2023 Independent Sponsor Report - How Far We've Come

Page 1

Citrin Cooperman is among the largest, full-service assurance, tax, and business advisory firms in the United States. 50 Rockefeller Plaza New York, NY 10020 (HQ) info@citrincooperman.com citrincooperman.com 2023 INDEPENDENT SPONSOR REPORT How Far We've Come

Independent Sponsors: The Rise of a New Asset Class

When we launched our first Independent Sponsor Report in 2017, the independent sponsor sector was the "Wild West" of private equity, as one of our esteemed contributors, Bruce Lipian of StoneCreek Capital, aptly described it. Back then, there was no real playbook, there was little standardization of deal economics, and independent sponsors often faced an uphill battle to convince sellers and capital providers of their value.

It was our hope, with our initial report and the reports that followed in 2018 and 2019, that we could shed a light on the largely unchartered landscape of the independent sponsor sector. We sought to underscore the value and expertise of independent sponsors, to share their insights and advice, and to provide benchmarks for fees and carry so that independent sponsors and capital providers alike would know what the market would bear.

We took the pulse of the sector in the midst of a global pandemic in our 2020 Independent Special Report: COVID-19: Weathering the Storm, showcasing how independent sponsors were rising to meet unprecedented challenges, doing what they do best by increasing their engagement, adapting to uncertainty, and pivoting as needed.

Throughout the years, we have watched as independent sponsors have shown how agile, resilient, and adept they are at managing risk and uncertainty, even in tumultuous times. Year after year, they have shown their mettle and proven their staying power.

Now, as we take stock of the sector just over five years since our first report, our survey respondents and contributors describe a sector that has expanded and a landscape that has shifted.

The number of independent sponsors has grown exponentially, underscoring the lure of the model. No longer are independent sponsors considered “fundless sponsors,” as they once were called. Now, the advantages of being an independent sponsor are well-understood — the ability to drive and direct your destiny, the flexibility to tailor strategies and appropriately time exits to take advantage of market conditions, the freedom to negotiate deal-by-deal economics, and the potential for substantial returns for all involved parties.

Capital providers who were once wary of independent sponsor transactions are now embracing the sector. Moreover, there is increasing interest in the asset class from institutional investors, a change which many did not expect five or 10 years ago. Independent sponsor fees and carry, which were once questioned and subject to significant pushback, are now more standardized and accepted.

This year’s report details many of these changes, providing further benchmarking and insights that show how far the independent sponsor asset class has come.

With this path behind us, we look forward to seeing what the next five years will bring.


The Research

This is Citrin Cooperman’s fourth annual Independent Sponsor Report.* This year’s Report incorporates results from an online survey of independent sponsors and from interviews with leading independent sponsors and capital providers.

This year, through our online survey, 237 professionals in the independent sponsor sector shared their views on topics such as deal flow and mechanics, capital sources, deal economics, liquidity events and industry outlook. The survey was conducted in October 2022, and interviews with leading independent sponsors and capital providers were conducted in December 2022.

One hundred and ninety-eight respondents identified themselves as independent sponsors. The majority of these respondents (57 percent) are at firms that have been in existence six years or more. The breakdown in independent sponsor respondents’ (also referred to as “IS respondent/s”) seniority has been roughly consistent in each year of our annual survey.

Most firms (62 percent) represented in this year’s report have two or three principals, and 25 percent have only one principal. The majority of firms (64 percent) have one nonprincipal professional staff member.

All major regions of the continental United States (U.S.) are represented by our respondent population.

FIRM LOCATION OF SURVEYED INDEPENDENT SPONSORS Northeast Southeast Southwest Midwest West 35% 24% 23% 25% 20% 4 | 2023 Independent Sponsor Report CITRIN COOPERMAN
*Citrin Cooperman issued Independent Sponsor Reports in 2017, 2018 and 2019. In 2020, we released our Independent Sponsor Special Report: COVID-19: Weathering the Storm.
FIRM LONGEVITY: Less than 1 year 1-2 years 3-5 years 6-9 years 10 years or more 6% 22% 20% 37% 15%

This year, our IS respondents are investing in or targeting companies with a higher EBITDA than in any other year of our survey. Forty-four percent of this year’s IS respondents have invested in or targeted companies with a typical EBITDA of $5 million and over, whereas in 2017 only 26 percent of respondents invested in or targeted companies with that EBITDA or higher.

In the past year, the majority of IS respondents (54%) closed transactions at 4-6x EBITDA, the most common multiple range for transactions closed in each year of our IS survey. Significantly, this year, more IS respondents (41%) have closed deals at 6x and over than in any prior year of our IS survey.

