Independent Sponsor Model - Worth It?
Hey all - have been looking at LMM and a few independent sponsors. Received an offer from an independent sponsor, great comp (high end of market, especially for LMM). Does joining this realm of PE exclude you from future opportunities/progression in broader PE?
I understand independent (fundless) sponsors are different in that they don't invest from pooled funds, LP engagements, have to raise on deal by deal basis etc. However the team is great, culture looks very chill and like mentioned comp is above market (get co-invest on deal by deal basis, too).
As someone who is jaded about big name PE/IB (been there done that) and all that comes with it, would this be a good opportunity to explore while staying in a investor role?
Work at an independent sponsor.
I think it's a great "after-big PE" step if you want to remain an investor. I think it does kind of exclude you from opps and progression within the fund world, but I don't view that as a negative. I think it's more of the progression to go that route especially if your firm can easily raise capital. You get most of the positives (and some negatives), but for the most part I think it's a net positive. There's a lot of IS around who came from the fund world because it got so tiring/political/AUM collection-driven as opposed to returns-driven. Some will stay that way for the rest of their careers, because they like doing what they do, the deal-by-deal nature, and the ability to be more of your own boss. Some will use that as a bridge to a fund. It depends. But I do think that once you go IS, it's hard to go back to the fund world just because of the pros.
And plus, if it's a great team and the culture is chill, isn't that what you worked hard for? To be in an investment role with a better work life balance?
Thanks, appreciate your points. I guess my main concern is going the IS route, having a change of heart, and then not being able to re-recruit into traditional PE. Even the LMM / non-brand funds of the world.
I think you should be fine. The skill set of investment evaluation / deal execution are largely the same. If you're not as senior and don't have fundraising responsibilities, it's largely the same job. The fundraising side is completely different though as you're likely not dealing with the same set of LPs (endowments and foundations, FoF, etc. vs. family offices, PE funds, HNWI, etc.)
There will likely be some questions should you re-recruit, but in the end I think you'd be fine if you've got the deal experience. But then you've got to ask yourself - at that point, barring some bad situations at the IS, do you really want to reset the economics clock?
I think the interesting thing to ask the independent sponsor is if they intend to stay that way long term or eventually launch a committed fund. Could change your potential comp path meaningfully...
This independent sponsor I'm talking to is looking to raise an SBIC fund and use that to go out and raise an actual fund down the road. Does this change comp potential/horizon in your opinion?
As in with a newly formed fund, you're "locked in" to working there longer?
The grass is always greener…on the plus side you get to focus and go in big on the really attractive opportunities without overdiversifying. One deal 10x the size is just better in almost all respects than 10 small deals.
The cost is having to juggle negotiations on two fronts (deal execution and fundraising) at the same time which is a real constraint on speed and flexibility. Every deal needs to be no brainer enough that whoever you’re raising from doesn’t risk their career committing to it and you’re basically herding a bunch of neurotic cats unwilling to commit on their own always glancing to see what the other cool kids are doing.
If you’ve ever griped about your IC being political or unwieldy imagine replacing that with a bunch of self important LPs that control lots of other peoples money and act like big swinging dicks but by definition can’t see what you see or do what you do.
In what situations would LPs struggle to see things the same way that you would? Any examples?
Also, how are LPs able to control peoples money? I thought they are passive investors in the fund? Is it different for Independent Sponsor funds?
Lots of things require a judgment call - do you just pay up on a deal with the view that growth will bring the valuation down? Are there problems that make a deal cheaper and are they actually resolvable? Your judgment may be correct but it draws on experience and expertise that investors may not have. Will they agree? What will it take to convince them? In a blind pool they make a call on your ability and let you pull the trigger when you are convinced. When you raise around a single deal they get a chance to second guess everything.
Many LPs are not investing their own money. Pension fund invests on behalf of beneficiaries. The people you interface with are not investing their own money that they earned by creating value and being great investors with great judgment. It's just a very large amount of money entrusted to them, which makes them important to you but not necessarily well equipped to understand your thesis and see what you see.
Agree that it won't be hard to go from IS to committed-fund PE, unless you're trying to do different strategies or size of businesses (i.e. going from 10m EBITDA platforms to 100 is a bit of a different ball game, granted sounds like you have a big PE-background so likely not an issue).
A highly underrated benefit of IS is deal-by-deal carry. You don't have to wait 7-10 years (post fund formation) for carry payouts. You do a good deal and exit in 2 years? Get paid. A lot of junior folks really underestimate how much this matters, especially as you think about long-term career progression, the likelihood that you'll move to a few different firms in your career, etc.
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