Here is our third installment discussing the various types of institutional investors many business owners may meet. Previously, we have written posts focusing on debt and equity investors. This time, we focus on investors that are less common but still play a vital role when it comes to investing in small-to-medium-sized businesses (SMB), specifically independent/fundless sponsors, business development companies and turnaround funds. Independent/Fundless Sponsors Independent sponsors (also referred to as fundless sponsors) are individuals or groups who seek to acquire and operate businesses without the existing backing of a fund. In other words, once they identify a target acquisition, they then seek the needed capital from investors. Sponsors will have a portion of the equity in the business either from investing their own money or granted for their role in identifying, acquiring and operating the business. They may also collect management fees from the business. Independent sponsor deals, much like private equity (PE) firms, often include a combination of debt and equity. Typically, the investors backing independent sponsors tend to be one or more of friends and family, private equity firms, family offices and hedge funds, depending on size and type of acquisition. Often, the independent sponsors themselves are private equity experts, former investment bankers or those with highly successful operating experience who want equity ownership and direct involvement in the growth of a company. Because of their experience, they are usually able to bring expertise, relationships and other assets to their investments. Business Development Companies A business development company (BDC) is a type of closed-end fund that normally trades on a stock exchange. BDCs typically invest in SMBs or financially distressed businesses. Investments in SMB are intended to generate growth, while investments in financially distressed businesses are with the aim of getting the company back on solid financial footing. Because BDCs are a closed-end fund, they must be registered with the Securities Exchange Commission (SEC) and come with certain requirements:
They must invest at least 70% of their assets
Those investments need to be in private companies or public U.S. firms with a market value of less than $250 million
They are required to give managerial assistance to the companies in their portfolios
When BDCs make their investments into companies, it is usually with some combination of debt and equity. Turnaround Funds
Turnaround funds are PE funds that specialize in investing in businesses in turnaround situations. These businesses are financially distressed, may be in or rapidly approaching bankruptcy or are facing some other special situation that could lead to their (financial) demise.
Because these businesses are financially distressed, they have a lower value, which is what makes them attractive turnaround investments. That also means that there is a lot of potential value upside as the business gets back on solid footing.
Turnaround funds typically bring a variety of expertise and resources from financial engineering to restructuring to operations management. While no business wants to find itself in a turnaround situation, working with a partner with expertise in this area can be a real benefit, creating long-term value.
Fulham Partners is ready to help you with understanding your capital needs and identifying potential investors.