Facilitating introductions between independent sponsors and capital partners who can fund their deals is the first step in a successful M&A scenario. Knowing how to efficiently leverage relationships and get in front of the right people is key to getting deals done. 

Christian Berger joins this episode of Deal-by-Deal to share how introductions play into business development and his approach to the process. 

“We [make introductions] to help our clients, prospective clients, and others in our network meet each other and find opportunities that they otherwise wouldn't have seen,” Christian explains. Ultimately the goal of making introductions is to complete successful private equity partnerships. 

Also on this episode, get insights into the best way to approach finding introductions. Christian shares how to calculate the number of introductions you might need by sharing his three assumptions for finding investors, and outlining what a capital firm considers a strong deal. 

Christian and Greg also share details on the upcoming McGuireWoods Independent Sponsor Conference in Dallas. The conference is an opportunity to see firsthand what makes McGuireWoods a collaborative firm that knows how to leverage relationships to make the right introductions. 

Featured Guest

Name: Christian Berger

Title: Partner at McGuireWoods

Speciality: Joining McGuireWoods in 2015, Christian focuses on helping new and existing clients in the firm’s private equity practice. He has received a number of industry awards, including the Most Innovative Law Firm in the Business of Law from the Financial Times in 2018, and Executive of the Year by Legal Sales and Service Organization in 2018.

Connect: LinkedIn 

Acquired Knowledge

Top takeaways from this episode 

★ The investor introduction process. Facilitating investor introductions is part of business development. It’s a way to connect with clients who are doing M&A deals that need legal counsel. A firm like McGuireWoods helps guide independent sponsors to get a clear understanding of the opportunity and find the right investors for their unique position.  

★ Attributes that make an independent sponsor attractive to a fund. These funds are looking for someone who has an attractive opportunity requiring capital that matches the needs of their fund. It’s common to see single transactions in the 20 million dollar range, with many private equity firms looking to make 10 transactions out of a single fund. It’s important to have a clear identity that allows firms to match what you need with the box they’re looking to fill. 

★ Three assumptions when finding investors for a deal. First, what is the target check size for the investors? Secondly, what percentage of investors will accept an introductory call from an independent sponsor? Third, how many investors will be willing to invest in a deal? Asking these questions allows you to work backward and determine how wide you need to cast your net. 

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You're listening to Deal-by-Deal, a McGuireWoods, independent sponsor podcast. Deal-by-Deal invites you to conversations with experienced independent sponsors, and other private equity professionals. Join McGuireWoods partners, Greg Hawver, Jeff Brooker, and Rebecca Brophy, as they explore middle market, private equity, M&A, to provide you with timely insights and relevant takeaways.

Hi, and welcome to Deal-by-Deal a podcast presented by McGuireWoods for the independent sponsor community. This is your host, Greg Hawver. I'm a partner in the Chicago office of McGuireWoods and our private equity group. And I'm joined today by a special guest Christian Berger, who's a senior advisor at McGuireWoods. He focuses on new clients and helping existing clients in the firm's private equity practice. Since joining the firm in 2015, Christian has received a number of industry awards, including personally collecting the award for the Most Innovative Law Firm in the Business of Law, from the Financial Times in 2018, and Executive of the Year by Legal Sales and Service Organization in 2018. Christian, welcome to the podcast.

Thanks Greg.

And I'll just say that Christian is a unique and fantastic member of our team here at McGuireWoods, whereas myself and other partners and associates in our group are spending the bulk of our days, negotiating and closing M&A deals. Christian is not a lawyer and he is able to focus his days on spending the bulk of his time, working with our group defined new clients and the topic for today, which is investor introductions and how our group works with independent sponsors to introduce them to investors in our network. And so, maybe let's start there, Christian. Tell me a little bit about the investor introduction process and the role that plays being distinct from capital raising, where an independent sponsor might hire a broker to do that. Could you explain a little bit more our role here at McGuireWoods?

