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Private equity investing is no longer reserved for firms with dedicated funds. Because fundraising for private equity firms has become a longer, more arduous process, many investment professionals have decided to focus on doing deals without the expense and time consumed by a dedicated fund. Working with and competing against independent sponsors is becoming more mainstream. “The independent sponsor model has gained credibility,” says Stephen Ellis, a founder of the Stratford-Cambridge Group, an independent sponsor firm. “Lenders are reaching out to me for meeting in a much more significant way than ever before. We are also seeing partners leave private equity firms to be independent. It’s a growing group, and everyone, including the investment banks, are recognizing it.” Here are four independent sponsors that have found success, completing transactions on a deal-by-deal basis.

Akoya Capital Partners, LLC

Max DeZara learned about the private equity business by placing C-suite executives into portfolio companies of private equity firms. After selling his business to the Whitney Group in 1998, DeZara stayed on for a while, but decided he was ready to try something new. In 2004, DeZara founded Akoya Capital. The Chicago, Illinois-based firm’s strategy originally was to partner with operating partners who had deep industry expertise.

“These people had a perspective on how to create value and execute a buy-and-build strategy,” says DeZara. “Between 2004 and 2009 the firm was able to complete four platform deals across multiple sectors. In 2010, the firm narrowed its focus.”

Today, the firm invests in specialty chemicals, industrial manufacturing, valued-added distribution, professional information services and consumer foods/products. These sectors were selected based on the expertise of the partners. For example, Don Stanutz, executive chairman of the firm and the specialty chemical sector leader, spent 20 years working at Texaco until it was sold to Jon Huntsman in 1993, and then he worked more than a decade with Huntsman Corp. Lou Nieto, the consumer foods sector leader, was president of the consumer foods division at ConAgra Foods prior to joining Akoya.

Like many other independent sponsors, Akoya got started by partnering with private equity firms to complete deals. However, today the firm works with a small number of family offices and SBIC funds on a deal-by-deal basis. “Our process is evolving. We are having very detailed discussions with family offices and other investors who are frankly looking for an alternative to the traditional limited partner/general partner relationship,” says DeZara. “While there are no guarantees, we have a high degree of confidence we could raise a fund, if that was our intention. The end game is to cultivate relationships and have go-to investors who can be our anchor investors in each deal.”

To date, the firm has completed 11 platform acquisitions and some add-ons. The firm spends most of its time sourcing deals. “We have target segments and a business development and research team that is actively focused on deal generation,” says DeZara, adding that 12 of its acquisitions have come through proprietary channels with no adviser representation.

ICM Products Inc., a specialty developer of silicone polymers, emulsions and defoamers, is a company that Akoya found through its network and purchased on a proprietary basis.

“It was an under-resourced business and we had a specific point of view on how to grow this business by adding strategic, operational and human capital resources in addition to just providing capital, which is what many private equity firms do,” says DeZara. “They wanted a business partner as well as a liquidity event.” 

Akoya bought the company and moved the founder and CEO to the role of scientific officer, product development. Akorya recruited a new CEO, chief financial officer and sales organization. “The company was doing $20 million in revenue and had 20 employees when we bought it,” says DeZara. “Today, with organic growth and two add-on acquisitions, the company is approaching almost four times that revenue and has 165 employees across several global locations. We transformed this business….That’s the type of deal we like to do.”

Consumer Growth Partners

Richard Baum co-founded Consumer Growth Partners with two partners in 2005. Baum had been an equity research analyst covering the retail and consumer sectors for Goldman Sachs and other banks for 15 years prior to founding the firm. His partners were traditional private equity investors. “My partners and I were interested in doing something a little different, more concentrated in retail and consumer,” says Baum. “I was interested in the private markets, and we decided to form Consumer Growth Partners.”

When the firm was formed, the original idea was to raise a dedicated fund, but the firm didn’t have an attributable track record of the partners working together, so institutional investors weren’t clamoring to invest with the new firm. “We kept hearing that we should just do a couple of deals. We were seeing good deal flow, but didn’t understand how we could we do a deal without committed capital,” says Baum.

A banker had told the firm about the concept of a fundless sponsor and introduced the partners to a handful of traditional private equity funds who agreed to back them if they found a good deal. “That’s how we got started. We had a few handshake relationships and made our first investment at the end of 2007,” says Baum. The firm completed six transactions by the end of 2012 using this model and has partnered with Palisade Capital Management, the Walnut Group and Banyan Mezzanine Funds private equity firms. By 2012, New York-based Consumer Growth had strong relationships and a track record, and was able to get some family offices start investing with them on a deal-by-deal basis. Family offices have been increaslingly investing directly in deals.

Consumer Growth Partners isn’t interested in raising a fund anymore. The firm has several family offices interested in their deal flow. Baum and his partners like the flexibility that comes with being an independent sponsor. “We remain very involved with the companies post-transaction and focus on helping the companies where they need help,” he says.

Consumer Growth Partners can take a controlling or non-controlling stake in a company. The firm can invest in companies that have as little as $3 million Ebitda or as much as $100 million Ebitda, exceeding the range of most private equity firms. Unlike a typical PE fund, the firm’s investment results are not comingled because every deal might have a different set of investors.

Consumer Growth Partners has exited four of its investments. Often, the firm sells to a private equity firm that wants to take the company to the next level of growth. In 2007, Consumer Growth Partners invested in Shoe Sensation, a retail chain of family footwear and accessories. In 2015, Consumer Growth Partners sold the company to private equity firm JW Childs. In 2009, the firm invested in Baskins, a retail chain of Western, work, and weekend wear headquartered in Houston. In May 2013, Consumer Growth Partners sold the company to Boot Barn, a portfolio company of Freeman Spogli.