“We have seen many experienced private equity professionals become independent sponsors, especially as of late. This may in part explain why this year’s report reflects independent sponsor transactions in a higher EBITDA range with greater multiples. These former private equity professionals are used to pursuing larger transactions, and many seek out larger transactions as independent sponsors. In addition, this trend – to higher EBITDAs and greater multiples – also reflects the maturation of the independent sponsor sector as a general matter. Many experienced independent sponsors have moved upstream and are investing in larger companies, having already established solid relationships with capital providers and proven their value.”


2017 2018 2019 2022

Under $5M 74% 67% 68% 56% $5M to under $10M 22% 27% 28% 36% $10M to under $15M 1% 2% 3% 5% $15M and over 3% 4% 1% 3%
6 | 2023 Independent Sponsor Report CITRIN COOPERMAN
MULTIPLE FOR TRANSACTIONS CLOSED IN PRIOR YEAR 2017 2018 2019 2022 Less than 4x 10% 7% 5% 8% 4x to under 6x 62% 54% 56% 54% 6x to under 8x 16% 19% 18% 32% 8x or more 1% 6% 4% 9%

Looking Back: The Changed Landscape

As this year’s report illustrates, so much has changed in the independent sponsor landscape since we first launched our Independent Sponsor Report in 2017.

The category has certainly matured, with independent sponsor transactions becoming almost their own asset class. From the deal sourcing side, sellers and their advisors are more confident in independent sponsors’ ability to close deals and thus are more likely to engage with them.

An increasing number of capital partners are also realizing the value that independent sponsors can bring.

“Private equity firms, mequity firms [mezzanine funds that provide debt and equity] and family offices now have designated professionals who just target independent sponsor transactions, whereas just five years ago many of them were still trying to figure out what an independent sponsor was,” said Max DeZara, Founder and Managing Partner, Akoya Capital.

“In the past, private equity groups didn’t want to go to their LPs with a capital call for independent sponsor deals because LPs would question why their private equity firm was piggybacking on someone else and incurring more fees,”said Bruce Lipian, Co-Founder and Managing Director, StoneCreek Capital. “But now, more LPs understand the value independent sponsor deals can bring to the portfolio.”

Likewise, there is greater acceptance of independent sponsor deal economics. Information-sharing, such as that provided by these reports, has provided greater transparency, which in turn has facilitated greater standardization and led to less negotiation around fees and carry.

As one of our IS respondents noted, fees and carry are “more broadly established and accepted,” and, as another observed, they are also “easier to negotiate because precedents have been set and more capital providers are familiar with working with independent sponsors.”

8 | 2023 Independent Sponsor Report

“The number of independent sponsors has skyrocketed in the last 10 years. Back then, maybe there were a couple hundred of us, and now there are probably a couple thousand.”

9 | 2023 Independent Sponsor Report
– Richard Baum, Managing Partner, Consumer Growth Partners

Liquidity Events

Not surprisingly, many (83 percent) of younger firms (defined as those IS firms in existence five years or less) represented in our survey have not had a liquidity event. Among older firms (those in existence six years or more), 18 percent have experienced more than five liquidity events. This year, 15 percent of firms returned an average realized equity multiple greater than 5x.


83% 15%




10 | 2023 Independent Sponsor Report CITRIN COOPERMAN


Never had a liquidity event: 24%


Not Applicable: 19%

Greater than 5x: 15%





Deal Sourcing

As in years past, boutique investment banks or business brokers are the most significant source of deal flow, cited by 85 percent of respondents in this year’s survey.


Service providers remain the second most popular source, cited by 36 percent of respondents, followed closely by company owners/management, regional or national investment banks and operating executives. Independent sponsor respondents noted that, as they became more experienced, they were more likely to use proprietary deal sourcing and referrals from brokers and other intermediaries than they were when they started out as independent sponsors.

Boutique investment banks or business brokers: 85%

Service Providers (e.g., accountants, attorneys, consultants, recruiters): 36%

Company owners/management: 33%

Regional or national investment banks: 29%

Operating executives: 29%

Industry research / cold calling: 20%

Other: 8%

P/E firms (e.g., funds, sponsors): 5%

TRANSACTIONS CLOSED AS AN INDEPENDENT SPONSOR # Closed Platforms Add-Ons None 12% 36% 1-2 18% 21% 3-5 38% 17% 6-10 19% 9% >10 13% 17% 12 | 2023 Independent Sponsor Report CITRIN COOPERMAN


# Anticipated Platforms Add-Ons None 2% 12% 1-2 84% 57% 3-4 13% 19% 5+ 1% 12%

Looking Forward: Independent Sponsor Partnerships

Several of our contributors noted that, in the past few years, they have seen more examples of independent sponsors or independent sponsor firms partnering together for a particular transaction. In some cases, this is a partnership between a veteran and novice independent sponsor. In other cases, two veteran sponsors may partner because of complementary skill sets such as operational expertise, capital access, or geographic proximity. A partnership requires giving up a share of the economics, but it can be highly accretive in the right circumstances.

