Independent sponsors are playing a bigger role in lower middle-market deals. As they hustle to find the right family-owned business to back, they’re vulnerable to the same challenges as private equity firms, says Steven Marcus, founder Rainbow Capital. Unlike a PE, which raises a fund prior to doing deals, Marcus pursues capital after agreeing to be a part of a transaction, with the hope that his “big bank” expertise gives him the edge he needs to seal a deal at just the right price. Watch the video with Marcus below, or click here.

Marcus, who founded Rainbow in 2001, also has experience as a private equity investor. Prior to that, he spent 14 years in the high yield bond market and leveraged finance. Among the major investment banks he worked for, are Donaldson Lufkin and Jenrette, Smith Barney Inc., PaineWebber Inc. and L.F. Rothschild Unterberg and Towbin. Over the years, Marcus has been involved in numerous junk bond financings as well as many privately negotiated transactions of debt and equity securities.

What are some of the challenges of being an independent sponsor?

The enviornment is challenging for everybody because the multiples are so high. For an independent sponsor to be able to have an affect in a transaction, at a price that’s competitive with the market, is pretty difficult. It typically takes some specialization in an industry or some industry edge, with perhaps a new management team to really be able to get into a transaction and complete it.

Are there particular types of deals that you’re looking for?

What we call the unicorn deal, I avoid. I know I’m going to be outbid by all the funded sponsors. So I try to find transactions and opportunities that are a little more on the periphery. Maybe a good company with a bad balance sheet, or some ownership issues that need to be changed. I try to come to events like ACG Boston DealSource Select and meet regional or local investment bankers. There’s also the business broker community, which has literally thousands of people with potential deals. I try to find the transactions that not everybody else is in.

Why should a family-owned business choose you? What’s your pitch?

I bring big investment bank experience to the lower middle market. It’s that simple. Those transactions where they’re going to continue to own a business, it’s vital that they have the right chemistry with the sponsor. Not only do I structure a deal around their needs, I also try to be the type of partner that provides help when they want it, but without getting all over them in terms of reporting like some larger private equity firms may require. It’s about finding the right balance.

For more on independent sponsors, see 3Qs With ... Richard Baum, Director, Consumer Growth Partners.