Many believe that independent sponsors acquire whatever they can get under LOI, and that the flexibility of the model enables them to close any deal.
On the contrary, the independent sponsor model is quite formulaic. The target needs to be sufficiently stable to attract 2-3x senior debt and sufficiently attractive to project a 30%+ IRR for equity investors.
Independent sponsors' "Buy Box" is therefore quite narrow.
While there are exceptions to every rule, most independent sponsors shy away from:
• Distress (timelines too quick, poor access to debt)
• Legally complex deals (need unconditional access to capital)
• High valuations (>7x deals require "unrealistic" growth projections)
• Growth equity (conservative underwriting is a mismatch with high CAGRs)
• Cyclical, volatile, seasonal (lenders don't like)
• Stable/flat revenue (nice cash cows, but not enough upside for LPs)
• Large deals ($100m EV, requires massive fundraising lifts)
• Small deals (<$1m EBITDA, not worth the time; txn fees are prohibitive)
• Turnarounds (not sufficiently proven for capital providers)
