The Rise of the Independent Sponsor

The independent sponsor form of private equity is on the uptick as evidenced by the many the articles written on the topic which speak to the growing prominence of the model.  And though we at KCG may have been on the earlier side of this most recent wave, we are not alone, and we believe this trend is here to stay.  That said, there are also many different forms and styles of independent sponsors, so we thought we’d use this post to speak a bit about the model itself and our similarities and differences.

Fundamentally, an independent sponsor seeks to buy strong companies with potential at a fair price like any other PE firm.  However, we do so by funding each company independently, aggregating specific pools of capital partners for each opportunity.  While this in our opinion aligns us greatly with our stakeholders in the transaction, it is also a concentrated bet for us and them.  Simply put, it’s not for everyone.  A traditional PE fund employs diversification by investing in anywhere from 5 – 15 companies (or more) per fund.  When you have that many children in a portfolio, it necessarily impacts your behavior – a topic perhaps for another post.

But at the outset, for the seller, most independent sponsors look and feel pretty much like a traditional PE firm.  At KCG, however, we further differentiate ourselves after the transaction by taking a long-term approach.  We seek to partner with management teams and companies that we think we wouldn’t mind being married to for a long time – because we just might be.  We are specifically not trying to “buy and flip” our businesses, but rather striving to grow and build great companies that can sustain over the long-run.  While are in the minority in this regard, we think focusing ourselves, our management team partners and other stakeholders on building a great business over the long-term by applying good management and PE principles is the best, and most fun, model for generating great long term-outcomes.  And you cannot pursue this style of investing in a fund – fund investors want their money back as fast as possible – which also necessarily impacts the PE fund’s behavior and M.O. with the company and team.

The reality is, there is no “right” or “wrong” way to practice principal investing, and quite honestly most sellers don’t care.  That’s why we seek to find owners of exceptional companies who are looking to transition to partners / buyers who will care about their business and their people as much as they do.  They are hard to find, but we think their ranks are increasing as well.