Yeah, sure. No problem. Well, first of all, thanks for having me on the podcast. It's great to be a part of it Greg, and it's great to be a part of the team. So, I think there's a distinction to be made between what we call investor introductions and capital raising in general. I think the main distinction is that we don't charge any money to make these investor introductions. We do this as a service to help our clients and prospective clients and others in our network meet each other and find opportunities that they otherwise wouldn't have seen and ultimately, to do successful private equity deals, whereas a placement agent or an investment banker, that's doing an equity placement, is going to charge a fee and that's their business. The way that we make money obviously, is to represent clients who are doing M&A deals, and represent them as their legal counsel. So, my role and the work that I do is kind of a value add, and we do it basically just for the purpose of business development and helping create value for others.

Great. Yeah, that's a helpful introduction. And we really wanted to start off this episode with that little bit of a quasi disclaimer there, that we're going to be talking about a topic that touches upon industries that are regulated such as raising capital, and so wanted to start off with a disclaimer. But with that out of the way, let's talk about Christian, what it looks like for an independent sponsor, who just has a new deal in hand. Maybe he or she is in talks with a target company, even pre-letter of intent with a target company. When that independent sponsor gives McGuireWoods a call, and you're on the phone with that independent sponsor, what resources can we bring to help that independent sponsor at that stage in the deal process?

I think the first goal in helping an independent sponsor find investors and receive investor introductions from us, is to help them find capital that's going to hopefully get the deal done. And so, different independent sponsors have different levels of familiarity with the types of investors that are out there in the market. And I think the first step is to get a clear understanding of what is this particular opportunity and introducing this process that we use. So, maybe I'll say a little bit more about that.

Our investor introduction process involves finding investors by generating a clear description of the opportunity and then generating a list of proposed investors that we share with the independent sponsor, which then they will approve. And once we have an approval for us to reach out and solicit an introduction to an investor, then we send an email and that email shares the opportunity with a potential investor. And when the potential investor says, "Yes, we would like an introduction to this independent sponsor." We make that introduction and then we step away. We don't participate in anything past that initial introduction. And in fact, we ask people to just drop us out of the email string and communicate with each other directly at that point.

Yeah. And describe to me the profile of some of the capital sources in our network, be it family offices, private equity funds, et cetera. And are you seeing any trends there, over the past couple years, as far as the types of capital providers that are investing in independent sponsor deals?

Yeah, sure. I think of about five different categories. This is a rough list of five categories, and I think of them on a spectrum of highest imperative to deploy capital, to lowest imperative to deploy capital. On the end of the spectrum, where there's the highest imperative to deploy capital, that's a traditional blind pool fund, that is in the business of investing capital on behalf of its investors. On the opposite end, would be a private individual or a family office that is not required by anybody to go and deploy capital. So those are the two extremes, and I'll just kind of walk you through from alongside that a little bit.

So, I think of asset managers as being pretty close to traditional GPs, and asset manager is a little different because asset managers aren't often pure controlled private equity firms. They can often be a fund to funds group. They can be a dedicated vehicle at an insurance company. They can be a balance sheet investing group at an investment banking firm. These are groups that look like an institutional investor and are an institutional investor, but they have different capital, different requirements in their investments. Then we have credit funds. Credit funds, I think distinguish themselves between firms that will write an equity check and firms that won't write an equity check. And then we have large family offices and small family offices. Those are approximately the five groups that we think about.

Got it. And any trends, as far as whether you're seeing more of one category of investor over the other? I know mezz equity shops have always been major players as far as partnering with independent sponsors. I'm continuing to see robust activity with that category of capital provider, but any other recent developments?

Yeah. I would say that mezz equity funds fall generally into that credit fund category. And they're more credit oriented, obviously. I would say one trend is that there's been, I think a lot of non-bank lenders that have raised funds that allow for equity co-invests in their transactions. So, we're seeing more of those. We've also seen an increase in multi-family offices that are pooling capital among many different families together. And it's interesting because in some cases, they will often in some way look like an independent sponsor. So, the lines can get a little blurry.

