An independent sponsor (IS) is an individual or group that sources, negotiates, and diligences acquisitions of private companies on an investment-by-investment basis without having a pre-raised, committed pool of capital. Independent sponsors then execute a value-creation strategy with the goal of exiting within a few years. The popularity of IS investments has increased substantially in recent years, yet very little research examines investment characteristics and performance. We survey limited partners who invest in IS companies as well as independent sponsors themselves to better understand these investments. We find that IS investments are mostly done by serial sponsors with multiple partners in industries less represented in larger private equity investments. This suggests the development of an “IS industry” that now provides a professional service in a differentiated market. The typical IS partner has previous work experience in private equity and investment banking with operational and/or industry-specific experience. The representative IS investment has a total enterprise value of between $10 and $50 million and EBITDA between $2 and $10 million though there are many larger and smaller investments as well. Using the data reported by investors, we also perform an analysis of IS investment equity returns and find an average (median) gross TVPI of 2.9 (2.1), along with an average (median) gross IRR of 29%(24%) for fully exited transactions. We benchmark IS investments against gross performance of comparable private investments that are not IS initiated and find that the excess returns are mostly positive (and differences are mostly statistically significant). We find no evidence that IS investments have more downside risk than non-IS investments which suggests that IS investments provide a superior risk-adjusted return.
Greg Brown, UNC Kenan-Flagler Business School & IPC
William Volckmann, Institute for Private Capital
