CITRINCOOPERMAN.COM

INDEPENDENTSPONSOR REPORT - 2017

CITRIN COOPERMAN’S

INTRODUCTION

A decade ago, independent sponsors were still oper-ating on the fringes of the private equity industry. They were relatively few and far between, often fighting an uphill battle to convince companies and capital providers of their value.

But now, significant numbers of independent sponsors have entered the market, wanting to reap the benefits the model provides – better deal economics, more flexi-bility to choose deals and less pressure to exit within a predetermined timeframe.

Greater numbers of sellers and capital providers are also embracing the model, closing more deals with independent sponsors. And these transactions have provided investors access to a vertical and to opportuni-ties largely untapped before - lower middle market companies that can be purchased at lower multiples and with considerable potential upside.

Yet, despite the evolution of the sector, in many ways, it is still the “Wild West” of private equity as one of our esteemed external contributors aptly described. There is no playbook, the first few years are often very lean, and the path to closing a deal is fraught with potential difficulties. It is a path not for the faint of heart.

That is why, through Citrin Cooperman’s inaugural Independent Sponsor Report, we endeavor to shed a light on the sector, to share insights from those who

01 | INTRODUCTION | 2017 INDEPENDENT SPONSOR REPORT

fight the battle each day, to offer recommendations from the trenches, and to identify the rules and practices that independent sponsors use as they soldier on. We are indebted to our survey respondents (comprised of 245 independent sponsors) and our esteemed group of external contributors, both inde-pendent sponsors and capital providers, for sharing their thoughts and experiences with us.

We hope that you enjoy the Report, and we look forward to discussing our findings with you.

Sincerely,

Sylvie Gadant, Partner, Citrin Cooperman

2017 INDEPENDENT SPONSOR REPORT | INTRODUCTION | 02

THE RESEARCH

The inaugural Citrin Cooperman 2017 Independent Sponsor Report incorporates results from an online survey and interviews with leading independent sponsors and capital providers.

* Some statistics used throughout this Report may reflect rounding.

03 | THE RESEARCH | 2017 INDEPENDENT SPONSOR REPORT

Through the online survey, conducted in April and May 2017, 245 independent sponsors shared their views on industry outlook and operational issues such as deal flow and mechanics, capital sources, relationships with portfolio companies and liquidity events. Interviews with leading independent sponsors and capital providers were conducted in June 2017.

The majority of our survey respondents are at firms that have been in existence more than five years. Most firms (59 percent) have two or three principals, and 29 percent have only one principal. The majority have one non-professional staff member. All major US regions are repre-sented by our respondent population, with the largest percentages located in the Northeast and Midwest.

* Multiple responses allowed

Through the online survey, conducted in April and May 2017, 245 independent sponsors shared their views on industry outlook and operational issues such as deal flow and mechanics, capital sources, relationships with portfolio companies and liquidity events. Interviews with leading independent sponsors and capital providers were conducted in June 2017.

The majority of our survey respondents are at firms that have been in existence more than five years. Most firms (59 percent) have two or three principals, and 29 percent have only one principal. The majority have one non-professional staff member. All major US regions are repre-sented by our respondent population, with the largest percentages located in the Northeast and Midwest.

2017 INDEPENDENT SPONSOR REPORT | THE RESEARCH | 04

FIRM LONGEVITY

BACKGROUND OF PRINCIPALS

0%

10%

20%

30%

40%

50%

<1 1-2 3-5 >5

NUMBER OF YEARS

5%

16%

24%

54%

0%

10%

20%

30%

40%

60%

50%

Private Equity

Fund Mgt

Invest-ment

Banking

Lending Opera-tions/ C-level Mgt

66%

49%

16%

50%

Other

19%

INDEPENDENT SPONSOR DEMOGRAPHICS

0%

10%

20%

30%

40%

60%

50%

<4x 4-6x 6-8x >8x

10%

62%

16%

1%N/A

10%

TYPICAL ACQUISITION EBITDA MULTIPLE FOR TRANSACTIONS CLOSED IN PAST YEAR

0%

10%

20%

30%

40%

60%

50%

<2mm 2-5mm 5-10mm 10-15mm

14%

60%

22%

.5%>15mm

3%

TYPICAL EBITDA FOR COMPANIES INVESTED IN OR TARGETED

FIRM GENESIS AND EVOLUTION

05 | FIRM GENESIS AND EVOLUTION | 2017 INDEPENDENT SPONSOR REPORT

Most respondents (43 percent) cited a “desire to sponsor deals” as the primary reason they became independent sponsors. A smaller percentage (10 percent) became independent sponsors in order to eventually raise a fund.