And then one of the last trends that I'll just mention, is a significant increase in the number of funds that specifically go after this particular independent sponsor category. And their value proposition is that, "Hey, we have a mechanism to help independent sponsors raise equity capital very quickly. And if you are essentially on our approved list, you're going to be fast tracked when you have an opportunity and will be a ready and willing investor alongside you and your transactions." That's something that gives the independent sponsor, a lot of certainty and security when they're kind of out there hustling and looking for deals.

Yeah, that's interesting. On the latter trend, I've been seeing that as well. And last month's podcast even, we were referring to the independent sponsored niche as being its own asset class almost. And so, you've got these new funds being raised with the focus on investing in independent sponsors as an asset class, which is super interesting. As you think about an independent sponsor, maybe seeking to get on the approved list of one of these new funds, what are these new funds that are independent sponsors specific? What attributes are they looking for in the independent sponsor? And what are sort of the pros and cons for an independent sponsor linking up with one of those funds?

Yeah, that's a great question. So, it's amazing the onboarding process that some of these groups have to get independent sponsors on their list. And I think generally speaking, an independent sponsor, that's going to be successful in raising capital from one of these dedicated funds is going to be somebody that knows how to find an opportunity, that is an attractive opportunity that requires a certain amount of capital. Typically, I think these firms are looking for independent sponsors that have a minimum equity need of... I would say it's fairly common of 20 million or more with a potential to invest more than that in a single transaction. A good rule of thumb is a typical private equity firm is going to make 10 investments out of a single fund.

So, if it's a 250 million fund, that's approximately 10, $25 million checks that might be per platform. However, you'll find firms that will say, "Okay, we're targeting 2 to $5 million equity checks." So, the advice I would give to the independent sponsor is have a clear identity that allows the capital provider to kind of put you in their box hopefully, which often that means they're going to look to prioritize people that they're going to be able to do three or four or five deals with, before they go out and raise their first fund. And ideally somebody that has experience with their partner in doing these investments, has experience doing these transactions, ideally has experience returning capital to investors. I would say those are some general bullets.

Great.

Did I cover the question?

Absolutely. It's an interesting development for sure. So, taking a step back, when we think about an independent sponsor who is getting ready to approach the equity markets, setting aside the debt finance markets, which it's a little more developed. And we see, frankly less of our independent sponsors probably reaching out with questions on the debt finance market, because it can be more straightforward in many respects, although we do make introductions on that front a fair amount. But again, if you are thinking about the first conversation that you're having with an independent sponsor, who gives us a call and says, "How should I think about the equity piece of this transaction?" One piece of that question is, who can you, McGuireWoods, introduce me to? Can you introduce me to some investors in your network? Which is something we're all always happy to do. As you mentioned, we will put together a couple bullets on the deal and make those introductions.

But I think, correct me if I'm wrong, but another part of your role when you're having those conversations Christian, is just sharing your wisdom as far as what you've seen independent sponsors separately out there doing, raising capital when they are making calls to capital providers and/or working with a placement agent to help think about capital sources. So, it's kind of a holistic discussion. What are some initial points and ideas that you try to communicate to that independent sponsor? One thing I'm thinking about is, I hear sometimes, "I really want to work with family offices. I only want to approach family offices." So, let's think about that. Do you think there's wisdom in that? Do you think it's better to cast a wide net? Anyways, just your thoughts on how level bullets would be helpful.

Sure.

That was like a seven part question. So, good luck with it.

Let's just talk about casting a wide net, first of all. There's three assumptions when you are out there trying to find investors for a deal, I think are important to guide your decision about how wide of a net you're going to cast. The first assumption is, what is the target check size that the investor is going to write on average among the cohort of investors that you're going to go target? Let's assume that an independent sponsor has an opportunity and it needs a 20 million equity check. And let's assume that for the sake of simplicity, we're going to go out to try to solicit introductions to a cohort of investors who target a 20 million equity check. So, 100% of the amount of equity needed for the particular transaction.

So, assumption number one is, what is the target check size for the investor? Assumption number two, is what is the percentage of investors that are going to accept an introductory call from us? The second assumption is what percentage of the investors are going to accept an introductory call with the independent sponsor. And let's assume in this case, it's going to be about 50%. The third assumption, is how many investors are actually going to be willing to invest in a deal. So let's use this example, independent sponsor has a 20 million equity need. It's an attractive opportunity in whatever subjective definition that an investor is going to choose. And 5% of investors are going to accept an introductory call. And let's assume that one out of 10 investors, is going to invest in this particular opportunity.

