Hosts Greg Hawver, Jeff Brooker, and Jason Griffith present the 2024 Independent Sponsor Deal Survey, a treasure trove of data compiled from more than 300 transactions by independent sponsors and capital partners. “One of the things that’s really changing in independent sponsor transactions is that the professionalism, the backgrounds of the folks, and the credentials just become better and better every year,” Jeff observes. “And that is resulting in more transaction volume, more sophisticated transactions, and, frankly, larger transactions as well.”

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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 are listening to Deal By Deal, a McGuire Woods podcast. Deal by Deal invites you to conversations with experienced independent sponsors and other private equity professionals. Join McGuire Woods partners Greg Hawver and Jeff Brooker as they explore middle market private equity M&A to provide you with timely insights and relevant takeaways.

Welcome everyone. Feel free to obviously continue eating and enjoying the food. We are very happy to present to you for your lunch entertainment, the 2024 Independent Sponsor Deal Survey. First, a couple housekeeping notes. Hancock Whitney Bank was the sponsor of this fantastic lunch, so want to thank Hancock Whitney. Appreciate that, appreciate that. Thank you. All right. Thank you.

So it's been several years since we've released the McGuire Woods Independent Sponsor Deal Survey and we're excited to share the latest iteration with you. A couple other just very quick housekeeping notes. Again, thank you to Hancock Whitney Bank for hosting this. The other quick housekeeping note is that we are going to be presenting some slides that show the data for our most recent survey, but this afternoon you should be getting a much more polished version of this report that's going to go to the attendees of this conference, and so we're excited to share that with you as well. So let's do a very quick intro to the three of us on the stage here. My name's Greg Hawver. I'm a partner in the Chicago office. I'm an M&A deal lawyer and have been focused on independent sponsor transactions in addition to working with funds and family offices and other M&A buyers and sellers.

I'm Jeff Brooker, private equity M&A attorney. Do a lot of work with independent sponsors either representing the sponsor or the capital provider on a sponsor-led deal. I've been doing this for a while and know a lot of you and met a lot of nice new folks in the room over the past two days.

Happy Wednesday lunch. I'm Jason Griffith, I'm in our Chicago office. I work with these guys a lot. Similar practice, M&A private equity funds and independent sponsors working for capital providers and independent sponsors.

All right, so the summary this time, so those who were here three years ago might remember Greg and I giving a similar presentation. This one is bigger with more data. Unfortunately Greg and I have less hair three years later, but better presentation, hopefully. Over 300 transactions. We're going to try to distill down our view of market as well as what the data reveals. And one of the things that's really changing in independent sponsor transactions is that the professionalism, the backgrounds of the folks and the credentials just become better and better every year, and that is resulting in more transaction volume, more sophisticated transactions and frankly larger transactions as well.

Yeah, just to follow up on that, to set the context of it more of this study. We sent out surveys several months ago now and many of the people in this room, thank you for filling out those surveys about the transactions. We appreciate that. We took that data. The McGuire Woods data analytics team uploaded that in this power BI dashboard, so it's really a treasure trove of data. We kind of put the high-level points in here, but it's fun to kind of slice and dice it behind the scenes. And so if you ever want to slice and dice with us on a specific question based on what type of capital partner, et cetera, we're happy to discuss that.

Yeah, Greg has spent a lot of time in this data.

Non-billable time.

So this is just the breakdown of who has responded to this survey. And really I think the important thing here is it's a pretty broad representation of the ecosystem, the participants in independent sponsored transactions. And so we like to think that this hopefully means that there's not an inherent bias in the data because it's coming from a whole bunch of different places.

And pretty much 50/50 independent sponsors and capital partners.

And then next slide. So among the independent sponsors that have responded to this, how many transactions have they closed? And you see again, it's pretty broadly dispersed experience level here. Some very experienced, some less so. And again, I think that's probably representative of the independent sponsor community at large. So enterprise values, this is still primarily a lower middle market phenomenon. 75% or more of the transactions are occurring between 10 million and 75 million in enterprise value. I think probably as a firm skew a little higher than that, but I do get the sense that this is probably representative of the overall activity.

