Credit Considerations for Independent Sponsors

Credit Considerations for Independent Sponsors and Their Transactions

?Independent sponsors play a crucial role in the private equity landscape, particularly in the lower-middle market. Unlike traditional private equity firms, independent sponsors do not have committed capital and must raise funds on a deal-by-deal basis. This unique model presents several credit considerations that both the sponsors and their financial partners must carefully evaluate.

?1. Capital Structure and Financing

?One of the primary credit considerations for independent sponsors is the capital structure of the transaction. Independent sponsors typically rely on a mix of equity and debt to finance acquisitions. The ability to secure favorable debt terms is critical, as it impacts the overall cost of capital and the potential returns on investment. Lenders will scrutinize the target company's financial health, including its cash flow, debt levels, and profitability, to assess the risk of extending credit.

?2. Equity Partner Relationships

?Independent sponsors often partner with equity investors who provide the necessary capital for transactions. The relationship between the sponsor and the equity partners is vital, as it influences the governance and strategic direction of the portfolio company. Equity partners may impose specific covenants and performance metrics that the sponsor must meet, which can affect the creditworthiness of the transaction.

?3. Due Diligence and Risk Assessment

?Thorough due diligence is essential for independent sponsors to identify potential risks and mitigate them effectively. This process includes evaluating the target company's financial statements, market position, competitive landscape, and operational efficiency. Identifying any red flags early on can help in negotiating better credit terms and avoiding future financial distress.

?4. Transaction Fees and Costs

?Independent sponsors typically earn fees for their role in sourcing and managing transactions. These fees can include a percentage of the enterprise value or a flat fee. While these fees provide compensation for the sponsor's efforts, they also add to the overall transaction costs. Lenders will consider these fees when assessing the creditworthiness of the deal, as higher fees can reduce the available cash flow for debt servicing.

?5. Post-Closing Governance and Control

?Post-closing governance structures are another critical credit consideration. Independent sponsors must ensure that they retain sufficient control over the portfolio company to implement strategic changes and drive value creation. This control is often negotiated with equity partners and can impact the sponsor's ability to meet debt obligations. Effective governance structures can enhance the credit profile of the transaction by ensuring that the company operates efficiently and meets its financial targets.

?6. Market Conditions and Economic Factors

?Finally, independent sponsors must consider broader market conditions and economic factors that could impact the credit environment. Interest rates, economic cycles, and industry-specific trends can all influence the availability and cost of credit. Sponsors need to stay informed about these factors and be prepared to adjust their strategies accordingly to maintain favorable credit terms.

?In conclusion, independent sponsors must navigate a complex landscape of credit considerations to successfully execute their transactions. By carefully evaluating capital structures, fostering strong equity partner relationships, conducting thorough due diligence, managing transaction costs, ensuring effective governance, and staying attuned to market conditions, independent sponsors can enhance the creditworthiness of their deals and achieve their investment objectives.

?Who We Are

?At Aviara Partners, (“Aviara”), our mission is clear: to provide customized advisory services and tailored capital raising solutions that empower both independent sponsors and funded sponsors. We offer access to a diverse range of flexible capital solutions, including common equity, preferred equity, and debt. What sets Aviara apart is our ability to navigate complex transactions, optimize marketing strategies, and enhance positioning to drive success for our clients. We're dedicated to integrating decades of experience, state-of-the-art methodology and curated outreach into everything we do, embodying a forward-thinking ethos that ensures we deliver exceptional results in today's ever-evolving business landscape.