Others, such as Max DeZara, Founder and Manag-ing Partner, Akoya Capital Partners, are commit-ted to the independent sponsor model and have made the strategic decision to maintain their independence. “Funds have the constant pressure to deploy capital and may have to exit deals before the optimal time,” he noted, “but our model doesn’t have that pressure. In addition, we can look at opportunities for what they can become by investing additional resources, rather than what they are right now.”

“The hardest part of the independent sponsor model is how high the mortality rate is,” said Bruce Lipian, Co-Founder and Managing Direc-tor, StoneCreek Capital. “Until you build a large enough portfolio of investments, it’s hard to get to the point of self-sustainability and you need to protect against the downside. But once you’re self-sustainable, it’s a viable model.”

In addition to the potential better economics and flexibility, the independent sponsor model “also offers considerable opportunity for pre-partner private equity players who aren’t yet eligible for carry,” observed Sylvie Gadant, Partner, Transac-tion Advisory Services, Citrin Cooperman.

Also, independent sponsors do not need to spend significant time capital-raising like traditional funded sponsors. Another interesting feature is the variability of the independent sponsor model.

“Many independent sponsors, especially those who’ve been in the field for a decade or so, have reinvented themselves at various points along the way,” noted Ms. Gadant. “It’s a testament to the adaptability and flexibility of the model. Also, because independent sponsors are so variable and highly differentiated, they rarely compete for the same deals, which is another advantage.”

For example, for seven years, Consumer Growth Partners acted like a traditional independent sponsor but was still plagued by lumpy cash flow. When one of the firm’s deals fell apart due to company underperformance, the firm leveraged the opportunity by providing onboarding of a new CEO (introduced by the firm) and consulting to professionalize the company. They charged a fee in line with their typical independent sponsor monitoring fee.

Firm Longevity Yes No Unsure

2 years or less 13% 38% 49%

3-5 years 25% 36% 39%

5 years or more 9% 59% 32%

DO YOU PLAN TO RAISE A FUND WITH COMMITTED CAPITAL?

Consumer Growth Partners continues to utilize this model by providing advisory services to several clients on strategy, performance improve-ment and competitive positioning in addition to pursuing traditional independent sponsor deals. All of the firm’s advisory clients have a transac-tion in mind down the road. “When they are ready, we can put on our independent sponsor hat, if we think we are the best buyer for the company,” explained Richard Baum, Managing Partner and Founder, Consumer Growth Partners.

Many of our survey respondents described the evolution of their firms over the years. According to many, capital-raising has gotten easier since launch, but the hardest part of their business is finding good, “appropriately-priced” and propri-etary deals.

Networks have also improved for numerous respondents, leading to better deal flow and improved access to capital.

Several respondents noted the importance of building firm infrastructure as their firms have matured, which they are accomplishing through the addition of personnel (especially at the junior levels), enhancement of technology (for example, through CRM systems or investor portals) and improvement of processes used to evaluate deals.

Increasing specialization was also cited by several respondents, with one respondent noting “specialization benefits sourcing, diligence, capital-raising and value creation.” Others agreed, noting that as their firms and investment theses matured, they were more “discerning” regarding which deals to pursue.

2017 INDEPENDENT SPONSOR REPORT | FIRM GENESIS AND EVOLUTION | 06

WHY RESPONDENTS BECAME INDEPENDENT SPONSORS

Precursor to raising a fund

Opportunity to participate in equity upside in addition to receiving a transaction fee

Wanted better economics than available as part of a private equity group

Desire to sponsor deals even without committed capital

Other

10%

20%

9%43%

18%

“Independent sponsors have been around for decades, but the population has exploded over the past several years. And, despite the high mortality rate for the sector, the fact that 54 percent of our respondents have been in busi-ness for more than five years is a very encour-aging sign.” – Sylvie Gadant, Citrin Cooperman

07 | DEAL SOURCING | 2017 INDEPENDENT SPONSOR REPORT

Boutique investment firms, company owners/management and service providers are the top sources of deal flow for our IS respondents, as shown on page 8.