I think that it's a very durable part of the private equity market in that independent sponsors are usually the first institutional capital in investing with a founder and able to make real substantive improvements to the business after the investment. So we love this segment of the market, that's why we focus our practice here. And so that's where the data bears out that that's where in event sponsors are transacting.

And I would add, I think we're seeing continued momentum towards some of the larger deals. We've got the 50% increase noted on deals over 100, and I think that's a trend that we may see continue. There's just more sophistication and more capital providers that are comfortable being in this deal space that see the value of the assets, and that influx of capital is making it easier to get deals done. And I think that accrues to everybody's benefit in this room and it'll be interesting to see how that continues to develop.

This next slide is the EBITDA multiples for the transactions that were reflected in the survey. It's mostly, I think, consistent with the last time, although you will see there's a little bit more activity in this seven to 10 times EBITDA multiple. I think that's probably reflective of the size of transactions increasing a little bit. It could also be the market becoming a little bit more frothy. But the big takeaway here I think is the independent sponsor has to find value. They're not typically transacting at really high, high-end multiples.

The bread and butter deals remain in EBITDA ranges that are well below what you're seeing in auctions.

And I think that's right. We hear from capital providers again and again, if the story is we paid the highest price, that's not a great deal for us. The story is we found value or there's something in it we think we can do, that's a great way for us to get in. And I think you see that reflected in the value that independent sponsors and their capital providers can bring to these deals.

And finding the right deal for them, being the right person to unlock that value and deliver the value of the capital provider is part of the core of success in the industry. So where are sponsors finding deals? So the takeaway here is mostly not in auctions, which is probably not a surprise. Some of this is broken auctions, but I mean consistent with the prior slide, it's not the sponsor finds a deal and then is just willing to pay more than anyone else. There's a lot of proprietary sourcing going on and a lot of deals being found by relationships.

Totally. This was new data for this survey, but it reinforced what our experience was and expectations. The next point we cover here is seller rollover. I mean everyone in the room knows what seller rollover is, and I think most think very positively of it when it's in a transaction from an alignment perspective, from easing the funding burden perspective. This isn't necessarily a specific dynamic to independent sponsor deals, but we thought it worth inquiring what percentage of deals had seller rollover. Other than maybe in an independent sponsor deal, I think you want the transaction to be down the middle of the fairway so it's easy to explain to capital partners the business and also the structure. And so I think when you lack seller rollover, that leads to some questions.

Yeah, it's interesting talking to capital providers who say it feels more like the expectation is seller rollover, and there's a story to be told if there's not. I think anecdotally we were a little surprised that the 29% of deals, or I can't read the percentage from here, but the deals that didn't have seller rollover. And I think for each of those there's probably some really unique story that goes behind it. I think the expectation really is we want the seller to be part of the team going forward and we need them to be aligned economically with what's going on.

So the next slide, just quickly, we don't need to spend a lot of time on this, but an important question is who is the lead equity investor? And you'll see family offices led the way with MezEquity including SBIC, funds close behind. We asked this primarily because it's really interesting to filter the rest of the data by who is the lead equity provider because that will drive things like governance and carried interest and other points.

This is the first prong of our independent sponsor. You'll read about it in the survey. It's the same as three years ago now. The three pillars of sponsor economics, the first one, the size of the closing fee. I don't know that we've seen tons of movement on that. I do think you can see some amount of consolidation around the midpoint there, which suggests this is kind of how the market views this. To Greg's point about filtering, however, by capital provider as you start to play with whose the lead capital provider, those numbers can move around a little bit. So to the extent that's something you want to explore somewhere we can, maybe a follow-up article or something that we can provide.

Or a podcast.

