Independent sponsors are playing a bigger role in lower middle-market deals, says Richard Baum, managing partner of Consumer Growth Partners.
Unlike a private equity firm, which raises a fund prior to doing deals, Baum is part of the growing camp of buyers that pursue capital after agreeing to be a part of a transaction. New York and Kansas City-based Consumer Growth signs an exclusivity agreement, and then hustles to find the capital necessary to close a deal by reaching out to backers.
Its most recent acquisition was Violife, a developer and distributor of oral and personal care products and accessories. To facilitate the deal, which closed in December, Consumer Growth skipped over the fundraising process and co-sponsored with Banyan Mezzanine Funds, Diamond State Ventures, PMC Partners and Siena Lending Group.
Mergers & Acquisitions caught up with Baum at the Alliance of Merger & Acquisition Advisors' (AM&AA) Winter Conference in Scottsdale, Ariz., where he was a featured speaker.
Are there more independent sponsors sourcing deals in the lower middle market?
Yes and there are a lot of reasons why. You don’t need much to get started. There are virtually no barriers to entry. Since you’re not raising capital beforehand, it’s relatively easier to be an independent sponsor assuming you have M&A experience. They usually come from different walks of life. Some independent sponsors previously worked for PE funds. Maybe they’re former investment bankers that feel they can generate good deal flow on their own. Or, perhaps, they want to get more involved with companies for which they’re raising capital. Sometimes they’re folks who have run their own businesses in the past and feel they have the right operational expertise. But you need to have demonstrated expertise since it’s mainly a question of getting people to trust you. Sellers just want to know that you have the ability to get a deal done.
How is structuring a deal different with a fundless sponsor?
Fundless sounds too much like homeless. We’re called that because we do not have a fund of committed capital. If you’re a private equity fund and raise, say, $100 million and you find a deal, limited partners will send a check for whatever amount you need. We have to find the deal just like a private equity fund but we have an additional thing to do that they don’t. For every independent sponsor there’s a different model. We, for example, have over 300 sources of institutional capital. We also have a lot of informal relationships with funds of one sort or another that have said to us, 'If you find a deal that fits our investment criteria and passes muster with our committee, we will be your investor.' There’s more than one of those in any given deal and we have to select which one will be the best. The alternative, private equity, is to raise a fund which is very difficult and time consuming. It’s an 18-month process, there’s a lot of documentation required and, frankly, you have to have an a proven track record of generating returns. In the world of private equity, the commodity that is in short supply is good deals. Not capital. So we were having good deal flow from the beginning we got good access to the commodity that’s in short supply. Why raise another fund which is going to bring more capital? That’s not what was needed.
Which deal is emblematic of the benefits an independent sponsor brings to a company?
We exited Baskins, a Western-style work wear retail chain, in June. We had bought it from private equity firm Transition Capital Partners (TCP) in 2009. It was a family owned business - a 16 store chain popular in east Texas. TCP had retained an investment banker that was running a sale process. However, he wasn’t succeeding at finding a strategic buyer or financial buyer. We met TCP at a networking event and they told us about their portfolio company and wondered if we could help. So, we stepped up, found a new CEO and put together an investor syndicate that included Banyan Mezzanine Funds, CapSources Funds, Diamond State Ventures and Mid States Capital to purchase Baskins. Jack Gunion was the new CEO. He spent a majority of his career running specialty retail businesses. Together, we doubled the number of stores in four years, 16 to 31, installed good operating systems and brought discipline to the operations. We eventually doubled the size of the chain and sold it to Boot Barn, a western wear retail company that had been acquired by Freeman Spogli & Co. a few months earlier.
What this deal really demonstrates is the ability of an independent sponsor to help the seller and investment banker complete a successful transaction. Look at an independent sponsor as providing a solution to the problem that the owners of the company may have. We can help you get the deal done and beyond that help the company grow.