Fellow monkeys,
I am curious to understand what is your view of the independent sponsor model (for those not familiar here's WSO guide), particularly for LMM PE. I've been recently at a PE conference here in Europe where there was a strong appetite for this, particularly from family offices, private banks and the likes. Some speakers even mentioned that some asset managers are targeting to have half of their illiquid exposure to direct investments (with illiquid representing half of the total AuM). If this is the case, the inflow for the next years in this asset class will be terrific.
I agree direct PE investments are better than funds for the obvious reasons, but this requires that the people taking decisions at LP level have a relatively different set of skills and experience in deciding which deals to back, especially if their usual approach is to back uniquely established GPs. As the people currently in these seats are probably not well equipped in this sense, I wonder if they will ultimately invest in the wrong opportunities which will sooner or later bring to a bad reputation for the direct PE investments.
What will happen is unknown by definition, and it's for sure also a matter of being optimistic or pessimistic, but is there any key driver you think should be considered to understand how this thing will unfold?
There are puts at takes.
Pros:
- LPs like them because it gives you direct access to emerging managers without the risk (they you can write a smaller check to a guy who might go raise a fund one day, if the company does well, you have access to that eventual fund)
-GPs like them because carry is done deal by deal and not at fund level. There are also some independent sponsor deals I’ve seen where you can get better than 20% carry over certain hurdles (have seen 35% over a 5x MOIC)
-You can keep your overhead low and don’t have to worry about staffing up certain functions like you would at a regular fund (probably don’t need a fund CFO, certain administrative positions, etc etc)
Cons:
- Raising capital is hard and it makes your diligence process slower than tradition funds
-some investment banks refuse to show independent sponsors dealflow as a result (why would they show a deal to someone without a fund when they can give it to 500 people with a fund?)
-you’re pulling management fees out of your company since you don’t have a fund (typically it’s 10% of EBITDA with a ceiling), but if you’re company underperforms you’re screwed
-More uncertainty in deal closing process given the fundraising aspect
All said I think the asset class will continue to grow, but I probably wouldn’t join one as a junior employee
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