“The partnership model has a lot of benefit for newer independent sponsors,” said Mr.Baum. “One of the hardest things for any independent sponsor and, especially for a newer independent sponsor, is to raise capital. By partnering with someone who is established, a new independent sponsor automatically gets access to a network of vetted capital partners.”

“Such a partnership can certainly flatten the learning curve for the new independent sponsor,” explained Mr. Lipian. “However, there needs to be compatibility for it to make sense, and it's preferable if they come to us before they've secured the deal. That's when we can add the most value.”

15 | 2023 Independent Sponsor Report CITRIN COOPERMAN

Capital Sourcing

The top capital sources for this year’s independent sponsor respondents are family offices (cited by 63 percent of respondents), “mequity” funds (cited by 50 percent), and high net worth individuals (cited by 47 percent). These have been the primary sources of capital each year of the IS survey.



“It is not surprising that family offices continue to top the list of capital partners for independent sponsors, as they have in prior years of the survey,” noted Ms. Gadant.

“While they may be more risk-averse than some other capital sources, they provide non-control capital, unlike many buyout, SBICs and co-investing mequity funds. They also tend to be one of the more patient capital sources.”

“Family offices continue to be good partners for independent sponsors, particularly smaller family offices that don’t have large staffs,” Mr. Baum underscored.

“Many of these family offices appreciate independent sponsors because they can serve as an extension of the family office’s resources.”

However, family offices may start to pull back from independent sponsor transactions in the near term.

“In this uncertain economic climate, family offices can be skittish about the economy and more tentative, so I expect the bar will be higher in terms of the deals they will find attractive going forward,” warned Mr. DeZara.

After family offices, mequity funds are the second most popular capital source among our respondents.

“For newer independent sponsors, mequity funds can be great, especially for transactions of $2 to $5 million EBITDA,” advised Mr. DeZara. “Like family offices, they are less apt to seek control and marginalize an independent sponsor like a private equity fund might.”

However, in some cases, the economics with a mequity fund might not work in an independent sponsor transaction.

As Mr. DeZara explained, “With mequity funds, we realized that if our investment was over $5M to $6M EBITDA, we’d outstrip the mequity fund’s ability to support our transaction. Their capital was quite expensive, and the pressure to meet their yield goals impeded our ability to meet our growth goals for the company.”

Though a bit lower down on our respondents’ list of capital providers, SBICs remain attractive to many independent

Family offices Mequity funds (mezz funds that co-invest) High-net-worth individuals SBIC funds One-stop funds that underwrite all debt & equity 50% 63% Buyout funds Own funds Institutional investors BDCs Other 22% 24%
47% 13% 34% 3% 31% 2% 16 | 2023 Independent Sponsor Report CITRIN COOPERMAN

sponsor respondents, with 34 percent citing SBICs as a top capital source.

“In our opinion, SBICs are one of the most attractive sets of capital providers because they provide a hand in glove fit for an independent sponsor,” said Mr. Baum. “SBICs often lack the resources necessary to do the heavy lifting and therefore value an independent sponsor’s contribution,” he added.

Mr. Lipian agrees. “SBICs who allocate a portion of their capital to control deals are a great complement to independent sponsors. They are mezz-oriented in their DNA, but, unlike private equity groups, their organizations are typically not staffed to handle the oversight tasks after the deal closes. A credible independent sponsor who can assume a GP role post-close provides significant value to them,” he explained.

Going forward, private equity may become a more influential capital partner. There is an increasing acceptance of independent sponsors by private equity, and more private equity firms have launched efforts dedicated to sourcing independent sponsor transactions.

“Private equity funds have a capital commitment for their limited partners, of which the unused capital commitment goes away if they haven't invested all of that capital in that time period,” Mr. Lipian explained. “As a result, in either a recessionary environment, when it can be harder to find good deals, or a frothy market when purchase price multiples are prohibitively high, independent sponsors become particularly relevant if they are able to secure reasonably priced deals where the risk/reward balance is attractive.”

One of the downsides is that private equity is often control-oriented. In addition, if the private equity group and the independent sponsor both

charge a management or transaction fee, the private equity fund’s LPs rarely want to pay seemingly “duplicative” fees.

Looking Forward: Capital Sources

In the coming years, we expect to see more institutional investors providing capital to IS transactions.

