Understanding acquisition financing for “Sponsors” – professional investors backed by private equity
What is a “Sponsor”?
In the world of Mergers and Acquisitions (“M&A”), a “Sponsor” is the entity executing transactions and investing cash equity into an acquisition. There are various types of investors, with different sources of equity:
- Committed Private Equity Funds: what is typically thought as “private equity”, raises money from large institutions such as pension funds and endowments, is run by managers and makes multiple investments usually within a limited time frame (usually 7-10 years)
- Family Office: an entity founded to invest the money of a single, or a few, families that created generational wealth (often by selling a business to a PE group!), run by hired professionals or family members
- Independent Sponsors: an individual or group of individuals without committed capital, experienced in buying and operating businesses, sources cash equity for each deal from investors (including committed PE funds and family offices), some Independent Sponsors worked as mid-level employees of large PE funds
Why Sponsors Buy Businesses
Everyday we hear about the stock market – where anyone can buy an equity stake (shares) in a publicly traded business. A much larger part of the U.S. economy is outside the public markets, from the hairdresser renting a single chair to multi-billion dollar family owned businesses. Within that wide range are smaller businesses ($5-50MM annual revenue) that produce lots of cash flow, are very desirable investments – and are being sold by their owners. The Sponsors we work with at Main Street Bank are buying those businesses, and want to borrow money to finance the transaction.
Depending on the type of Sponsor, they may want to hold the business indefinitely, getting a return over time by paying down debt and taking dividends. Other Sponsors focus on taking a successful business that has operated the same way for many years and applying the latest technology, new processes and focused financial management to become more profitable – and more valuable. Ambitious Sponsors with access to lots of investor cash might be highly acquisitive, seeking to first buy a business that has already developed a strong management team, compelling sales and a stable back office and then acquiring a series of competitors in a short time period, executing a “roll-up” within a specific industry. When the business has reached a certain size and scale, it is sold to a larger PE group or business – earning a healthy return for the investors.
How Main Street Bank helps Sponsors buy businesses
The team at Main Street Bank focused on providing the loans that help Sponsors close transactions is called “Sponsor Finance”. The loans originated by the team have important differences from many other loans at the Bank. Because the business owners are often a pool of investors, with no single investor owning a majority or controlling the business, personal guarantees are not practicable to market.
Many very valuable businesses that generate above average cash flow have few or no assets, such as real estate or equipment. Some great businesses don’t even have invoices (aka accounts receivable) – customers pay in advance. These businesses can be great borrowers – but without any assets the Bank can take as liquidatable collateral.
Finally, businesses all across the country are bought and sold with buyers from all over the world. By working with experienced, well-capitalized buyers that are acquiring great companies anywhere in the U.S., Main Street Bank Sponsor Finance sources 100+ opportunities each year and selectively lends into the best transactions.
Of the dozen loans closed since 2023, when the Bank started the Sponsor Finance group, all but one loan were acquisitions of an existing business by new owners. In this case, the credit worthiness of the buyer is not the focus of our credit analysis, instead we evaluate the certainty of the business – under the new owners – to generate the cash profits needed to repay the loan.
Value Proposition of the Sponsor Finance team
On time and on terms. Selling a business is usually a once in a lifetime event for the business owner, and is an expensive, complicated and risky undertaking for the business buyer – not all acquisitions succeed. Often the Bank is the single largest contributor of cash to the transaction – without the Bank, the deal does not close.
The Sponsor Finance team, with experienced lending and banking professionals, seeks to appropriately qualify the loan request and manage the process to meet the required timeline of the buyer and seller. By creating certainty for buyers the Bank is creating value – and a great reputation in the market.
Meet Brent
With over 20 years of diverse credit product experience, Brent specializes in empowering businesses through acquisitions and recapitalizations, particularly for privately owned companies, private equity groups, family offices, and independent sponsors.