When comparing different deal sources by firm longevity, the sources relied on are roughly equal with a few variations. Older funds - defined as those in existence more than five years - are more likely to rely on service providers for deal flow versus their younger peers (those in existence less than five years). Not surprisingly, younger funds are more likely than their older peers to rely on cold calling for deal flow. Older funds are less likely to source deals from company owners/management than their younger peers.

MATERIAL VARIATIONS IN DEAL SOURCES BY FIRM LONGEVITY:

At Akoya Capital Partners, launched in 2005, nearly half of their deal flow is through a proprietary, direct outreach system aligned with particular industry-specific strategies. The system entails identifying a strategic opportunity, then soliciting a large number of potential platform companies, of which only a small number will prove promising. “It’s a long cultivation process which can take 15 months or longer from the initial call to the economic agreement, but it works for us,” Mr. DeZara noted.

DEALSOURCING

“WE ARE STRATEGIC ACQUIRERS LOOKING FOR A PLATFORM COM-PANY THAT WE CAN BUILD A STRATEGY AROUND. WE AREN’T FINANCE GUYS LOOKING TO DEPLOY CAPITAL.”– MAX DEZARA, AKOYA CAPITAL PARTNERS

* Multiple responses allowed

Deal Source CompanyOwners/Mgt

Industry Research /Cold Calling

Service Providers

Firms 5 years oldor younger 52% 35% 38%

Firms over 5 years old 42% 24% 45%

2017 INDEPENDENT SPONSOR REPORT | DEAL SOURCING | 08

“WE ARE STRATEGIC ACQUIRERS LOOKING FOR A PLATFORM COM-PANY THAT WE CAN BUILD A STRATEGY AROUND. WE AREN’T FINANCE GUYS LOOKING TO DEPLOY CAPITAL.”– MAX DEZARA, AKOYA CAPITAL PARTNERS LLC

Boutique investment banks or business brokers

Operating executives

Regional or national investment banks

Company owners/management

Industry research/cold calling

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

Service providers (e.g., accountants, attorneys, consultants, recruiters)

WHAT ARE INDEPENDENT SPONSORS' MOST SIGNIFICANT SOURCES OF DEAL FLOW?

* Multiple responses allowed

42%75%

27%

37%47%

29%

13%

Respondents review a large number of investment opportunities, with nearly half reviewing 100 or more in a typical year. How-ever, 72 percent submit 10 or fewer IOIs and 52 percent submit only one or two LOIs in a typical year.

NUMBER OF INVESTMENT OPPORTUNITIES A FIRM REVIEWS IN A TYPICAL YEAR

According to respondents, the top reasons why transactions do not close are due diligence findings/concerns about deal fundamentals, seller chooses to retain company or financial performance changes significantly post-LOI.

0%

10%

20%

< 10 11-25 26-50 51-100

7% 8%

17%21%

101-200

21%

> 200

26%

Number of Opportunities

Deciding which capital provider to bring in on a particular transaction is a critical decision for independent sponsors. It can make the deal or it can break it.

“Trust and compatibility with your capital provider is key,” advised Mr. Lipian.

According to our independent sponsor respondents, their top capital sources are family offices, “mequity” funds and high net worth individuals. The “youngest” firms (defined as those in existence two years or fewer) are significantly more likely to obtain capital from family offices and high net worth individuals than their “oldest” peers (defined as those firms in existence more than five years).

“Different capital providers bring different things to the table,” explained Ms. Gadant. “For those trying to maximize their person-al compensation, high net worth individuals and family offices might provide better

economics, as well as more autonomy, though they may be riskier partners if new to independent sponsor transactions. On the other hand, if certainty of close is the most important factor, then an independent sponsor might decide to choose a funded sponsor partner who has already done independent sponsor deals. The other benefit is that, if the deal falls through, the funded sponsor typically covers the lion’s share of broken deal costs.”

“The kinds of deals that independent spon-sors typically do are deals which have a higher level of risk,” said Mr. Baum. “Family offices and high net worth individ-uals are often more concerned about capital preservation and hence more risk-averse than institutional sources of capital. As a result, many independent sponsor deals may just be too risky for them.”

“Part of our value proposition is that we can provide real value post-transaction,” noted Mr. DeZara. “Mequity funds and SBICs allow us to do that and give us more governance opportunities and better economics than control-oriented investors.”