“Many clients of wealth management firms want access to private equity deals,” said Mr. DeZara. “These firms may have $5 million to $20 million in investible assets and may want to invest $500,000 to $1 million in a transaction. In addition, very few are taking additional fees. Independent sponsor transactions provide a great way for these wealth management firms to co-invest in private equity transactions on behalf of their clients. I expect we’ll see a lot more of this going forward,” he added.

Brian Kerr, Partner and Co-Founder, Prolign Capital LLC, agrees. “I think we’ll continue to see more institutions invest in independent sponsor transactions, particularly those with experienced independent sponsors. This will translate into more alternatives and better terms for independent sponsors, ” Mr. Kerr explained.

In addition, if more capital invests in IS transactions, it may allow independent sponsors to have “greater certainty of execution, which will allow independent sponsors to transact on larger companies,” said Zoltan Berty, Partner and CoFounder, Prolign Capital LLC.

57 37 46 30 24 49 19 16 67 32 53 32 24 46 24 11
Firms five years old or less Firms six years old or more Family Offices High Net Worth Individuals One-Stop Funds That Underwrite All Debt & Equity Buyout Funds Mequity Funds SBIC Funds Own Funds Institutional Investors
17 | 2023 Independent Sponsor Report CITRIN COOPERMAN

The Capital Provider Perspective

Proprietary deal flow is not enough

“We always want more than just a deal source. We’re looking for a partner who has the right personality and can bring the value the deal needs, such as bringing in an executive, sitting on the board, and being very proactive with the company.”

Heather Madland, Partner, Huron Capital, agrees. “We don’t want a deal dropped on our desk; we want to be involved during negotiation of terms and due diligence. Partnership with our independent sponsors is essential throughout the process, ” she explained.

Huron Capital seeks out sector-focused independent sponsors who can bring investments “right down the middle of the fairway in terms of aligning with the sectors we target,” said Ms. Madland.

18 | 2023 Independent Sponsor Report

Zoltan Berty agrees. “Our underwriting methodology looks at the track record and experience of a potential independent sponsor partner. We do a lot of informal background checking to assess how they have been to work with, especially in difficult situations. In those circumstances, we want to see that they’ve doubled down on their level of engagement."

“One of our biggest due diligence items is trying to determine what our independent sponsor partners will do if a deal goes sideways. We want to understand – will they be a collaborative thought partner or will they be more sharp-elbowed.”
Proven track record, especially in tough situations, is also an important differentiator
19 | 2023 Independent Sponsor Report CITRIN COOPERMAN
– Heather Madland, Partner, Huron Capital

Broken Deal Costs

As in prior years of the IS Report, independent sponsors shoulder or share broken deal costs in most cases. Thirty-nine percent of IS respondents pay broken deal costs with their own funds. To decrease the burden of broken deal costs, 30 percent of IS respondents say their service providers discount their fees, and 14 percent of IS respondents say their service providers roll their fees into the next deal.

“Division of responsibility for broken deal costs tends to vary based upon the capital partner,” said David Zawitkowski, Partner, Citrin Cooperman. “Private equity firms are the most likely to share or bear the burden of broken deal costs, mequity firms may share them, but others such as family offices will not bear them.”

Because they partner with family offices, Akoya Capital underwrites all deal costs and bears all the risks. “We decided that broken deal costs were a risk we were willing to bear,” explained Mr. DeZara.

Brian Kerr notes that assigning responsibility for broken deal costs is a bit of a balancing act. “We are open to covering a percentage of broken deal costs,” he acknowledged. “But we don't believe there is a complete alignment of interest if we cover all costs. On the other hand, if an independent sponsor is footing the full costs, it creates a real incentive for them to close as the costs accumulate.”

Equity funding source covers broken deal costs

Independent sponsor covers broken deal costs

Independent sponsor covers broken deal costs prior to partnering with the equity funding source and equity funding source covers broken deal costs thereafter

Independent sponsor and equity funding source share broken deal costs

Target company agrees to cover some of the broken deal costs in the event the target company cancels the deal

Other 19% 3% 7% 23% 22% 26% 20 | 2023 Independent Sponsor Report CITRIN
HOW INDEPENDENT SPONSORS PAY FOR BROKEN DEAL COSTS I pay with my own funds 39% Service providers roll fees into the next deal 14% Service provider gives discount and IS pays with own funds 30% Other 4% Not applicable (I don’t pay for broken deal costs) 13% 21 | 2023 Independent Sponsor Report CITRIN COOPERMAN

Deal Economics

As this year’s report shows, independent sponsor economics, which were once questioned and subject to significant pushback from capital providers, are now more standardized and accepted. According to one of our respondents, terms “are more market and better for the IS community.” Others agreed, observing that there are “fewer negotiations with [capital] providers” and “equity providers are more willing to share economics.”

