Thomas Shattan, Co-Chairman for Shattan Mendel Enterprises
Tom Shattan has been a Private Equity financing specialist for over 25 years. He has been an Advisor to middle market private companies, raising Private Equity growth capital from institutional investors for over 100 different companies, while simultaneously co-investing in several of them. He established and ran PE Financing Groups while on Wall Street at Goldman Sachs, Kidder Peabody and Prudential Securities and established his own boutique firms, now Shattan Mendel Enterprises, a NYC-based merchant banking firm www.shattanmendel.com. He has advised and raised capital for some of the fastest-growing companies in the U.S., including the early rounds of Dell Computer, Staples, Qualcomm, Barneys NY, Rollerblade, Hickory Farms and MemberHealth, the #1 company on the INC 500 list a few years ago. He has worked closely with Independent Sponsors, and arranged Private Equity capital for them, enabling them to make various acquisitions over the years.
Q: How are Independent Sponsors changing the market?
A: There appear to be many more Independent Sponsors than ever before because there are more "alumni" of PE Funds, ex-Investment Bankers, and former "Operating Guys" who find a new company (or two) to buy or invest in, but don't have the capital to complete the investment. This results in a need to find a capital source on a deal-by-deal basis to back them. Often the deals they find are proprietary, and the Sponsors are able to strike attractive terms and provide strategic knowledge to enhance the company’s growth. In turn, PE Funds and Family Offices are seeing these transactions early-on, as opposed to through an auction process by an Investment Banker. PE Funds and Family Offices are frequently happy to back an Independent Sponsor – depending on the terms and structure, of course.
Q: What are the advantages gained from this new outpouring of Independent Sponsors? The disadvantages?
A: New Independent Sponsors in the market are generating an additional flow of potential deals for capital providers. Their presence also creates a new way for Family Offices and Angels to invest directly into a company without having to go through a typical PE Fund, which is a more passive form of investment. Because PE Funds bundle companies into a portfolio, this represents a more direct route of investment.
The prime disadvantage of Independent Sponsors is that they are frequently more "broken deals" because Independent Sponsors do not have the capital committed up-front through a PE Fund. Thus, the process of these deals can be greatly extended, sometimes causing frustrations to both parties. It is also harder for Independent Sponsors to spend money on due diligence and legal and accounting fees because they don't have the Management Fee that a PE Fund has to pay for these expenses. This “push and pull” of how much due diligence needs to be done before getting your capital source, frames one of the main disadvantages that Independent Sponsors face regularly.
Q: How successful do you think these Independent Sponsors will be while in competition with PE Funds?
A: It depends. Certain Independent Sponsors are very experienced in doing deals and can provide real value. Those would be entitled to attractive "promotes" and fees for delivering a good deal. They can establish a close relationship with a seller and engender trust because of their experience in an industry. However, it is also true that PE Funds have wider networks, broader resources to bring to the table and frequently more experience in investing. Certain sellers might want to deal directly with that kind of investor instead, as well as having the assurance upfront that the capital is truly committed.
Q: What kinds of offices would prefer Independent Sponsors for an investment over PE Funds?
A: More and more Family Offices and Angels now prefer to look at doing deals directly with an Independent Sponsor (as long as their investment is directly into the company and not through a GP/LP structure) as they can provide direct value to the company as opposed to just investing as a passive Limited Partner. I believe this trend of Independent Sponsor deals will continue to grow, as Investors want more control and selectivity over what they invest in, and want more control over the timing of their exit.