I spent several years at a software and technology focused independent sponsor after starting my career in investment banking, working across sourcing, diligence, fundraising, deal execution, and portfolio company work.
Happy to answer questions about how the independent sponsor model actually works, raising capital deal-by-deal, compensation and carry, working on a lean team, career development, and the pros and cons versus traditional private equity.
Thank you for this. A couple questions:
- What level did you enter in and how did the promotion cycle work?
- How many deal professionals did/does your firm have and how has it scaled?
- What were/are your primarily sourcing tactics?
- Compensation and carry mechanics?
Thank you in advance OP.
Sure - see below:
What level did you enter in and how did the promotion cycle work?
Entered as Associate and left as Vice President. Promotions at the end of the year and follow normal cadence. In fact, founders of the independent sponsor spun out from an established PE firm (which is common) so a lot of overlap from traditional PE with hiring/back-office/comp.
How many deal professionals did/does your firm have and how has it scaled?
Four total, composed of 2 senior partners and 2 investment professionals (VP and Associate (me) when I started) with 2 contracted operating partners. We didn't scale which is the nature of the IS model; you basically do 1-2 deals a year and stay at steady state. If you want to scale, you typically go out to raise your first committed fund and leave the IS life behind. This is a very common way that a lot of first time funds got their start - track record proven as IS and then fundraise based on that result.
What were/are your primarily sourcing tactics?
Sourcing was primarily from boutique investment banks (smaller processes) and business brokers, with some proprietary deal flow as well (banker conferences, industry conferences, cold email/call, lawyers, accountants). We averaged 100 deals per year at top of funnel, down to about 4-6 LOIs.
Compensation and carry mechanics?
Lower compensation than traditional PE but still solid. Depends how far along the IS is with investing and fees generated thus far (which is a separate topic around deal fees/structure). Carry however was more than traditional PE (to compensate for lower salary/bonus)- and the pure beauty of being an IS is that you collect carry on a deal-by-deal basis; no waiting around for the fund to clear its hurdle. Each deal has its own hurdle so when you exit, you get paid carry immediately (should the investment be successful of course).
How often would you lose deals in competitive processes by nature of not having committed capital / needing to raise equity on a deal-by-deal basis?
It's a great question because that's always the largest obstacle when trying to win deals as an IS. My firm started off with a small fund (which didn't perform well) and then switched into IS mode. We acquired 3 businesses as an IS with one of them at a 15x MOIC. The fund we raised in the beginning gave us credibility to be in banker processes, and then completing an investment as an IS had a compounded effect. The first deal is always the most difficult to get funded as an IS, but once you do, it's a great example to show banks, founders, etc.
I'm sure some banks purposely excluded us from processes due to no recent fundraising history on Pitchbook, etc. but we also didn't start the IS from nothing to be fair.
If you want more insight on how to navigate the first deal and communicating equity sources to fund deals, let me know.
Thanks so much for doing this, super helpful!! Two questions: why did you end up leaving the IS, seems like you had great economics and great carry? Also how did you think about negotiating comp on carry and base?
No problem.
The founder decided to downsize as he was nearing retirement age and also was well positioned (big carry pool) after the 15x MOIC investment that I mentioned.
Base was a bit below market given the nature of deal-by-deal and fee income associated with that model. However, carry was meaningful and it scaled after each deal closed that I worked on. Once you become more senior you have more leverage and can negotiate a higher percentage of the pool.
What do you do now?
What I find hard about independent sponsors is they often ask investors for a term sheet. This can make it hard because as an LP we are usually term takers. Do you have any advice there?
I'm working with AI labs and also leading a capital raise for a middle market software company. It's contract-work for the time being.
Are you referring to valuation terms or fee/carry economics?
I'd recommend any IS to propose terms to LPs first instead of asking. There's a lot of data out there for market fee/carry terms that any IS can find and the IS needs to be thoughtful depending on the LP and what terms they're used to agreeing to. It should be a conversation/negotiation between the two parties from there. We had a 8% hurdle with 10% carry up to 2x and 15% thereafter (LPs were institutional). If an IS asks you for a term sheet, I'd tell them to provide you a proposal first. The reality is they need you more than you need them in most cases.
If the IS is asking you to help with terms regarding valuation, then that's a negative sign regarding the IS's competence.
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