Not surprisingly, 61 percent of our IS respondents who have been in business three years or more believe it is easier to negotiate deal economics with capital providers now, versus three to five years ago.

“The three-legged stool of independent sponsor economics – the closing fee, the management fee and the promotehave all crystallized, as have expectations around them,” emphasized Mr Berty. “Independent sponsors and capital providers both understand what the market is and will be in terms of fees so there’s more consistency in the ask and expectation around them.”

“There used to be more pushback from some capital providers in terms of fees and carry, but now both are

noted Mr. Baum. more standardized and accepted, which is a good thing for independent sponsors,” added Mr. Gallinson.

Despite increasing standardization, bespoke economics –especially when it comes to carry - still remain, as this year’s findings also illustrate. Significantly, this year, we have also seen an increase in the minimum and maximum carried interest rates earned by respondents.

Some suggest that independent sponsor economics have reached a plateau.

I don’t think we’ll see that much movement in fees or carry in the near future,” cautioned Mr. Baum. “I think the numbers and calculations are pretty baked in at this point.”

“It’s as if we went from the Wild West of fees and economics to becoming more standardized year by year,”
22 | 2023 Independent Sponsor Report CITRIN COOPERMAN

61 percent of IS respondents who’ve been in business three years or more believe it is easier to negotiate deal economics with capital providers now, versus three to five years ago.

Closing Fees

Closing fees are more likely to be a percentage of transaction value than in prior years of the survey. This year, 74 percent of IS respondents use a percentage of transaction value for their closing fee, whereas in our 2018 survey, only 57 percent of IS respondents calculated their closing fees this way.

Forty percent of IS respondents always roll a portion of their closing fee into equity, and 26 percent always roll it in full. These percentages have been roughly consistent each year we have asked this question.

As in prior years, the majority of IS respondents typically earn closing fees between $251,000 to $500,000. However, this year, the percentage of respondents receiving higher closing fees significantly increased, with 27 percent of respondents earning closing fees over $500,000 (versus only 15 percent citing this number in 2019, the last year of our survey). This jump is not surprising, given that this year’s IS respondents have closed transactions with a significantly higher EBITDA multiple than in prior years.

Less than $100,000 7% $101,000-$250,000 26% $251,000-$500,000 40% Greater than $500,000 27% HOW
% of transaction value 74% Flat number 18% No closing fee 6% No closing fee but higher year 1 management fee 2% 1%: 11% 2%: 55% 3%: 11% >3%: 1% N/A: 22% 24 | 2023 Independent Sponsor Report CITRIN COOPERMAN
Always a portion of the fee is rolled into equity 40% Always in full 26% Sometimes 20% Never 10% Other 4%

Equity Contributions: A Snapshot



Contribute own funds

Raise equity from other investors Depends

Roll closing fees into equity

30% 6% 55% 8% 11% 62% 28%
26 | 2023 Independent Sponsor Report



100 percent upon closing Less than

After equity sponsor receives predetermined return

Tiered vesting based on the performance


55% 16% 2% 27% 10% 9.5% 9.5% 22% 13% 36%
2% 16-20%
Greater than
11-15% 27 | 2023 Independent Sponsor Report


Annual Management Fees

As in years past, the largest percentage of IS respondents (this year, 45 percent), calculate their management fees as a percentage of EBITDA with a floor and a cap. If that fee is typically a percentage of EBITDA, it’s most often five percent (utilized by 65 percent of respondents). As a dollar amount, the majority of IS respondents charge management fees of $251,000-$500,000.

“Most often we see five percent management fees with a floor and a cap,” said Mr. Kerr. “If a company hits a rough patch, we want the independent sponsor to devote sufficient time and resources to the company. Having a floor helps ensure the independent sponsor can continue to do that.”


2% 5% 3% 3% 4% 2% 5% 65% 6% 6% N/A 19% Percent of IS Respondents EBITDA Percentage 28 | 2023 Independent Sponsor Report CITRIN



Flat number 11% Flat number with escalations 7% Percentage of EBITDA with no floor and no cap 5% Percentage of EBITDA with no floor but with a cap 5% Percentage of EBITDA with floor and cap 45% Other 7% Percentage of EBITDA with floor but no cap 20%
2% 5% 35% 4% 51% 3% Less than $100,000 $ $ $ 500,000-251,000 N/A - We haven’t closed any deals 250,000-101,000 > 500,000
29 | 2023 Independent Sponsor Report CITRIN COOPERMAN
N/A - We don’t charge management fees

Carried Interest

Throughout the years of the IS Survey, carried interest has been the area of independent sponsor compensation with the greatest variability. While that remains true this year, certain trends have emerged.