Or a podcast. It's a plug for deal by deal, which is sponsored by Jeff Brooker and Greg Hawver. So you see the dominant market position coalescing around two to 2.5%. Obviously that sits in the context of what is the rest of the deal. What's the ongoing monitoring fee, how do people think about cash and then what's the relationship with the real humans that are involved in the transaction? That all goes together, and I think in our experience we generally see people being pretty thoughtful about what is the real human dynamic at play. Is there any situation where it's going to create a cash outcome that's inconsistent with what we want on the deal or is it going to drive weird behavior?

Yeah, when a deal gets larger, I mean kind of playing off that, but also some of the earlier slides about most deal activity being in that 10 to $75 million enterprise value range, when you start to get above that range, there starts to be downward pressure on the fee, because when you start to multiply 2% times a very large number, you get a very large number and a lot of times you get over that 75 or over 100 million, you're not going to get 2% anymore, you're going to get something less. And as you get bigger and bigger, it's going to be a smaller and smaller percentage.

In terms of what's being done with the closing economics, the blue bar is our prior survey, the orange bars are the new survey. You can see the movement away from cashing out that fee. And we continue to see increases of 50% to 100% rolled in the deal. I think some of that goes into a little bit of how the closing fee is structured, which we'll talk about in a minute. But I think the idea of people taking cash away at closing, not reinvesting some of that in the transaction, you can really see the movement on that. And again, I think anecdotally we were still a little surprised at the amount of the orange bar that sits in people cashing out of the deal.

Inconsistent really with what I'm seeing. I'm seeing in almost every deal we do, I see the fee be either issued in the form of a profits interest, which is basically 100% role or invested on an after-tax basis, which then would fit into this third or fourth bucket to 50 to 75%. And so for us, I think nearly 100% of the deals would fit into one of those two categories, that it could be that cash out is in some deals where a sponsor might not be getting full reimbursement of all of its transaction costs and that fee might be being used in that context.

And I think that question will interplay then with what does the ongoing monitoring fee look like? What's the floor on that fee? Because that's a cash lever that pulls, and as you think about those concepts together, it's hard to say what is the exact market approach to those things because they move in tandem opposite of each other in every deal.

Jeff, to your point, the structure of the rolled fee can look a few different ways. One is a profits interest that's issued. Typically that's right behind return of the cash capital. There's a full catch-up. So other than a slight timing mismatch, economically it's really the same as a cash investment, but you get the benefit of doing it without having to pay taxes on taking the cash out and reinvesting it. So it's a really nice solution if you're comfortable with that slight timing mismatch. There's also the cash investment after taxes. That's really clean but usually results in a lower investment amount. And then there's the contribution in exchange that's typically referenced to the LOI, that I think is really falling out of favor as people move towards these other models that are a little more sound and a little more tested from a tax perspective. There's a lot that goes into this question, and I hope you have wonderful lawyers that can call and help you explore them so you can make a good decision for your deal.

Yeah, the orange bar is a very aggressive tax strategy in most cases.

Definitely talk to your tax lawyer before you use the orange structure.

Right. Go in that one eyes wide open after tax.

And from a regulatory perspective, if you are receiving cash and you're calling it, I mean, this is where the nuance is as well, about making sure you're talking to your lawyer because if you're receiving cash and that's a due diligence and structuring fee that's tied in some respects to the amount of hours that you're spending to structure that, then that's looked at one way from a regulatory perspective. And it's just phrased as a pure closing fee for cash, then you might need to think about some SEC registrations and some things of that nature. And beyond the scope of this conversation, it depends on structure and size of assets under management. But when you make this decision, talk to your lawyer on the closing economics.

Yeah, there is some interplay with broker-dealer risk for sure.

So management fees are the second pillar. There's the diligence fee, there's a management fee, and then later Greg's going to talk about the carried interest. So the management fee is the ongoing fee that's paid by the portfolio company. It's the sponsor's current cash that they're going to get between closing and exit. And really the market has really congealed even a little bit further than it was previously on 5% being the market answer. There's some more nuance to it than that, but the vast majority of deals we're seeing, certainly that are not very large are having the 5% of EBITDA fee.

