Importance Of Sponsor Fit In Leveraged Buyout Financing

Posted on: September 24th, 2021

leveraged buyout

Independent leveraged buyout sponsors are a diverse group with many of them characterized as fundless or search fund sponsors. Fundless sponsors have no equity money of their own, but first find their acquisition target and then raise equity and debt to close the leveraged buyout.

Fundless sponsors are very focused, high performing entrepreneurs whose primary talent is generating deal flow and selecting a deal that they can get other investors to buy into. Not having equity of their own subjects, them to the vagaries of the equity investor market. Unless the equity investors come onboard, there is no way to close the leveraged buyout. The key piece that fundless sponsors should have in place, prior to sourcing equity or debt is sponsor fit.

Sponsor fit sounds self-explanatory but its meaning is often lost on sponsors in the heat of battle trying to put a deal together. It means the sponsor has specific and relevant expertise about the company or industry they are doing a leveraged buyout in. For example, if the sponsor spent 10 years in a mechanical contracting company and is purchasing a mechanical contracting company, most lenders will see strong fit and have comfort that the sponsor will know what they are doing.

Conversely, if the same sponsor were to acquire a chain of fitness centers, the lenders would question whether the buyer has relevant expertise. Too many fundless sponsors disregard fit when looking for a deal, and often spend time on far flung deals they have no chance of raising leveraged buyout financing for. Lack of sponsor fit is one of the most common reasons lenders pass on deals, and for good reason. Acquiring a company through a leveraged buyout is a risky move.

The change of ownership and the level of leverage creates a high level of change and in some cases, stress for the organization. Post-closing, there are always unknown surprises that come to light such as people leaving or customer unrest. Seasoned sponsors with strong sponsor fit, have a better chance of managing through and successfully leading the company through unforeseen surprises. The more relevant expertise you bring to your leveraged buyout deal as a sponsor, the higher your chances of raising funding and having a successful run.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

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