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, they want to get more involved with companies for which they're raising capital. Sometimes they're former business owners who 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 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." The alternative, private equity, is to raise a fund, which is very time consuming. It's an 18-month process that requires a lot of documentation and a proven track record of generating returns. Meanwhile, the commodity that is in short supply is good deals. Not capital. We already had 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 highlights 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 hired a banker to sell it, but wasn't succeeding at finding a buyer. At a networking event, TCP told us about their portfolio company. 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, who spent a majority of his career running specialty retail businesses, was the new CEO. In four years, we nearly doubled the number of stores to 31 and brought discipline to the operations. We sold it to Boot Barn, a western wear retail company that had been acquired by Freeman Spogli & Co. What this deal 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 and beyond that help the company grow.