So the next slide, this is about floors and caps. And so it's pretty common, because the management fee is the only current income that a sponsor is going to get, that there's a floor on it often. And then because if the company gets very large, it can start to be a very large amount of money that's coming out, there's often a cap. And so what we're seeing is 68% of transactions included a floor and then 65 included a cap. It's not universal, but certainly the majority. Another thing to note is if the capital provider received a management fee and only 14% of the deals, and so there are certain capital providers that institutionally, that's how they operate, they typically expect a management fee and they're not going to be moved by this slide saying only 14%, right? They're going to be moved by their own fund and new practices. And so there's some nuance there based on who your capital provider is. But in the most deals we are not seeing the capital provider take a management fee.

And in the deals where they do need to take a fee, I think that time you can see the sponsor's fee maybe come down a little bit below 5%. But I think with 5% being the market answer, a lot of the action becomes around what are the caps in the floors. And so with this heat map, and I'll break out the pointer for the first time, we're just trying to show the bulk of the data is kind of settling at floors of X amount and caps. And I can't even read up there.

And just sitting here, I can see-

Oh, here we go.

... it's a little bit hard to read from here. So I think people are still getting lunch served. This is all packaged in a broader survey that gets released later today. So if anybody's trying to take notes on this side of the room, apologies for the small print. You'll have it in an easier digest version soon.

And so holding size of deal constant, which is probably the most important factor, caps of between 500,000 and 750,000 seem to be a common answer together with floors between 100 and 300,000. For those that didn't bring binoculars to this presentation.

So the next slide is about subordination of the management fee. So it's pretty customary that if the payment of the fee would cause a breach or the company's in breach of its credit agreement, then there will be a pause on the management fee. So what we found is 90% of the time that's a pause rather than something else. And then there's 62% have no cap, and then there 28% have a cap on the accrual, and then the other 10% that only 5%, interestingly, does the fee get entirely, or does not accrue while it's blocked at all. This 4% that says that the fees are not even if there's a breach or a default. I think there's got to be a story behind those or that's bad data because that's a little unusual. And then it's highly unusual for the management agreement to terminate upon a default, but it shows up there a little bit in the data.

Great. Okay, so now we'll move on to the third pillar of the independent sponsor economic package. And probably the most important to the people in this room. We talked about closing economics and management fees. So moving on to carried interest. Our goal with this survey was to provide a snapshot of what the market is doing with respect to carried interest, and also try to depict it in a little more user-friendly manner. But we kind of broke the data down into two buckets. There's kind of two models of carried interest. The 29% they use a straight percentage model. That is kind of a more basic and straightforward approach. It's essentially the investors get their return of capital back plus an 8% typically preferred return. And after that the ups are split at a constant percentage, which is usually 20% to the sponsor. So that's kind of a classic or 1.0 or more straightforward model. And it works. Nothing wrong with that. It works in transactions where maybe it's a pass the hat deal, lots of small checks, it's easy to understand.

What we probably focus on more at McGuire Woods and maybe people in this room focus more on is what we call the variable percentage model, which is there's a return of capital to the investors and perhaps a preferred return as well. But then there's multiple hurdles that are set, and at each hurdle, the percentage of profits or ups that is split with the sponsor moves up at each hurdle. When we kind of talk about independent sponsor economics, this is mostly what we're talking about, this 71% of these deals. And that's what we're going to dive into the next couple slides.

So when you're in the variable percentage model, how are the hurdles being set? The options are multiple of invested capital, which was 54% of the deals in this survey. Last time around that number was higher at 70%. And you'll see IRR, which introduced a time component at 12%. And then the hybrid model has moved to 34%, so that's increased quite a bit. And we were talking about some variations on that. At its most basic level, a hybrid hurdle would just say maybe at each hurdle along the way you need to hit 2X MOIC and also a 15% IRR or something like that. Until you hit both MOIC and IRR, you don't move on to the next stage of the waterfall.

