Structuring Independent Sponsorship in M&A: Deal Terms

Management Fees, Promote and Carried Interest, Equity Return Hurdles, Sponsor and Fund Involvement Post-Closing

Recording of a 90-minute premium CLE video webinar with Q&A


Conducted on Wednesday, June 9, 2021

Recorded event now available

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Course Materials

This CLE course will discuss M&A transactions in which independent sponsors collaborate with traditional private equity and other funding sources in M&A transactions and portfolio management post-acquisition. The panel will discuss exclusivity, non-circumvention and other upfront concerns, sponsor management fees and promote, governance and the related the roles of the parties post-closing, and more.

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.

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Outline

  1. Independent sponsors: background and emergence
  2. Private equity fund collaborations: mutual benefits
  3. Issues to address in the sponsorship agreement
    1. Exclusivity for the sponsor and the PE investor
    2. Management fees and other compensation to be paid to the sponsor
    3. Equity interests issued to private equity investors
    4. Promote and carried interest: hurdles and waterfalls
    5. Relative roles of independent sponsors and investors post-closing
    6. Covenants not to compete; non-circumvention

Benefits

The panel will review these and other important questions:

  • How does a PE investor benefit from partnering with an independent sponsor when pursuing an acquisition?
  • What are the typical provisions in sponsorship agreements?
  • Should the economics of the partnership be finalized before the transaction is commenced?
  • What is the market regarding the equity interest awarded to the sponsor (with a focus on return hurdles and waterfalls)?
  • How does governance in an independent sponsor portfolio company typically work (with a focus on both affirmative and negative controls of the parties)?
  • What are the roles of the independent sponsor and PE investor post-closing?

Faculty

Gilson, John
John C. Gilson

Member, Private Equity
Moore & Van Allen

Mr. Gilson represents private equity sponsors, independent sponsors, fundless sponsors, search funds, self-funded...  |  Read More

Miller, Michael Ryan
Michael Ryan (Mike) Miller

Member, Corporate
Moore & Van Allen

Mr. Miller represents domestic and international private equity, venture capital and search funds, independent...  |  Read More

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