In that case, you can do some simple math and you can think, "Okay, well, I know that I'm going to need at least 10 investor calls, which means that I'm going to need to reach out to 20 investors for 50% of those to accept a call with me. And if we hit our numbers, then one of those 10 is going to say yes, and invest in my deal. And that if we're targeting people who write $20 million checks, we're only going to need one investor to say yes. If we happen to target investors who want to write a smaller equity check, like a one to $5 million equity check, for example, we just have to increase the numbers." So, that to me is a very simple way of thinking about casting a wide net. I'll pause there and let you kind of take us where you want to from there, Greg.

Yeah, it makes sense. And you've got to work backwards and think about the pool of whether it's 20 or 40 or 60 investors to approach. I guess a question is, whether at that stage you see a lot of independent sponsors, maybe starting with family offices only, starting with mezz equity funds only, and then expanding from there. Or do you just start off with sort of the widest net possible in most scenarios?

Yeah, that's a really great question. There's a very strong, I think instinct among independent sponsors to get the equity lined up prior to exclusivity. And I think that we could have our own. Maybe you should just consider having an entire episode focused on this particular topic, but generally speaking, our investor introduction process seems on an anecdotal basis to work best where the sponsor has exclusivity. It works reasonably well, when the independent sponsor's close to exclusivity. It works less well, when the independent sponsor does not have a current opportunity they're currently contemplating right now.

Makes sense. And on the topic of success rates and talking to people with a deal in hand, what are the types of deals that are the most investible that you see from your perspective? What are the attributes that those deals have, furthest to the ones that no investors really want to touch?

Yeah, they look very similar to what probably most people have heard. If you've heard a private equity firm, describe their target, their investment criteria, it's fairly common to see the opportunities that are most attractive. So, basically are you buying an attractive company at an attractive price? And what measurements do you have to determine whether the company is attractive or not? And beyond that, are you looking for a structure that is quote unquote, "market?" And to the extent that independent sponsors are asking for things that are out of market or trying to do deals that are less common, those are harder for us to help with. I'll give you an example, and this is just one of many hypothetical examples that we can get, but an independent sponsor who's raising equity capital in support of a growth equity transaction, where there's no leverage. And the downside case is potentially zero. If the investment thesis fails, that tends to be less attractive than one where there's leverage. It's a leverage buyout structure, and the downside case is more like one times or one and a half times MOIC.

Yeah, that makes sense. I don't see too many growth equity deals in the independent sponsor space. I've seen some, but I would say the successful deals that I see where there's a very heated competition to fund those deals, they're usually quote, "kind of boring businesses," with a track record of consistent EBITDA that are acquired at a reasonable multiple. Maybe there's a little bit of complication or hair on the transaction, which is perhaps the reason why it wasn't a widely banked process or how it ends up in the lap of an independent sponsor. But yeah, I don't see a lot of the growth equity deals that's for sure.

Well, let me just add to that a little bit. It's much harder to raise capital in support of a situation where the independent sponsor was the highest bidder in a competitive auction, for example. That's not a good recipe. A good recipe is one where, like you said, it's for whatever reason, it's an off market transaction or it was a smaller process. And the independent sponsor was able to get exclusivity or is getting very close to exclusivity at a valuation that allows them to project a base case return that's going to be attractive to the type of investor that they're going to go after. So anyway, that's a good way to think about it. The same thing applies to things like customer concentration and cyclicality in the revenue and industry considerations. For example, certain high tech industries are sort of not attractive to certain investors or retail or consumer products, are kind of outside the investment mandate of many groups. Things like restaurants or anything related to guns or sin industries. Those tend to be very difficult to raise capital for as opposed to what we think of as more traditional types of industries.

Sure, and we touched upon this concept briefly earlier, but the use of placement agents by independent sponsors to help them find equity. I think the placement agents have been around for quite some time, they might be becoming more prominent. What do you see? And what's your advice as far as when independent sponsors are trying to make that decision of whether to engage a placement agent?