Sometimes then instead you'll see there'll just be a base IRR and it'll be a series of MOIC hurdles, but one base IRR and see that you have to clear. Nothing below 10 or 15% IRR or something with a series of hurdles. Or sometimes you'll see this hybrid approach. It'll be MOIC, MOIC, MOIC, but then to hit under maybe the home run scenario at the end, you have to have MOIC and IRR. So we see a bunch of different variations in this 34% of how that's structured.

Yeah. Okay. So next couple of slides are going to be what we call heat maps basically. So we struggled and I think in the last survey with ways to portray what's market for carried interest. What is the data telling us given the different MOIC hurdles, et cetera? And so in this survey we put together these heat maps. And so these two are showing where is each hurdle set in each of both an MOIC framework and an IRR framework. So the first hurdle, what do we need to hit to move on to the next one? So you'll see in the data, in this world, there's no what's market, right? But you can see the heat maps here. What are some common answers?

And so for the MOIC, the first hurdle, 1.5X to 2X, relatively common. The second hurdle from 2X to 3X, it trails off because there's not always going to be a third hurdle, a fourth hurdle. You'll see third hurdle 3X being common as well. So this will be in the survey. We thought this was the most helpful depiction. But all this being said, with carried interest, it's very hard to say what's market because there's all sorts of factors. The investors look different in most deals, whether it's a private equity fund, a family office or no lead investor. And we were talking about some other variations.

The deal's different too, right? Are we thinking this is a likely home run, which case the independent sponsors may be chasing the higher hurdle at the back end? Are we thinking this is a more stable growth kind of company? In which case maybe the first catch up or the first hurdle is the more important focal point. It's all different and variable and it all kind of mixes together in really interesting ways. But the idea behind the heat maps is to try to give you some sense of how we see things over the 300 deals that are included in the survey.

So this next heat map here, so this is showing the prior slides or what are the thresholds? And then these heat maps are showing once you hit those thresholds, what are the returns to the independent sponsor. And so again, on MOIC, while there's no market, you can see some focal points here. 10% is very common at the first hurdle. When you get to the second hurdle, 15%, 20% are common answers. And then the third moving to 20, 25, et cetera.

What you see is a range, right? The diligence fee and the management fee have really congealed around 2% and 5% being largely the market answer. And not 100% of the time, but most of the time that's the market answer. Here you see market is a range of outcomes. And like Greg and Jason have said, even then the deal specifics, there's points outside of the range here. And it could be if you're treating catch-ups differently, tax deductions differently, maybe you took a bigger closing fee or a bigger or smaller management fee, et cetera. There's a lot of ways that this kind of gets manipulated. And so I think any of us on the stage, if you gave us the particulars of a deal and you said, does this feel right? And we could probably tell you yes. To tell you for every deal overall with no detail on it, it's harder to really pinpoint that.

Jeff, your catch-up point is well-made, because I think that really skews how you think about the hurdles. Are we getting caught up to each step is an important question to what each step is. And then people who have different skill sets than the lawyers can build models and try to figure out how that actually plays out.

And then just one more kind of new graphic we have in this survey is a common from the hip questions like, okay, who pays the highest economics and what's typical for the highest economic return once you've hit your highest hurdle? And so we mapped out the data and took each waterfall to its highest point. And I think this is probably consistent with what we would think, and that it's anywhere from 20 to 30%. And then that's where those are landing, and there's all the variety of factors we talked about.

Right? Yeah. I think 25 and 30 might be slightly higher than I would've expected and 20 slightly lower as far as how this came out.

Yeah.

But again, it's hard to interpret this in a vacuum and I think this largely looks representative of things. And interesting in the IRR-based deals, the return profile at the highest tends to be lower. And we were speculating as to why that might be. And I think the answer to that is probably private equity funds tend to gravitate more toward the IRR hurdle, and then they tend to also be a little bit more discerning about some of the carry they're going to pay because often they're writing a large or one-stop shop check. So that gives them some power to push the economics down. They've got a lot of other attributes as to, we can bring a lot to the table, so maybe we're not going to pay top dollar, but we can bring a lot to the table overall. And then obviously they have to pay two letters to carry. So it didn't surprise me that that was a little bit lower.

