to create an M&A practice and ecosystem dedicated solely to this segment of private equity. As we’re coming up on the annual independent sponsor conference, which is hosted by McGuireWoods. I wanted Jeff to give us an update on number one, what’s happening in the independent sponsor world, and two to share with us what we can expect at this conference, which is scheduled for October 25th and 26th. So Jeff, welcome to the show. Thanks for joining me today.
Jeffrey Brooker: Yeah, thank you, Patrick, really appreciate you having me on.
Patrick: Now, before we get into the conference and independent sponsors, specifically, let’s just briefly start with you just to get a little context. What led you to this point in your career?
Jeffrey: Sure. So I had been a industry agnostic, private equity M&A attorney, for really the entirety of my legal career, which started back in as an associate back in 2006. And I’ve been doing kind of really large private equity deals, then out of New York, and then moved to kind of true middle market, doing deals for Goldman Sachs, Greyhill, TA Associates, those kinds of clients for about four years in Boston. And then about eight years ago, found the group that I’m with now in Dallas, and we’ve been doing lower middle market and middle market private equity.
And then maybe about five years ago found that independent sponsors were really becoming an attractive and underserved, you know, at that time underserved and maybe still segment of the private equity community, and really started to dedicate some effort and some thought to working in that space. And that is really gained traction over those past five years to the point where it really now represents a pretty meaningful part of our practice. We’re probably a third to a half independent sponsor related transactional activity, and then the other half to two thirds of our practice still remains kind of traditional, committed funded private equity work. But that half to two thirds, really, I mean, we’re a big group.
So that still represents I think, significantly more independent sponsor transaction volume than any other firm is doing. And we really have dedicated a lot of thought leadership, a lot of effort to building out forms, building out resources, thinking about, you know, how are the best ways to do these things. And that’s come with, you know, dozens and dozens and dozens, you know hundreds at this point of transactions in the independent sponsor space to draw on and continually improve our practice in that space.
Patrick: Well, for the benefit of our audience that’s growing right now. And there are a lot of people that are new to M&A. Let’s define what independent sponsors are and how they’re different from private equity, because a lot of people may have heard the term fundless sponsors, which really isn’t applicable now. But talk about that please.
Jeffrey: Sure. Yeah, I mean, fundless sponsor is it, you used to hear that, you hear independent sponsor a lot more now. Fundless was almost a pejorative. You’d be like calling like a penniless sponsor. You know, an independent sponsor really is just a private equity professional that doesn’t have a traditional committed private equity fund. You know, a traditional committed private equity fund would be kind of a blind pool committed fund that the LPs in that fund commit to invest in the fund over a course of several deals, over a course of the term of the life of the fund. And those returns are aggregated.
And there’s a traditionally a management fee and a carry that gets paid to the manager of that private equity fund, based on the on the performance of the fund. And so an independent sponsor doesn’t have that traditional multi year commitment, they typically will go out and find a an M&A deal, get it under LOI, and then at that point, go find their capital on a on a deal by deal basis. And that is, you know, it’s very good in some ways for the independent sponsor because they don’t have to dedicate the resources to keeping that fund going, and to maintaining that fund and the pressures of always having to deploy that capital under the timeframe that is dictated by the fund documents. And then the independent sponsor also gets, in a traditional private equity fund, those returns are aggregated over several deals.
Whereas an independent sponsor deal by deal model, typically the deals that don’t perform quite as well, they still stand alone, and the deals that perform better standalone as well. And so those returns are not aggregated. It’s really on the on a much more deal by deal basis. So there’s, there’s advantages and disadvantages for both LPs and for the independent sponsors to pursue that model. But there are a lot of very talented, very experienced, very capable, private equity professionals who are operating within the independent sponsor model for, for a variety of different reasons.
Patrick: And so what happens is the independent sponsor finds a target opportunity. So you got the opportunity on one side, and you got capital on the other. And let’s talk about what McGuireWoods does, because you guys position yourselves in a great spot where you help facilitate bringing those two sides, capital and opportunities together. Talk about that real quick.
Jeffrey: Sure. So, you know, beyond just being able to do the deal, you know, the actual legal work, drafting the documents, knowing the terms, knowing market, you know, we can do all that. But I think what really sets us apart and what has really driven our practice into the stratosphere is kind of the matchmaking approach that we take to dealing with independent sponsors. We’ve really developed a very deep knowledge of the independent sponsors on one side, as well as the capital providers on the other side who like to invest alongside independent sponsors, who are open to doing that. There are certain funds that simply say, you know, it’s not in our business model, our LPs won’t tolerate paying too little to carry.