It's a good question. I think whereas maybe five years ago or seven years ago, there were only a very small handful of placement agents that specialized in raising equity capital for independent sponsors. The proliferation is extraordinary in that particular space. And I think most placement agents that will raise lower middle market focused buyout funds, will also help independent sponsors raise capital on a Deal-by-Deal basis. So, if I were an independent sponsor, the questions that I would ask a placement agent would revolve around things like, "Have you done this before? What is the strategy that you utilize to raise this type of capital? How do you think of the need or the desire that I have to find the most subjective... subjectively saying, best capital for me, versus finding investors and co-investors that will pay economics." In other words, another way of thinking about it, "Is how do you manage the issue of representing my interest as an independent sponsor while still maintaining a good relationship with the investors that you know? Does that make sense?

Yeah, you can see the tension there. I think that as we've discussed Christian, separately, we know some very strong, reputable players in that industry and some newcomers who may or may not be reputable. We don't know yet, but that's a tension. One thing that I'm seeing, is that maybe the placement agent route is more applicable for a first or second time independent sponsor. From what I've seen, many times after an independent sponsor develops a track record and is out there in the field, meeting people for several years, the equity capital raising process just naturally becomes a bit easier. And the fees involved with the placement agent may not be needed.

It's an interesting discussion. I highly recommend to independent sponsors that they take each situation on its own. In some cases, a placement agent can be helpful if you need to access a different type of group or investor than you're accustomed to dealing with. I'm happy to discuss that kind of on a case by case basis with any listeners that want to call me and talk about it.

Yeah, that's a great point. And many times, it never hurts to take a phone call for each deal and each specific situation and bounce ideas around. Well, Christian, this has been super fun and interesting to have you on to hear about your world and what you're focused on day to day. Definitely, appreciate your time. Any other parting thoughts, words of wisdom for the independent sponsor listeners out there?

Yeah, I would say that the value proposition that McGuireWoods makes, I really do believe is without parallel because of our ability to leverage the relationships that we have with this amazing and diverse community of investors that look for these types of deals. We have that community. We have that set of relationships by virtue of, I think couple of things. One, is the independent sponsor networking groups that we have around the country. I know that you help to lead some of those groups, Greg. I'm involved with some of those groups in New York, San Francisco, Los Angeles, and Dallas. We have 14 groups total around the country, and we often will have different investors come and give a brief presentation at these meetings. That's one way that we've developed relationships. The other way is through our conference. Anybody who's an independent sponsor or an investor in independent sponsor deals is welcome and really ought to attend the conference. So, I'll put a plug in for that. And the last thing is that-

That conference is in October in Dallas and either Christian or I, can send information along to that. It's not similar to what we're talking about with our investor introductions. That is not a money making endeavor for McGuireWoods. It's an effort to provide value on a break even basis, but to get as many people as possible who are investing independent sponsor deals and independent sponsors in the same room, there are no other service providers invited to that other than us, McGuireWoods lawyers. And so, I'll second your plug for that Christian.

Good. And the last thing I would say is that McGuireWoods is also different because we're a very collaborative firm and we are able to leverage the relationships that we have as a firm, more efficiently than others that we compete with. That makes us, I think, a formidable source of competition to the other firms that we compete with, because it just makes a huge difference when we're able to draw upon a big pool of relationships when we're trying to make introductions for any individual person or firm that we're trying to help. So, that little plug is there. And also the last thing is, that our door is open. We are delighted to help in different ways and hopefully, have a lot of access to market intelligence and relationships that can be beneficial and even deal flow that can be helpful to those people that we're meeting.

Great. Fantastic. Well, thanks again for your time, Christian. Appreciate it.

Thanks Greg.

Thanks. Bye.

Thank you for joining us on this episode of Deal-by-Deal, a McGuireWoods independent sponsor podcast. To learn more about today's discussion and our commitment to the independent sponsor community, please visit our website at mcguirewoods.com. We look forward to hearing from you. This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.