And I think we see that in other pieces of the economic arrangement, too. So the overall fees may a little higher with the private equity investor, it's because they're sharing it, the closing fees may be cut up a little different because some of it needs to go to different places. And it is, it's a very different relationship in terms of who can bring what to the table. How does the governance work? It's an interesting model that I know folks in this room are working on and trying to find new angles on, and we have some views on that. I think there's some new ideas and rooms to grow there.

So the next two slides, we'll try to move quickly and make sure that we get to everything and give everyone plenty of time to move to their next meetings. The next two are important, but I think they're important points to focus on at the term sheet stage, because they're purely economic points at the end of the day. The first is they're a catch-up. And so the basic way that catch-up works is if the agreement is we're splitting 80/20, the economics upon a 2X return, and once the business gets to the 2X threshold, then payments pause and go 100% to the independent sponsor to get the independent sponsor up to 20% of prior profits. And then moving forward it's 80/20.

So it's critically important. And I see probably too many term sheets that don't address whether there's a catch-up or not. And I think as you're building out your model, you need to make this clear. And especially if it's a competitive process, you have multiple potential investors and one's providing a catch-up and one isn't critically important. And this just says that the market data is that catch-ups are prevalent as 76% of the answers.

I mean, if you're a sponsor and you don't have this, it's not been in the models and it's not in the LOI, you expect that your capital providers not thinking catch-ups probably, and that you're going to lose the point. It really is important that it's surfaced and that you're thinking of the carry as a holistic piece. And the next slide I think is a piece that you want.

We want to keep moving and don't want to go down a rabbit hole of tax distributions and the right versus the wrong answer versus compromise positions here. But we just note that the question of when you establish a 2X threshold, and this is only for flow through deals, do tax distributions count towards that 2X threshold? It's critically important. It should be in the model and it should be in the term sheet of how you're going to treat these. And again, I think what's important from this is that there's no market answer here. There's kind of no right or wrong answer. There's a lot of back and forth.

Yeah, there's different ways of viewing it. Some funds have very strong views on this. And I always tell the sponsor, the important part is that it's agreed upon upfront when you're setting where the hurdles are and what the percentages are and whether you have a catch-up that this is also being considered. And so it's in the model and you're comfortable with the model, and that all hangs together as a whole. Because you can get nicked if you forget this at the LOI stage and you lose the point later, you may have been leaving some economics on the table.

While we're on the topic of carried interest, forfeiture. So we see this in a minority of deals. I think 25% of the transactions we looked at included some provision where if certain bad events or bad acts occur, the independent sponsor loses a carried interest. We think 25% is a little high for deals that we see. And I think there's several reasons why this penalty can be excessive. But we wanted to ask the question like, okay, in the minority of deals, what are the events that caused the independent sponsor to forfeit the carry? So I guess the good news is that these are by and large events that are directly in the control of the independent sponsor. Crimes, misdemeanors, breaches of non-compete. We think it gets really aggressive when items like financial performance of the platform results in a forfeiture of your carry. Out of 300 respondents, so that was the answer eight times. So interesting data.

I think that's right. And I mean, I think an important thing to remember is what we think about carried interest is maybe a different question. They're related, but a different question too. Are there board flips or control mechanisms that change upon a bad thing happening? They don't have to be the same thing. And Greg, when we've talked a lot about the carried interest being part of the deal that's being entered to on the front end, that it's really uncomfortable to have a conversation about maybe losing that.

Yeah. And another one, put it in your term sheet. There's a plug for McGuire Woods, right? If you have your term sheet and you address all these important points up front, you can just get on the same page philosophically with your capital partner as opposed to discussing one of these things when you're in the throes of a deal. So our term sheets address all these key points and make sure there's alignment before people get too far down the road. We're going to move quick now because we have about five minutes and we want to cover some important points. This one we talked about at straight percentage deals. They're not really the focus of our data, but broken deal expenses are important to everyone in this room.