But there are several other investors, private equity funds, who are willing to pay that, those two levels of carry as long as it makes sense in the overall economics of the deal. There are institutional investors, insurance funds, family offices, etc, that really use this as a pretty effective outsourced business development model, to have the independent sponsor go out and find the deal and bring it to them. And if the economics makes sense, you know, these, we find that these deals get funded. And so we’ve developed a real deep knowledge of folks that invest in independent sponsor deals.
And so a lot of times a good example would be an independent sponsor will come to us with a deal and say, you know, I found one, I’ve got it under LOI, but now I need $50 million of equity or what have you. And I don’t know where I’m going to get that from, and who would be the best fit for me. And so we as a, as part of our business development model, we know, kind of who the best fits would be for a deal of that kind, and can help plug the independent sponsor in to the capital providers that, from our knowledge, or you know, would be most interested in that kind of deal. You know, that kind of size, that kind of industry, etc, and make those warm introductions and allow those conversations to happen.
And really, that happens, you know, we’re not a broker dealer, we don’t take a fee for that. We only make money when we bill hours for legal work performed. This whole matchmaking thing is really just a perk to being part of the McGuireWoods network. And you know, it’s a, it’s great for the independent sponsor, it’s great for the capital provider, and it keeps us close to deal flow, and it keeps folks really appreciate it. And so, you know, a lot of times we’ll get hired in that transaction, sometimes we won’t. And it just, we’ve made friends in the community who will say great things about us, and we’ll get hired by somebody else. So it’s just it’s great for our business model. And it’s been a true game changer for us.
Patrick: Yeah, it’s a real world example of doing well by doing good. And this community is growing, but it’s very, very fragmented. And when I first met McGuireWoods, I, I thought about and said, gosh, you have all these people that are independent, all these professionals that are all out there. Is there any way you can get such a fragmented community together and form a community? Sure enough, McGuireWoods has their independent sponsor conference. Let’s talk about that real quick. What is it and just what happens at these things?
Jeffrey: Sure. So this year, will be, I forgot whether it’s year three or four, we had a little bit of interruption due to COVID and had to call it off for a year or two. But last year, we resumed the conference, we had about 900 attendees. The idea was to bring together capital providers and independent sponsors. And if you don’t fit in one of those categories, we actually don’t allow anyone else to join. So, you know, other types of service providers and ancillary folks that you might find that like an ACG, or an AM&AA, we try to keep it to just independent sponsors or capital providers. Because the focus of the conference is really deal making and the deal professionals meeting each other and facilitating those one on one conversations.
We do have content that we that we present and, you know, different topics and thought leadership and discussion topics, breakouts, etc. And I think there’s value in that. But the true value, I think, that most folks find in this conference is the real focus on doing those one on one meetings. And we have a speed dating app that target folks to make one on one meetings, not just you know, capital provider to independent sponsor, but to really narrow it even further, and say, you know, I’m a, I’m an independent sponsor, who likes these particular deal sizes, and these particular industries and these types of capital providers. And allow those folks to meet up with capital providers who are very targeted matches for them.
And so, you know, ideally, someone who comes to our conference isn’t just having 25 blind meetings in two days, they’re having 25 very targeted meetings with folks that like the same types of investment opportunities as them. And so we’ve gotten really great feedback from folks on both sides. Independent sponsor and capital provider, that it really like it’s drawing from, I think it drew from roughly 40 states and four countries last year. It’s not merely a regional conference. Folks are flying in from all over the country, and getting those targeted meetings. And so we have gotten great feedback, then it’s, it’s achieving those ends.
And that was, that was ultimately the goal is to facilitate deal flow, to foster some sorts of sense, some sense of community, but to get folks who are doing deals to meet other folks who are doing deals in similar spaces. And so that that way that, you know, we can we can give them the most value add out of that, that two days out of their schedule that they’re taking to be with us.
Patrick: What’s the average, I mean, you’ve got a wide swath of independent sponsors and a wide swath of deals now over the last couple years. With independent sponsors, what’s the relative size of these deals in terms of enterprise value?
Jeffrey: They typically tend to be between $20 and $100 million in enterprise value. We do see deals smaller than that. We do see deals larger than that. And I think, really any, any good deal that someone structures properly and gets under LOI for for a fair price, we do see deals get funded. So I would say, you know, a good deal is going to get funded. That’s not going to be the impediment to getting the deal done. But most of the deal activity we do see is in that that $20 to $100 million space.
Patrick: Okay, well, one of the things that’s facilitated a lot of these deals getting successfully done has been the parties have been able to transfer a lot of risk out of the, out of the transaction. And that’s, you know, shifting off the risk to an insurance company through a product called rep and warranty insurance. There have been developments in the market where rep and warranty used to not be available to deals under $100 million. They come way, way down in market. I’m just curious. I mean, you know, don’t take my word for it. But Jeff, good, bad or indifferent. In the independent sponsor world, how has rep and warranty insurance performed?