However, transactions with family offices and high net worth individuals are very popular among our respondents, especially at the “youngest” independent sponsor firms. Also interesting is the fact that in

09 | CHOOSING A CAPITAL PROVIDER | 2017 INDEPENDENT SPONSOR REPORT

CHOOSING ACAPITAL PROVIDER

“CHOOSING A CAPITAL PROVIDER IS A COMPLICATED DECISION, DRIVEN BY THE OVERARCHING GOALS OF EACH INDEPENDENT SPONSOR.”- SYLVIE GADANT, CITRIN COOPERMAN

half of the platform transactions closed by our independent sponsor respondents, those transactions were the first time the equity funding source worked with an independent sponsor. The oldest firms are more likely than their youngest peers to have closed transactions with capital providers new to the indepen-dent sponsor space.

“Clearly, many independent sponsors are having great success with family offices and high net worth individuals, despite the fact that both groups are newer to the space than traditional players like private equity and mequity funds,” observed Ms. Gadant. “It’s a very encouraging sign for independent sponsors that the diversity of funding sources continues to grow.”

2017 INDEPENDENT SPONSOR REPORT | CHOOSING A CAPITAL PROVIDER | 10

Private equity funds

“One-stop” funds that underwrite all the debt and equity

“Mequity” funds (mezz funds that co-invest)

Family offices

High-net-worth individuals

Own funds

Other

36% 35%

54%

34%60%

52%

3%

CAPITAL PROVIDERS’ PERSPECTIVE“We like to work with independent sponsors who take the lead and own the deal. We want them to run the diligence and find solutions to issues that arise, rather than just trying to push a deal on us and overlooking important issues. If we put all this capital at risk, we need to be comfortable.” - Evan Gallinson, Merit Capital Partners

“We are looking for independent sponsors who have a solid relationship with the manage-ment team and/or the seller. If there are any miscommunications, it’s nice to have that liaison. We want and encourage the independent sponsor to be a part of the company’s board or management, but when we provide the majority of the equity, we generally look to lead the board.” - Chris Sheeren, Huron Capital Partners

CAPITAL PROVIDERS’ PERSPECTIVE“We like to work with independent sponsors who take the lead and own the deal. We want them to run the diligence and find solutions to issues that arise, rather than just trying to push a deal on us and overlooking important issues. If we put all this capital at risk, we need to be comfortable.” - Evan Gallinson, Merit Capital Partners

“We are looking for independent sponsors who have a solid relationship with the manage-ment team and/or the seller. If there are any miscommunications, it’s nice to have that liaison. We want and encourage the independent sponsor to be a part of the company’s board or management, but when we provide the majority of the equity, we generally look to lead the board.” - Chris Sheeren, Huron Capital Partners

RESPONDENTS' PRIMARY SOURCES OF CAPITAL

WHEN TO BRING INAN EQUITY PARTNER

11 | WHEN TO BRING IN AN EQUITY PARTNER | 2017 INDEPENDENT SPONSOR REPORT

Most independent sponsor respondents introduce the deal to a potential equity co-investor only after a potential deal is further along – post-LOI, once the inde-pendent sponsor has exclusivity. The youngest firms are considerably less likely than their oldest peers to introduce oppor-tunities pre-IOI (with only 5% of the youngest firms but 16% of the oldest firms introducing deals pre-IOI).

Among our external contributors, there are varied approaches, reflecting the nuances involved in the decision.

For example, Akoya Capital Partners typically brings on a co-investment part-ner post-LOI. “That approach, of course, allows us greater leverage and control of the transaction, but it also makes sense given our process,” explained Mr. DeZara.

“From the beginning, we collaborate with the seller to create a detailed value creation plan. We then present that plan to our co-investors.”

However, other firms introduce deals to capital providers earlier in the process.

Consumer Growth Partners approaches potential co-investors pre-LOI. “One advantage of this approach is that co-in-vestors can often provide very useful feedback about the deal, both positive and negative,” noted Mr. Baum.

From a capital providers’ standpoint, “we love when an independent sponsor brings us an LOI with a negotiated deal,” said Evan Gallinson, Managing Director, Merit Capital Partners. “At that point, there are less moving parts, and the transaction is a lot easier. However, from a competitive standpoint, we like to get in early so the transaction isn’t shopped to other inves-tors. In addition, we are heavy mezz and light equity so if an independent sponsor comes to us post-LOI, it may not be a structure that works for us.”