This year’s survey results suggest that independent sponsors are getting better economics than they did several years ago, especially when it comes to carry.

This year, 57 percent of our respondents receive at least 15 percent carried interest on a typical deal, whereas in our 2019 survey, only 49 percent received at least 15 percent as their minimum carried interest on a typical deal.

The typical maximum carried interest for our IS respondents has increased as well. Just under half (49 percent) of this year’s respondents are able to receive maximum carried interest of 25 percent or more on a typical deal, versus in 2019, when only 37 percent of respondents could receive 25 percent or more.

MINIMUM AMOUNT OF CARRIED INTEREST ON A TYPICAL DEAL (2019 VS 2022 SURVEYS): MAXIMUM AMOUNT OF CARRIED INTEREST ON A TYPICAL DEAL (2019 VS 2022 SURVEYS): % Carried Interest 0-9.9% 10-14.9% 15-19.9% 20-24.9% 25% or more % Carried Interest 5-9.9% 10-14.9% 15-19.9% 20-24.9% 25% or more 2022 1% 5% 8% 35% 49% 2019 1% 3% 4% 45% 37% % of respondents % of respondents 2019 2022 14% 33% 18% 29% 2% 9% 28% 24% 29% 4% CITRIN COOPERMAN



Carried Interest Examples

Some independent sponsor respondents said their carried interest arrangements vary from deal to deal. Others detailed specific arrangements. Examples included:

• After 6% preferred return, 15% carry. 20% carry from 1525% IRR. 25% carry after 25% IRR.

• After 8% preferred return, 10% carry. Receive 15% after 2x, 20% after 2.5x, 25% after 3.5 or 4.0x.

• After 8% preferred return, receive 25% carry. Over 3x MOIC, receive 30% carry.

• After 10% preferred return, 10% carry. 15% preferred • return, then 15% carry. 3x MOIC, then 20% with catch up or 30% with no catch up.

• After 10% preferred return, 20% carry or after 2x MOIC, 20% carry. With fund backers: 3-tiered carry starting at 10% for 2x and going up to 20% for 4x.

• Less than 15% IRR, then 0% carry. More than 15% IRR, then 15% carry. 2.5x-3.5x MOIC, then 20% carry. Greater than 3.5x MOIC, then 30% carry.

• 10% hurdle, 10% carry. 15% hurdle, 15% carry. 3x MOIC with 20% catch up or 30% with no catch up.

• Either flat 20% or tiered IRR or MOIC rising from 10% to 25% as returns increase.

• 20% after return of capital. 35% after 3x. 50% after the investor has received 5x MOIC.

BEFORE THE CARRIED INTEREST KICKS IN? 33% 63% 31% 23% 11% 9% 8% 9% 4% 3% 6%
66% 16% 18% Yes, in full No Yes, in part MOIC hurdle 8-9.9% hurdle rate IRR hurdle N/A Comination of IRR and MOIC hurdles 10-11.9% hurdle rate 12%+ hurdle rate No hurdle rate No hurdle rate Other 5-7.9% hurdle rate
31 | 2023 Independent Sponsor Report CITRIN COOPERMAN

Economic Outlook

Many of our respondents and contributors expect challenging times for the sector through the end of 2023. Economic uncertainty, price pressure, and less leverage may make the deal sourcing and capital raising environment more competitive. On the bright side, the near future may provide some unique opportunities for independent sponsors.

As a preliminary matter, economic uncertainty will mean that it is more important than ever for independent sponsors to focus on maximizing the value of their existing investments.

“Independent sponsors need to be working to ensure that their current companies are set up for potential volatility,” Ms. Madland explained.

“When there’s a slowdown that’s delaying enterprise value creation or when the core investment thesis is challenged, we need our independent sponsor partners

to be more engaged,” advised Mr. Berty. “They need to work with their management teams to identify cost cuts and negotiate with lenders or, alternatively, play offense and try to create value through inorganic initiatives,” he added.

“A recessionary environment may, in some ways, favor more experienced independent sponsors, because they may be able to react quicker in challenging situations,” Mr. Berty said.

The current environment presents a unique opportunity for independent sponsors who can take advantage of slightly lower valuations and more accessible deals, whereas before they were outbid by funded sponsors,” observed Mr. Gallinson. “It’s not a huge window of opportunity, but it is a good time for independent sponsors.”

Many respondents are optimistic about deal-making opportunities, with 71 percent believing target company valuations will be more attractive for independent sponsors through the end of 2023 than they were in 2022.

Some respondents noted that there is still a disconnect between reality and expectation for sellers, but many

expect the economic environment will help reset seller expectations.