Rotunda Capital Partners

The team at Rotunda Capital Partners became independent sponsors almost by chance in 2008. In the midst of the financial crisis Allied Capital fell apart. The business development company had a sizeable portfolio—more than $2.5 billion of private equity deals. Allied was under pressure to reduce costs, divest portfolio companies and restructure. John Fruehwirth and Dan Lipson left Allied Capital and founded Rotunda Capital in 2008 with the idea of buying some of Allied’s portfolio companies. Rotunda went on to buy one of the companies— Worldwide Express, a subprime lender based in Seattle. The partners at the firm put up personal capital to complete the acquisition, as well as raising capital from family offices. In three years, Worldwide’s revenues tripled and Ebitda grew fivefold. The company was sold to Quad-C Management Inc. in 2013.

Over the last eight years, Rotunda has closed on nine platform investments, including two from Allied; completed several add-on investments; and exited three investments. Rotunda continues its independent sponsor model and raises capital on a deal-by-deal basis from wealthy individuals, large family offices and several institutional investors, including a large bank and a well-established university endowment.    

Rotunda focuses on investing in logistics, distribution, specialty finance and business services companies with Ebitda of $3 million to $15 million. However, being an independent sponsor with fewer limitations allows the firm to explore deals outside of its niche sectors and size. “Industry specialization is important today, but the flexibility to invest in a variety of capital structures and sub-segments of our core sectors is terrific,” says Lipson. “We don’t get boxed into a specific type of deal and can structure the investment to meet the needs of the sellers.” 

Overall, Lipson believes being an independent sponsor is an advantage. “We can do minority, majority, early-stage or late-stage investments, which you can’t always do at a fund. We also get to spend time working with the management teams of our portfolio companies to build better businesses, rather than being forced to move onto the next deal because we have a predetermined timeline to put money to work.” The partners can also put a considerable amount of their own money into a deal so their interests are aligned with their investors.

However, Lipson realizes being fundless does have disadvantages. Management fees can vary as portfolio companies are bought or sold. “It’s fine for the partners. They can deal with it and prepare for it, but it’s hard to build the infrastructure to help source and manage the portfolio with the choppiness,” says Lipson. And while Rotunda has never had a broken deal, those expenses would likely come directly from partners. The other issue is having to depend on your potential funding sources in good and bad economic times.

“Downturns and recessions are great times to invest, but your funding sources might not be liquid at that time or they may want to hold off, which can present an issue,” says Lipson.

For these reasons, Rotunda has become somewhat of a hybrid independent sponsor. They did not raise a traditional fund, but did partner with a large endowment to help build the firm and move faster to close deals. “The new approach allows us to maintain our independent sponsor model and raise capital on a deal-by-deal basis from our existing investors, but having a funded partner providing fees allowed us to hire two new senior associates and expand both the Washington, D.C., and Chicago offices,” says Lipson.

Rotunda sold two companies in 2013 and another in 2015, which Lipson says were “great outcomes. We made money for all the family offices that invested with us and they have all chosen to continue to invest with us…. Finding funding hasn’t been the issue; it’s finding great deals.”

The Stratford-Cambridge Group

“We do not have any current plans to raise a fund, but to continue to do deals on a deal by deal basis,” says Stratford-Cambridge’s Ellis. “When we started seven years ago I think the name ‘independent sponsor’ had a negative connotation, but that has changed considerably. I have even had successful private equity professionals tell me not to raise a fund. Deal-by-deal is much more accepted now.”

Ellis likes the model because there’s no pressure to invest or exit, and there isn’t the arduous task of worrying about government compliance, which has become an increasingly time-consuming job for private equity firms. “Most firms have a compliance officer today to deal with compliance issues. Compliance and regulatory issues are making raising a fund less and less attractive today,” says Ellis. 

Ellis says working on deals on a deal-by-deal basis is more acceptable today. “Investment bankers used to be hesitant to show us deals because we can’t just make a capital call like a traditional private equity sponsor can. The money is a little less sure, as we have an investor base that can opt in or out. But we found that as we continue to get deals done the concern on the part of bankers is mitigated,” says Ellis. “No banker or lender wants to go down the road with you and find out there is no money. Once you show that’s not an issue you become more credible in this model.”

Plymouth, Michigan-based Stratford-Cambridge Group gets its funding primarily from a network of family offices, high-net-worth individuals—including PE professionals, and institutional investors. “We have an network. When I started doing this, I thought raising equity would the challenge. It’s not. It’s finding the deals,” says Ellis. 

To date, the Stratford-Cambridge Group has completed five acquisitions in the niche manufacturing space, which is Ellis’ background. He owned an industrial distribution company prior to starting the firm. “Niche manufacturing is where my network and knowledge is and that’s where our investment base’s knowledge is too,” says Ellis. The firm has yet to exit any of its investments.

Stratford-Cambridge is typically looking at deals with $1 million to $5 million Ebitda. While these are considering micro-cap deals, Ellis says he is often competing against traditional private equity firms for assets. “We may be looking at a platform acquisition and they are looking at the same deal as an add-on acquisition,” says Ellis. The firm’s investment in Speedgrip Chuck, a manufacturer of work-holding components for the precision machining industry, is a typical investment for the firm. The owner had passed away and the management team was running the company and needed a partner. “The investment bank running the process knew this was fit for us and we bought the company in December 2015,” says Ellis. “The deal has been off to a great start.”

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