I think it's just an important, again, something you addressed at the term seed stage where you're feeling out the relationship between the capital provider and the sponsor. What is that partnership going to look like, and how do we think about who's going to be on risk prior to getting it closed? I don't think it's necessarily true that that goes into how's it going to be managed, how are the governance terms work? But there is interplay there in terms of who's going to be on risk and how do we think about that?

One thing that we've seen, and you guys can mull through the data, but not surprisingly when you've got single source capital, they're more likely to provide some expense reimbursement than if you've got in consortium or a pass the hat type deal. Although it's not necessarily true that somebody who's got a 25% stake can't provide 25% of the fee reimbursement. It's important conversation to have, and it's important for everybody as you think about the entire relationship, to think about what is this piece of it? Which for a lot of independent sponsors, this is a really high-risk conversation because the out-of-pocket busted deal expense for the first deal that an independent sponsor platform is doing is money right out of their pocket. And it's really high stress for them.

And just to reiterate what the data is saying and the way we divide it, we were seeing some interesting trends. So, again, we filtered by the lead capital partner and if there was no lead capital partner or was a family office, you get the results on the right of the page where there wasn't broken deal coverage. But in a world where it's PE Fund, MezEquity, other institutional investor, we're seeing the majority of deals have some level of deal expense coverage

Ensures alignment to have that coverage for the independent sponsor, because otherwise the capital's effectively getting a free look, and the independent sponsor and their law firm unfortunately are bearing a lot of risk right up to the time of closing. And that capital provider could just be saying, well, let's see how well he does and where this sits in 60 days. And at that point we'll decide whether we're in or out. And that obviously is a lot of misalignment and a lot of risk that everyone else is bearing, and there's a free rider problem.

And just last point, where you typically see this addressed and where a trade is made in a way is at the term sheet stage. And so a sponsor has a great deal and says, okay, capital partner, I'll give you exclusivity on this deal. I'll be the sponsor, you're the LP, but in exchange for that, I need broken deal coverage because private equity fund sponsors don't cover their deal expenses. So, okay, I think we have a little bit of time left here.

Okay, so this is the board matter slide. I think the important part here you see, no board representations only in 4% of the deals. So that typically the independent sponsor is going to expect to be on the board. The question of how board control is allocated and how many seats really I think follows the number and types of capital providers that invest. If it's a pass the hat deal and the independent sponsor is just by default, kind of the lead in the deal, then they're more likely to be in this 49% where they control the board. If there's a single private equity fund that is written 90 plus percent of the equity check, then almost certainly that private equity fund is going to expect to control the board. And then if you're somewhere in between that it's going to shake out probably roughly proportional to the investment. But there's, I think, a lot of different answers here, but you got to look to your capital stack to determine this.

And I think the percentage is hard to digest into a vacuum because of consent rights. So board control may mean something with a lot of consent rights or something with the few, and vice versa. If the independent sponsor is not, they should expect to have some protections having their rights moved as well.

Yeah, that's a good point. The party that doesn't have board control should have some protections. Even when it's an independent sponsor who's not putting in meaningful amount of capital, there are some basic level of protections that need to exist so that through corporate mechanics that are perfectly legal and are not a breach of the document-

You mean tricky lawyer moves?

Tricky lawyer moves, yes. You could use even more colorful language. Right, where the capital provider could decide that they're going to do something that's legal and not a breach of document, but that really fundamentally changes the deal in ways that really neither party expects to do upfront. That is our last slide, and we're about at time. So we are all three available to field questions by email after if you want to talk to us about the data. If you say, that was an interesting slide, are you able to give me... How does this break down by capital provider or what have you? We have a ton of data. We are happy to help here. We're happy to field your questions, but we are out of time right now, so we appreciate everyone who sat through and listened.

Yep, appreciate it.

Thank you for joining us on this episode of Deal by Deal, a McGuire Woods 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 McGuire Woods for informational purposes only. By accessing this podcast, you acknowledge that McGuire Woods 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 McGuire Woods. 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.