“Valuations in a recessionary environment are a balancing act, where you have to determine what valuation will lead to a transaction and what is too low for a seller,” Mr. Berty advised.

“Typically, we see a flight to quality in a recession,

32 | 2023 Independent Sponsor Report CITRIN COOPERMAN

which may translate into fewer deals getting done, and that may increase competition for independent sponsors, ” said Ms. Gadant. “However, a recession may also result in troubled balance sheets for many otherwise good companies. That presents a perfect scenario for independent sponsors to seize upon, especially while many private equity firms are still sitting on the sidelines.”

“As valuations come down to more attractive levels, it is a chance for independent sponsors to get better –and potentially oversized – economics,” advised Mr. Gallinson. “This wasn’t the case even a year ago, when many deals were won at auction with a higher price. As more funded sponsors come back ready to invest later this year or in early 2024, independent sponsors will have a tougher time winning transactions and getting outsized economics,” Mr. Gallinson warned.

Another factor that may strain deal flow is limited debt capacity.

“While the broader credit markets have seized up, there’s still activity in the lower middle market with buyers raising minimal senior debt with equity and using

a structure like a seller role or earnout to help create value for the seller,” noted Mr. Berty.

While our respondents and contributors are not yet seeing a shortage of capital, they have observed a half turn downward of leverage and are concerned that trend may continue.

“I think the credit markets will have a profound impact on deals in the near future,” advised Mr. Kerr. “People still have a certain exit multiple they want, but tightened credit markets limit valuation multiples which causes fewer deals to be in the market.”

With debt capacity constrained, Mr. Berty expects to see independent sponsors focus on smaller companies or add-ons because such investments will not be as debt reliant.

The proliferation of non-bank lenders doing independent sponsor transactions has helped address limited debt capacity, noted Mr. Lipian. “And these non-bank lenders are here to stay which is a good thing for independent sponsors. ”

33 | 2023 Independent Sponsor Report CITRIN COOPERMAN

The Next Five Years

Looking forward, we are excited to see what the next five years will bring for the independent sponsor asset class. We, like our respondents and contributors, are very optimistic.

We expect the independent sponsor model will continue to flourish and grow in popularity. We expect more institutional capital will enter the space and bring with it more options and pricing power for independent sponsors. And we expect that independent sponsors will continue to adapt to these and other changes with the same acumen and creativity they have shown in the past.

It is a good time to be an independent sponsor, and we look forward to the next five years.

To learn more, contact Sylvie Gadant.

“Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America, which is itself a regional member of Moore Global Network Limited (MGNL).

34 | 2023 Independent Sponsor Report CITRIN
“I think the independent sponsor model will continue to gain acceptance and flourish and that it will become even more accepted as a recognized asset class.”
- Brian Kerr, Partner and Co-Founder, Prolign Capital LLC

About Our Contributors

Sylvie Gadant, Partner, Citrin Cooperman | (O) 973-218-0500 | sgadant@citrincooperman.com

Sylvie Gadant is a partner with Citrin Cooperman’s Private Equity and Capital Markets Practice and is the Transaction Advisory Services (TAS) practice leader. She coordinates and leads buy and sell-side due diligence engagements for private equity firms, independent sponsors, family offices, and strategic buyers. Prior to joining Citrin Cooperman, Sylvie was the principal-in-charge of the TAS practice at a Top 20 national accounting firm, where she also spent more than 10 years in its audit and advisory practices. Learn more at: www.citrincooperman.com

David Zawitkowski, Partner, Citrin Cooperman | (O) (973) 218-0500 | dzawitkowski@citrincooperman.com

David Zawitkowski is a partner with the firm’s Transaction Advisory Services (TAS) Practice. He has worked with strategic buyers (both public and private) and private equity firms on asset purchases, stock purchases, carve-outs, and growth-equity investments. He also provides post-closing assistance. Prior to joining Citrin Cooperman, David worked in the capital markets groups of bulgebracket and middle-market investment banks. He worked as an equity analyst advising institutional investors, including hedge funds, mutual funds, and pension funds. Learn more at: www.citrincooperman.com

Richard Baum, Managing Partner, Consumer Growth Partners | (O) 914-220-8337 | rbaum@consumergrowth.com

Richard Baum co-founded Consumer Growth Partners in 2005 as a private equity investment and advisory firm with an exclusive focus on middle-market specialty retail and non-perishable branded consumer products companies. He also is a Partner in the advisory firm Founder Solutions that provides a broad range of strategic and operational advisory services to consumer/retail companies that have a transaction in their future but for a variety of reasons may not be ready to take in equity capital at the present time. Learn more at: www.consumergrowth.com and www.founder-solutions.com

