Structuring Independent Sponsorship in M&A: Deal Terms

Description

The participation of independent sponsors in the lower-to-middle M&A market has grown over the past several years, with traditional private equity investors seeking to co-invest with prominent independent sponsors. A working relationship with a PE firm provides the independent sponsor with an ally and leverage in negotiating an M&A deal. The PE-independent sponsor partnership, however, is nuanced and requires its own negotiation and deal making.

The PE-independent sponsor partnership relationship frequently begins with a sponsorship agreement which often gives the PE fund exclusive funding rights to the deal and gives the independent sponsor non-circumvention protections which restrict the PE fund from negotiating directly with the target company. The parties should also agree on investment size, any splitting of fees, relative equity stakes, and business terms such as the management fee, promote and carried interest provisions, and the closing fee payable to the sponsor (if any).

The independent sponsor principals are generally required to devote a specified amount of business time and attention to the portfolio company following the closing, however, they rarely serve in an officer or employee capacity. The independent sponsor and its principals are also prohibited from engaging or investing in any outside activities that compete with the portfolio company.

Listen as our authoritative panel discusses the emerging role of the independent sponsor in M&A and key terms to consider in structuring a successful independent sponsor-led deal.