Chris Sheeren, Partner, Huron Capital Partners, said that if his firm is approached around the time of the LOI, “We recognize it’s a pretty critical time, and the transaction will get our attention

0%10%20%30%40%50%60%

Pre IOI After invitedto mgt.

presentation

Post-mgt.presentation,

pre LOI

Post LOIafter gaining

exclusivity

Other

WHEN DO YOU INTRODUCE A DEAL TO YOUR POTENTIAL EQUITY CO-INVESTOR?

BROKEN DEAL COSTSWhen a deal goes south, independent sponsors shoulder or share broken deal costs in all but a small percentage of cases.

“Given that independent sponsors don’t have their own funds, broken deal costs can put a heavy burden on them,” noted Ms. Gadant. “However, because many of our respondents rely on capital sources such as family offices and high net worth individuals that typically aren’t in the business of doing deals, it’s not surprising that so many sponsors are shouldering or sharing broken deal costs.”

Huron Capital Partners typically bears 100 percent of the broken deal costs “I see it as a positive trade off when dealing with a firm like ours,” said Mr. Sheeren.

Merit Capital Partners takes a similar approach. “If the situation allows Merit to select the third party diligence providers that we have a relationship with, we only ask independent sponsors to cover their own travel and professional fees,” noted Mr. Gallinson.

“If an independent sponsor will shoulder or share broken deal costs in a particular transaction, they should definitely try to minimize those costs,” advised Ms. Gadant. “One of the best ways to do this is by conducting due diligence in phases. For example, in phase one, your CPA firm can only do a high level review and save a comprehensive quality of earnings report for when the deal is further along. Also, it’s smart to put your purchase agreement on hold until you validate earnings. This approach will require your service providers to work on a short timeframe to close the deal, but it’s a good way to reduce your risk.”

2017 INDEPENDENT SPONSOR REPORT | WHEN TO BRING IN AN EQUITY PARTNER | 12

as a live opportunity. If the independent sponsor has already developed a relationship with the seller, it’s a huge value-add for us.”

“It only makes sense to bring us a deal pre-IOI if it’s proprietary and we can help the sponsor establish credibility and demonstrate capital to the seller,” Mr. Sheeren added.

14% 28% 31% 23% 4%

Equity funding source 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

Independent sponsor covers broken deal costs

Independent sponsor and equity funding source share broken deal costs

Other

TYPICAL ARRANGEMENT TO COVER BROKEN DEAL COSTS WITH EQUITY FINANCING SOURCE

PORTFOLIOCOMPANY ROLES AND FEESOver half of the independent sponsors surveyed assume a lead sponsor role in their relationships with portfolio companies. Roughly one-fifth share sponsor duties with their lead investor or serve as an active board member.

The overwhelming majority (78 percent) assume a lead board role, receiving the first call from man-agement, compared to their capital partner.

Percentage fees are typically a fixed dollar amount for 58 percent of respondents, whereas the remain-der based their fees on a percent of earnings.

“If your fees are tied to earnings, you should set a fixed dollar amount floor in case the company goes through a rough patch,” Ms. Gadant advised. “If they do and you don’t have a floor, you’ll be spending a lot of time with the company and won’t get paid if EBITDA is negative.”

13 | PORTFOLIO COMPANY ROLES AND FEES | 2017 INDEPENDENT SPONSOR REPORT

2017 INDEPENDENT SPONSOR REPORT | PORTFOLIO COMPANY ROLES AND FEES | 14

0%

10%

20%

30%

40%

60%

50%

<$100k $101k-$250k

$251k-$500k

>$500k

12%

33%38%

10%

N/A

7%

TYPICAL STRUCTURING/CLOSING FEE

0%

10%

20%

30%

40%

60%

50%

<$100k $101k-$250k

$251k-$500k

>$500k

10%

53%

28%

2%

N/A (no closed

deals)

7%

TYPICAL ANNUAL MONITORING/ADVISORY/MANAGEMENT FEE

TYPICAL % OF TOTAL EQUITYINVESTED BY PRINCIPALS IN TRANSACTIONS

0% 6%-10%Less than 5%

11%-20% >20%

7%

47%

11%

24%

11%

LIQUIDITY EVENTS

15 | LIQUIDITY EVENTS | 2017 INDEPENDENT SPONSOR REPORT

Fifty-four percent of our independent sponsor respondents have not had any liquidity events.

