Why Capital Advisory Firms are Vital

Despite efficiency in capital markets, one aspect that remains incredibly inefficient is an independent sponsor wanting to find a capital provider.

On the surface that comment seems paradoxical. After all, there are independent sponsor conferences with literally THOUSANDS of capital providers in attendance who want to connect with indie sponsors and see deal flow.

The issue, however, is a question of efficiency and investment parameters.  

First, considerable how many PE firms, family offices, institutional investors, SBICs, and other capital providers have a stated goal of wanting to invest in independent sponsor transactions. Their interest might be sincere, and the professionals might be highly experienced and knowledgeable, but the success of closing a deal with any individual party is fairly low.

Said plainly, capital providers spend more time turning deals down than any other activity they do during their year! Each of these firms are looking for their "diamond in the rough". They will review 500 deals per year to invest in 5-10. There are stated investment parameters that must be met based on company size, check size, industry, location, and situation, among others. Then there are other intangibles that factor in such as internal bandwidth, are they between funds, did one of their partners have a bad experience in this industry, have they done too many indie deals this year already, etc. They may still want to "see" the deal, whether because of intellectual curiosity or to pad their deal flow stats (which LPs will undoubtedly ask them for), even if there's a <1% chance they will do it. In short, the hit rate is low with even the most credible of firms. 

Meanwhile, the independent sponsor needs to find the right partner, with best terms, in a timely fashion. Once the deal is near LOI stage, it's a race against time to find capital, especially if you want the partner to fund a portion of the diligence expenses. The deal is effectively on hold until capital can be soft-circled, which means third-party diligence can't proceed, which means deals fall apart. 

Yes, the indie sponsor could put deal materials together, set up a data room, reach out to parties via email or calls, solicit term sheets, and run a process. They may get lucky and the first 5 phone calls they make results in an interested party, just like when you are house shopping the first few houses you visit are perfect. More likely, however, is that they need to make 10 phone calls, or 15, or 20, and next thing you know deal momentum is lost as the sponsor gets bogged down in capital outreach instead of keeping the seller warm and pushing ahead with other aspects of diligence. Having to call 20+ parties becomes even more necessary if deals have a "story" to them, which often times deals signed up by independent sponsors do.

The services offered by firms like Orono Capital Partners (OCP) offer the solution to independent sponsors: cost-efficient, timely outreach and follow-up, ability to leverage an extensive network of pre-vetted capital providers, and the use of a competitive process to get better terms. OCP can do the dirty work of making multiple follow up calls and emails, sending NDAs and tracking responses, having intro calls, and narrowing the field from 100+ to a manageable number (e.g. 5-10) most interested parties. All for less than the cost of attending 1 conference, plus a deferred fee payable upon a successful outcome. 

As the independent sponsor marketplace continues to gain momentum, we expect firms like OCP to play an even more prominent role facilitating conversations between sponsors and capital providers so that even more transactions can close. Contact us today to schedule a call and learn more.