Jeffrey: I think it’s similarly to the way that it’s been used in private equity, and that those deal sizes really have and continue to move down in enterprise value for you know, when is it available. Anytime there’s a deal below, let’s say, or above, sorry, $30 million enterprise value, I’m seeing rep and warranty insurance used a vast majority of the time. I’ve seen deals as low as $5 million. There’s some specialty products out there now, for smaller deals. There’s underwriters willing to move down market.
You know, I think it’s probably worth kicking the tires on in nearly any deal unless it’s really small, to at least look at what the pricing would be and how the dynamic would work. The big advantage in rep and warranty insurance is being able to push a lot of the risk or breaches of reps and warranties to the insurance company. And I find that in these independent sponsor transactions, in those deal sizes, most of the time those sellers are going to be involved in the post closing operation of the company in a very material way. A lot of times they’ll be buying from a founder and the whole thesis of the transaction will be the independent sponsor and its capital provider will take a majority stake, but that the founder will continue to have a meaningful rollover equity stake and operate the company on a go forward basis.
And so if that founder is your seller, it’s, you know, it’s kind of icky and not terribly great business to be making claims against that founder or seller, who’s now you’re relying on to operate the business. And so to the extent that you can push that economic burden to that off on a, on a third party, that’s great. And then just every seller loves the clean exit. The cleaner we can make it, the better. And so it’s a it’s a good product for all of M&A and really no different in an independent sponsor lead M&A transaction.
Patrick: That’s a perfect summation. And the other thing that’s nice is the development of the industry now. There are products out there that can insure deals as low as a million dollars in enterprise value up to $30 million on one front, which fills a gap that was there before. Because that that’s an area of really, really high need. Now, Jeff, when we were talking about the conference, it’s grown quite a bit. And now you know, about how many attendees are we expecting? And let’s talk about just logistics for, you know, again, when it’s happening, and if you’re gonna register, register early.
Jeffrey: Sure, yeah. So we had about 900 attendees last year, we’re tracking to roughly the same. And that maxed out actually our space for fire code purposes. We had to turn folks away who registered late. So I would encourage folks, if you’re hearing this podcast, and this conference seems like something that might be worthwhile to you, I would encourage you to get out there and register. Both the space as well as the hotel capacity in uptown, Dallas, filled up last year.
So the, in order to register, you’d go to independentsponsorconference.com. And there’s a registration link. There’s also some thought leadership that that is out there on that site, you know. And if you’re an independent sponsor or capital provider who invests in independent sponsored transactions, yeah, I’d be happy, you know, for anyone who wants to reach out to me and ask questions about, you know, what am I seeing? What, how do I do this? What’s the process? You know, we’ve done this a whole bunch of times before, I’m happy to guide you through it.
At those early stages, we’re typically not billing hours, we’re just helping the community and planting seeds. And you know, maybe that develops into a legal client attorney relationship, maybe it doesn’t. But part of what we like to do is, is foster that community and watch it grow. That helps us, it helps the sponsors, it helps the capital providers. So I’d say don’t, you know, don’t hesitate to reach out. There are almost certainly things that we can do to help in ways that are going to make sense for everybody.
Patrick: And I just a logistical thing, because there are a lot of, everybody’s got busy schedules. But one of things that helps is the factor of who’s going to be there. Because if these people are going to be there, I’m, I definitely have to be there. Are you going to have like an attendee list or anything accessible that people can reference? Or is that, you just have to wait for registration?
Jeffrey: So I want to say it was it was roughly 1/3 independent sponsors, 2/3 capital providers last conference. And so that, that’s probably a fair guestimation for what it’ll be this time. Anyone who registers will get the list of that is that is also registered. And we actually do a survey of folks for what kinds of deals they look at. And that is made, I’m not sure whether we made that solely through the app or whether we provide that information more generally. But that information is made available so that folks can make very targeted meetings. Like I said, that survey helps us better connect folks with targeted connections at the conference.
Patrick: Oh, great. Well, Jeff Brooker of McGuireWoods. This is the McGuireWoods Independent Sponsor Conference is held. I’m sorry, I didn’t emphasize, this in Dallas. And it’s October 25th and 26th. Please go to their website. Check it out, because it’s a fabulous, fabulous expanding community. Jeff Brooker, thanks for joining us today.
Jeffrey: Thank you, Patrick. Thank you. Thanks for having me.
Jeffrey Brooker | An Inside Look at the Independent Sponsor Conference