“Given that nearly half of our respondents are at firms that have been in existence less than five years and the lead time required for exits, the fact that so many firms haven’t had liquidity events is more understandable,” noted Ms. Gadant. “It will be interesting to see how the number of liquidity events increases in future years of our survey.”

Of the oldest firms (in existence over five years), 26 percent have had four or more liquidity events, whereas none of their younger peers have reached the same number.

Of those who have had liquidity events, 12 percent have returned an average realized equity multiple of greater than 5x.

2017 INDEPENDENT SPONSOR REPORT | LIQUIDITY EVENTS | 16

INDEPENDENT SPONSOR TRENDS AND FORECAST

17 | INDEPENDENT SPONSOR TRENDS AND FORECAST | 2017 INDEPENDENT SPONSOR REPORT

Looking ahead, opportunities are mixed for independent sponsors.

“On the positive side, private equity’s record capital inflows bode well for independent spon-sors,” said Ms. Gadant. “Traditional private equity firms need to source deals in an increas-ingly competitive market with high multiples. Independent sponsors can introduce deals that private equity firms have historically overlooked – lower middle market companies that can be bought at lower multiples and that offer consider-able potential upside.” “Most private equity firms are smaller shops like us, with 15 or so individuals hunting for deals, and we can’t cover the market,” noted Mr. Gallinson. “By working with independent spon-sors since the mid-1990s, we have expanded our reach and opened a new pipeline.”

Many survey respondents agreed that capital providers are much more likely to embrace inde-pendent sponsors than they were a decade ago.

“Certainly, in the last five to seven years, I’ve seen more capital providers supporting indepen-dent sponsors, and I think that trend will contin-ue, with more capital sources available,” Mr. Gallinson added.

“More LPs are looking for co-investing opportu-nities than before,” said Mr. DeZara. “They want discretion, lower fees and to move away from the 2/20 private equity model. Given this, I think they’ll increasingly turn to independent sponsors, but we are still very early in the cycle.”

Along with increasing support from capital providers has come increased competition, with a significantly greater number of independent sponsors in the marketplace, all vying for the best deals amidst frothy valuations.

Several survey respondents also expressed concerns that there were too many “inexperi-enced” independent sponsors “flooding” the marketplace. “Many independent sponsors are also feeling pressure from competitors outside of the sector, as greater numbers of private equity firms are coming down market for deals,” said Ms. Gadant.

2017 INDEPENDENT SPONSOR REPORT | INDEPENDENT SPONSOR TRENDS AND FORECAST | 18

“STRATEGICS AND FAMILY OFFICES ARE STARTING TO DO MORE DIRECT INVEST-ING, WHICH PROVIDES AN ADDITIONAL SOURCE OF COMPETITION.”- SYLVIE GADANT, CITRIN COOPERMAN

ECONOMIC OUTLOOK

19 | ECONOMIC OUTLOOK | 2017 INDEPENDENT SPONSOR REPORT

Many respondents expect valuations to remain high through at least the first half of 2018.

One respondent noted, “I’m hoping for a stock market correction … to let some of the air out of the over-priced market.”

“THE MARKET IS ALWAYS CHALLENGING. HOWEVER, EVEN IF WE ARE FACED WITH AN ECONOMIC SLOWDOWN AS MANY OF US EXPECT, I DON’T SEE MUCH CHANGING IN THE NEXT 18 MONTHS FROM A DEAL FLOW STANDPOINT.”- EVAN GALLINSON, MERIT CAPITAL PARTNERS

“The abundance of capital within private equity pres-ents an interesting situation,” said Mr. Lipian. “Whether the economic environment is good or bad, investors are obligated to fund agreed-upon capital commitments and private equity firms need to deploy those funds within a certain period or lose access to that capital. As long as there’s excess capital on the institutional side, indepen-dent sponsors will be relevant to private equity funds.”

However, some are more wary regarding the effects of a potential slowdown.

“When (not if) the market turns down, private equity money will move to the sidelines, as it did during the last downturn,” explained Mr. Baum. “People think they would rather have the money burn a whole in their pocket than let it go down the drain. Most deals become riskier when the economy is bad, and very few sectors are truly counter-cyclical. As dry powder increases, less money will be available to independent sponsors.”

