Is this offer from an independent sponsor fair?
I've recently received an "offer" from an independent sponsor to join him in sourcing and execution on deals in the LMM space ($3m - $). Would be curious to hear all of your thoughts to see if this offer is fair, whether it makes sense for me to take it and if I'm missing anything.
Some background info:
- 1.5 years experience in M&A / Growth Equity in a small shop in a niche industry + 1 year experience in strategy @ startup.
- Since the start of the year, I've gone independent and am taking a career break. I have set up a small M&A advisory shop working on small equity raises and deal origination. I'm also putting in motion my own independent sponsor shop focused on building a portfolio of businesses in the micro PE range (<$2m in EBITDA)
- He's an experienced PE investor with 20 years of experience who can teach me the nuts and bolts of doing a PE deal. Most importantly teaching me how to do a deal as an IS. We also get along very well and he seems like he genuinely cares about my career development.
- He has a fairly good track record, for the three investments they have done over the last 5 years (which is quite low, admittedly), they should deliver 25%-30% IRRs on all their deals upon exit. Larger track record for realized investments is around the ~25% mark.
- My aspiration is to eventually be able to tackle an IS deal in the LMM space by myself. I've taken steps to set up a shop to do this independently, but I realize that it wouldn't hurt to work under someones guidance who can teach me more.
- I'm inherently attracted to a higher risk/reward profile financially. I realize I am young, live modestly and have some savings behind me so I can take risks that others may not be able to.
- Source, originate and execute on deals within the $3m - $10m in EBITDA range.
- The arrangement is low salary / very high upside in the form of bonus / carry should a deal close.
- I'm being paid a base, although it is very low. It is however enough to cover my living expenses and I do have some savings behind me.
- Sourcing fee between 1% - 2% of cheque invested depending on quality of introduction
- Deal-by-deal carry depending on value add anywhere between 5%-20%
- E.g, let's use round numbers -> we deploy $10m in equity. If I directly originated -> $200k to me. If I can genuinely add value in a board position -> 10%20% carry on a 3x return over 5 years -> $500k-$800k in carry.
A cherry on top:
- The MD at the IS is thinking about raising a fund within the year with three other experienced partners in the LMM space around the $100m range. They have secured a $50m anchor investor and are currently talking to another $50m anchor investor.
- There is a strong possibility that I can join the fund at inception in the associate / senior associate capacity.
- They have only executed on 1 deal in the last 3 or so years as an independent sponsor. This to me seems extremely slow given the dealmaking environment in the last 5 years. I would've assumed they could have got at least 3-4 deals in that timespan.
- I have concerns about the current deal making environment. Assets seem to be ballooning everyday and I am concerned we, for reasons not just limited to ballooning valuations, cannot complete a deal whilst I'm working for him.
- Base is low and so the opportunity cost is high relative to if I were to go down the route working for an actual fund with a solid base + bonus (albeit probably little to no carry)
- Does this arrangement seem fair given the risk/reward?
- If it's not fair, which parts don't seem fair and should I renegotiate?
- What else should I be vetting in this offer and him / the independent sponsor?
- What am I missing?
Apologies guys if this is a bit long but wanted to get my context out there with all its nuances - thanks!