Max DeZara, Founder and Managing Partner, Akoya Capital Partners | (O) 312-546-8322 | mdezara@akoyacapital.com

Max DeZara founded Akoya Capital Partners in 2005. He serves as Managing Partner of the company and is involved in overseeing all aspects of the operation. Max has sourced, evaluated, valued, and structured numerous investment opportunities across a variety of industries including manufacturing, professional information services, consumer foods, and specialty chemicals. Max is uniquely expert at partnering with industry-leading executives to develop proprietary investment opportunities for private equity cosponsorship. Learn more at: www.akoyacapital.com

Bruce Lipian, Managing Director, StoneCreek Capital | (O) 949-825-5557 | bruce@stonecreekcapital.com

Bruce Lipian is a founding principal and managing director of StoneCreek Capital LLC. Founded in 1992, StoneCreek is an independent private equity sponsor focused on investing directly in growth-oriented management buyouts. StoneCreek finances transactions on a stand-alone basis with equity provided by institutional investors, family offices, management, and the StoneCreek principals. StoneCreek targets transactions ranging from $10 million to $100 million. Learn more at: www.stonecreekcapital.com

36 | 2023 Independent Sponsor Report CITRIN COOPERMAN

Zoltan Berty, Managing Director, Prolign Capital LLC | (O) 949.269.3254 | zberty@proligncapital.com

Zoltan Berty joined PES, the predecessor of Prolign, in 2018, and brings more than 25 years of transactional experience across multiple industries and diversified markets. Prior to joining PES, Mr. Berty served as Managing Director for Gladstone Capital Corporation, where he originated new investment opportunities and coordinated the due diligence and execution of debt and equity investment transactions. He also has prior investment experience with Caltius Mezzanine, D.E. Shaw & Co.’s Direct Capital Group and CapitalSource Finance. Learn more at: www.proligncapital.com

Evan R. Gallinson, Managing Director, Merit Capital Partners | (O) 312.592.6114 | egallinson@meritcapital.com

Evan Gallinson joined Merit in 2005. Evan previously worked in investment banking with BMO Capital, William Blair & Company, and PriceWaterhouseCoopers, where he focused on mergers and acquisitions advisor work for middle market companies in a variety of industries. Evan received an M.B.A. from Northwestern University’s Kellogg School of Management in 2002 with a concentration in finance. In 1997, he received a B.B.A. from the University of Michigan with a concentration in finance and accounting. Learn more at: www.meritcapital.com

Brian Kerr, Managing Director, Prolign Capital LLC | (O) 610.937.0443 | bkerr@proligncapital.com

Brian Kerr has spent over 25 years working with lower middle market corporations and entrepreneurs on financial and strategic projects, including balance sheet recapitalizations, debt and equity alternatives, leveraged buyouts, and mergers and acquisitions.

Prior to joining PES, the predecessor of Prolign, in 2015, Mr. Kerr was the founder of Clairemont Capital Group, a lower middle market private investment firm. Before forming Clairemont Capital Group, Mr. Kerr was a Managing Director at Cornerstone Capital Holdings and Penn Mezzanine. Learn more at: www.proligncapital.com

Heather Madland, Partner, Business Development, Huron Capital | (O) (313) 446-8485 | hmadland@huroncapital.com

As a senior member of the Business Development team, Heather’s responsibilities include broad market coverage, maintaining a robust deal pipeline, as well as building/leveraging relationships with relevant buyside and sell-side intermediaries. She is also a member of the firm’s Investment Committee. Prior to joining Huron Capital, Heather was responsible for all West Coast new business development for SPP Capital Partners, a NY-based investment bank. Learn more at: www.huroncapital.com

Melissa McClenaghan Martin, President, M3 Strategic Alliances | (O) 917-715-8909 | melissa@m3strategicalliances.com

Melissa advises firms on the creation of business development, thought leadership and women’s initiative opportunities that increase firms’ visibility, reach and revenue. Melissa has 20 years of experience working with financial services firms, and her thought leadership and consulting span various sectors including private equity, hedge funds, venture capital, and real estate. Learn more at: www.m3strategicalliances.com

37 | 2023 Independent Sponsor Report CITRIN COOPERMAN
Citrin Cooperman
clients’ business needs.
alternative practice
independent member of
North America,
is itself a regional member
Citrin Cooperman" is the brand under which
& Company, LLP, a licensed independent CPA firm, and Citrin
Advisors LLC serve
The two firms operate as separate
entities in an
structure. Citrin
is an
of Moore Global
Limited (MGNL).
Issuu converts static files into: digital portfolios, online yearbooks, online catalogs, digital photo albums and more. Sign up and create your flipbook.