Others expressed concern over the potential impact of government regulations, whether it be tax reform, changes to carried interest treatment or the Border Adjustment Tax.

“The potential elimination of the interest expense deduction would change the math in our world pretty significantly,” Mr. Sheeren added.

2017 INDEPENDENT SPONSOR REPORT | ECONOMIC OUTLOOK | 20

ADVICE TO THOSE NEW TO THE GAME

21 | ADVICE TO THOSE NEW TO THE GAME | 2017 INDEPENDENT SPONSOR REPORT

HAVE TWO YEARS OF “RUNWAY” The most common piece of advice our respondents had for new independent sponsors is to have at least two years of “runway” before starting out. “Be prepared to go two to three years without a paycheck,” was how one respondent succinctly put it.

As another said, “be prepared to fail multiple times before closing your first deal.”

Several noted the importance of building a track record to improve your credibility. One advised, “Get your first few deals done, even if you need to lower economics and decrease your role in the deal.”

Mr. Lipian agreed. “Many new independent spon-sors don’t realize how difficult a path it is. To heighten your probability for success, I recommend teaming up with an experienced independent sponsor because it enables you to get your first deal done without the steep learning curve and potential missteps. It also means you’ll have a partner who has experience negotiating indepen-dent sponsor terms,” he explained.

“I think new independent sponsors should always start out with at least one partner,” advised Mr. Gallinson. “Otherwise, you could spend all your time chasing one deal for six months or more, with nothing else in your pipeline. If that deal falls through, as it too often does for new independent sponsors, you are stuck.”

BUILD YOUR NETWORKS EARLY“You need to build your network of deal sources and capital providers as fast as you can in your first two to three years of starting out as an inde-pendent sponsor,” advised Mr. Baum.

Mr. Sheeren agreed, noting, “You don’t want to have to scramble for potential investors when you have a viable deal, especially if your deal is on the larger side and you’ll need an institutional inves-tor. We’re happy to meet with folks in advance of doing a deal.”

“It’s also important to network for talent,” Mr. Baum recommended. “Many independent sponsor deals require bringing seasoned management to the party. Attend events sponsored by organizations such as ACG, Opus Connect, Capital Roundtable

“The independent sponsor model may seem somewhat simple, but the dynamics and psychology of it are very unique. Without committed capital, convincing sellers to sign an LOI and give you exclusiv-ity is a tall order. Then, you have to carefully navigate the relationship with your funding sources, which includes negotiating economics and managing the relationship between them and the compa-ny, especially if they are control-oriented investors. There isn’t a playbook. While things have become more institutional, it’s still the Wild West.” - Bruce Lipian, StoneCreek Capital- Bruce Lipian, StoneCreek Capital LLC

2017 INDEPENDENT SPONSOR REPORT | ADVICE TO THOSE NEW TO THE GAME | 22

and AM&AA where there are lots of executives in attendance in search of their next opportunity.”

TO SPECIALIZE OR NOT? Many respondents agreed it is important for new independent sponsors to specialize, whether that specialty is an industry or geographic focus, target market or some other differentiator. “I think it’s critically important to have niche areas of expertise,” said Mr. DeZara. “Capital is a commodity, and our industry expertise is what gives us an angle on a deal.”

Mr. Baum agreed. “I think if you don’t specialize, you won’t be as successful, particularly if you are just starting out. You have to convince a company that you provide unique value. It goes a long way to adding credibility when you can sit with an owner and right out of the box speak the same industry language.”

“From our standpoint, we are looking for independent sponsors to bring someone to the deal who has indus-try expertise that we, as a generalist firm, may not have,” said Mr. Gallinson. “Our deals with indepen-dent sponsors tend to be traditional buyouts, and we like having sponsors with specialized expertise who can be on the company’s board. It also helps us show a company that we can offer them more than just capital.”

“Independent sponsors are rarely doing the perfect deals – the ones with a fabulous concept growing like a weed with a great management team. Those deals will typical-ly go to the highest bidder at a premium multiple as part of a widespread auction process. Instead, independent sponsors are often doing deals that have some warts on them. If an independent sponsor knows how to remove the warts, they will be able to successfully win the deal.” - Richard Baum, Consumer Growth Partners

THE LASTWORDS

23 | THE LAST WORDS | 2017 INDEPENDENT SPONSOR REPORT

As this year’s inaugural Independent Sponsor Report shows, although the sector has seen significant evolution, it remains one without a clear playbook. It is a sector with considerable diversity in viewpoints, in approaches, and in economic terms, where some differences are expected and others surprising.

