Private Equity

Being an Independent Sponsor Doesn't Mean Going It Alone

Jon Finger, partner at McGuireWoods, discusses the crucial role he and his private equity team play in a variety of corporate transactional matters, including connecting independent sponsors with capital partners that they might not have access to otherwise.

CCBJ: You and the McGuireWoods private equity team have received quite a bit of attention related to the value you generate beyond pure legal work, including the development of your independent sponsor initiative. What piqued your interest in this lesser-known corner of the deal ecosystem?

Jon Finger: Our team has always focused on being a value-added partner to our network and client base. Whether we were introducing executives or originating investment opportunities, our differentiator as lawyers was evident. Through that process, we came to see the value in connecting independent sponsors with our network of small business investment company (SBIC) funds, family offices, private equity funds, lenders and other capital providers. At the same time, as our broad network of private equity firms continued to expand, we saw many of our contacts spin out to become independent sponsors and we continued our relationship with those deal professionals. Ultimately, this led to many opportunities with independent sponsors, and our practice grew from there, as our private equity experience really allowed us to be an advisor to these clients. Working with these independent sponsors has become a very rewarding part of the practice. The reality is that while there are nuances to independent sponsor transactions, they are not terribly different from the transactions we do for committed private equity funds. It’s allowed us to carve out a nice niche within that part of the M&A environment.

You spearheaded the McGuireWoods Independent Sponsor Transaction Survey. Tell us about the survey and what the results revealed about the impact independent sponsors are having on the broader M&A market.

The survey was borne out of our inaugural annual Independent Sponsor Conference last fall and the really incredible participation we saw. We wanted to leverage that knowledge base, so we decided to elicit feedback on various terms about transactions that involved independent sponsors.

We reviewed the responses from more than 200 submissions and pulled out what we thought were the most compelling data points for a white paper. One of the most illuminating results was the comparatively below-market purchase price multiples that were being paid in these independent sponsor transactions. It was clear that these transactions were highly sought-after by our capital partners – and generally priced quite well relative to market multiples that we see.

Another of the main takeaways from the survey was how often seller notes were present in the submitted transactions. In many cases, the independent sponsors were really able to develop strong relationships with the sellers. That allowed them to find good values and execute in an otherwise hot and pricey M&A market and showed how the sellers truly trusted the partnership with the independent sponsor. This dynamic feeds into how we see some private equity funds, SBICs and other mezzanine funds leveraging the independent sponsor community – almost as an outsourced business development team. At the same time, the independent sponsors are providing family offices, endowments, and other limited partner-type investors the ability to invest directly in these opportunities without going through traditional private equity funds.

In its recent U.S. PE Middle Market Report, PitchBook said, “One trend we can’t ignore is the middle market’s consistent strength over the years,” noting that it looked like 2018 would be another record year, after a blockbuster 2017. What do you think is driving this continued strength, and how long can it continue?

The first place to look is the staggering amount of dollars that are sitting with private equity funds, lenders, public companies, family offices and other investors – that’s just a huge driver in this M&A environment. There is so much money chasing deals that multiples continue to get driven up. As a general matter, broader confidence in the U.S. economy is also a factor, as is the continuing positive impact from the recent tax reform. Corporate profits are at record highs, there’s low unemployment – it’s all contributing to the strength of the M&A environment. At the same time, the aging baby boomer population and sellers’ interest in capitalizing on the current market dynamics provide a continuous supply of investment opportunities.

That said, while I don’t have a crystal ball, I think it’s fair to expect the public markets to have a pullback, along with the potential for a recession in the broader economy, in the relatively near future. While this would certainly change finance markets, the lower middle market and to some extent the mid-market are more immune to these changes than larger mid-market transactions. So I think it’s similar to what we saw in ’07 and ’08: No doubt there was a slowdown, but in the area where we practice, even in a recession and with changes to some of the availability of credit, I don’t really foresee a strong downturn in activity though structure and terms may look different. Hopefully I won’t look back on this and wish I hadn’t said that!

Is there any particular deal you’ve been involved in that you’re especially proud of and which best exemplifies your approach as a deal maker?

I actually have two in mind. The first is a deal that we closed earlier this year for a first-time independent sponsor who was trying to acquire a company in a space he had previously worked in. He was an operator, not a deal guy, which allowed us to really showcase our differentiation as true advisors – whether it was helping him manage the seller, introducing him to potential capital partners, or even advising him on market terms. He said that he was forever indebted to us, and it really validated everything that we’ve been doing with independent sponsors.

And two, we’re actually closing a deal today for an independent sponsor that we connected with their chosen capital partner. I’m paraphrasing, but he told us, “There is no way this deal could’ve gotten done in such a short time frame without you introducing and connecting me with this capital partner.” These guys were first-time independent sponsors, so many of the same dynamics were in play; anytime we’re responsible for introducing our clients to the capital partner for their deals – deals that wouldn’t get done without that capital – that’s really rewarding. That’s what we take the most pride in.

When you and your colleagues from Squire Patton Boggs joined McGuireWoods in Dallas four and a half years ago, the team was described as highly entrepreneurial. What does that mean to you, and how has the group adjusted to its new home?

Being highly entrepreneurial means that you’re always looking for ways to improve upon an already successful model. Our group of lawyers recognized that we needed to take a different approach to our practice if we were going to have the success that we wanted. We were not willing to merely be service providers and wait for the phone to ring from our clients. So we began by aggressively growing our network, adding value to our network, and then sharing our network freely with no expectation of anything in return. Over these years, we have seen this approach pay off, as our client base and network have grown exponentially.

At the same time, we’re helping cultivate the independent sponsor community through our conferences, thought leadership, and introductions to compelling opportunities and capital partners for deals. Being able to identify and capitalize on these needs in the market is a critical component of entrepreneurship. And we’ve done that both in our broader private equity practice and more specifically in our independent sponsor practice.

McGuireWoods has been a fantastic platform for our practice. The collaboration between lawyers and other team members when developing new business and counseling our clients on transactions across practice areas has been stellar. The leadership in both our practice group and the firm generally is totally aligned with doing whatever it takes to grow our practice, and that has really been a huge factor in the success we’ve seen in our Dallas office and in the broader private equity practice. It really has been a perfect marriage.

Jon Finger is a partner at McGuireWoods. His practice focuses on private equity and corporate transactional matters, including mergers and acquisitions, securities offerings and corporate governance initiatives. Reach him at [email protected].

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