We expect, in future years, that the sector will continue to grow in popularity and acceptance, with more independent spon-sor entrants and greater numbers of com-panies and capital providers embracing independent sponsor transactions. We also expect greater standardization of terms and practices as the sector continues to mature. And we are interested in seeing how the model continues to flourish.

It is an exciting time to be an independent sponsor, and we look forward to seeing what the future holds for these “road warriors.”

2017 INDEPENDENT SPONSOR REPORT | THE LAST WORDS | 24

“INDEPENDENT SPONSORS ARE THE ROAD WARRIORS OF PRIVATE EQUITY.” - BRUCE LIPIAN, STONECREEK CAPITAL LLC

MAX DEZARA, Founder & Managing Partner, Akoya Capital Partners625 North Michigan Avenue, Suite 2450, Chicago, IL 60611(O) 312-546-8322 | mdezara@akoyacapital.com

Max 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 co-sponsorship. Learn more at: akoyacapital.com

RICHARD BAUM, Managing Partner, Consumer Growth Partners445 Hamilton Ave, Ste 1102, White Plains, NY 10601(O) 914-220-8337 | rbaum@consumergrowth.com

Richard co-founded Consumer Growth Partners (CGP) in 2005 as an investment and advisory firm with an exclusive focus on the retail and branded consumer products sectors. CGP is typically the first institutional investor in the company, but also serves as a primary business advisor to companies contemplating a capital transac-tion over a 1-3 year timeframe. Prior to co-founding CGP, Richard spent many years as one of Wall Street’s leading equity research analysts covering the specialty retailing sector. Learn more at: consumergrowth.com

SYLVIE GADANT, Partner, Citrin Cooperman290 W. Mt. Pleasant Avenue, Suite 3310, Livingston, NJ 07039(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-side 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 with its audit and advisory practices. Learn more at: citrincooperman.com

ABOUT OUR CONTRIBUTORS

25 | ABOUT OUR CONTRIBUTORS | 2017 INDEPENDENT SPONSOR REPORT

2017 INDEPENDENT SPONSOR REPORT | ABOUT OUR CONTRIBUTORS | 26

BRUCE N. LIPIAN, Managing Director, StoneCreek Capital18500 Von Karman Avenue, Suite 590, Irvine, CA 92612(O) 949-825-5557 | bruce@stonecreekcapital.com

Bruce 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: stonecreekcapital.com

CHRIS SHEEREN, Partner, Huron Capital Partners500 Griswold Suite 2700, Detroit, MI 48226(O) 313-962-5805 | csheeren@huroncapital.com

Chris is responsible for sourcing and evaluating investments made by Huron Capital, as well as marketing and business development activities. He also oversees the firm’s executive network. Huron Capital makes majority and minority equity invest-ments in companies with $5M-$20M EBITDA. Prior to joining Huron Capital in 2004, Chris was with Conway MacKenzie, a crisis-management and turnaround consulting firm, serving as interim CFO, controller or financial advisor to clients in a variety of industries. Learn more at: huroncapital.com

EVAN R. GALLINSON, Managing Director, Merit Capital Partners303 West Madison Street, Suite 2100, Chicago, IL 60606(O) 312.592.6114 | egallinson@meritcapital.com

Evan is a Managing Director with Merit Capital, having joined the firm in 2005. He previously worked in investment banking with BMO Capital, William Blair & Company, and PriceWaterhouseCoopers, where he focused on mergers and acquisi-tions advisor work for middle market companies in a variety of industries. Evan is actively involved with the University of Michigan Alumni Association and is a member of the Chicago Association of Private Equity Executives (Capex). Learn more at: meritcapital.com

MELISSA MCCLENAGHAN MARTIN, President, M3 Strategic Alliances LLC(O) 212-737-5025 | melissa@m3strategicalliances.com

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

ABOUT THE WRITER

CONTACT US

SYLVIE GADANTPartner – Transaction Advisory ServicesTEL: 973.218.0500 E: sgadant@citrincooperman.com

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