Identifying and contacting lenders, devising capital structures and pitching the ‘credit story’ of your deal are all time-intensive activities. These often distract from higher-value priorities such as sourcing new opportunities, cultivating operating partnerships and developing existing portfolio companies.
Yet borrowers must engage in the necessary legwork if they are to attract lenders and secure favorable terms. Independent Sponsors (IS), however, are at a distinct disadvantage when compared with other borrower types (PE firms, large corporates, family offices). This is because most IS raise capital only when an active opportunity is on the table—an approach that lends itself to greater flexibility and nimbleness, but also comes with the downside of pitting IS ‘against the clock’ when approaching the debt markets.
This time crunch forces many sponsors to rely solely on their established networks of capital providers, and revert to familiar deal structures regardless of the particular arrangement, in an effort to ‘put some points on the board.’
In an ideal world, sponsors would do two things:
- Determine optimal debt structures (there may be more than one) based on the particular deal they are seeking to finance, and
- Pinpoint the best capital providers for a given deal, and identify their investment priorities and the deal attributes they are most sensitive to
Of course, we don’t live in an ideal world. These two approaches take precious time, and require a level of debt capital markets expertise that most IS simply don’t have the resources to acquire.
The CAPX Solution
An end-to-end digital marketplace like CAPX solves for many of the challenges independent sponsors face when sourcing debt financing, including:
1) Time Constraints
IS raise capital when an active opportunity arises, which pressures them to secure funds quickly. Sponsors often lack the resources of PE firms, which only adds to the pressures of capital sourcing.
The CAPX platform enables sponsors to instantly connect with bank and non-bank lenders on a national scale, streamlining the process for enhanced efficiency. And CAPX debt experts partner with borrowers to identify preferred debt capacities and capital structures, affording sponsors an invaluable resource when sourcing capital.
A digital platform like CAPX removes much of the time and resource pressure that sponsors face when attempting to raise capital.
2) Proof of Funds
However outdated, many sell-side bankers maintain a negative bias toward sponsors, as they prefer the ‘certainty of close’ that comes with larger PE firms (of course, closing is never a certainty, but we’ll leave that for another day). Regardless, given the added risk that a sponsor may not be able to close the deal, many sell-side bankers will ask for proof of funds.
By referencing a credible platform like CAPX that connects borrowers with lenders, sponsors can add legitimacy to their LOI. Once sponsors join CAPX, they can experiment with different debt structures and dollar amounts, and view the available lenders for any given scenario. The CAPX algorithm matches only the most appropriate lenders to the sponsor’s deal, hence these capital providers can be referenced in the sponsor’s LOI.
Additionally, lenders on the CAPX platform may also do equity co-investments, providing sponsors with a pipeline of potential equity transactions.
3) Flexible Financing Structures
One of the major upsides for LPs investing with an IS is flexibility of financing structures, as sponsors can create bespoke arrangements per each specific deal.
Yet these arrangements take time to ideate and solidify.
CAPX can help here as well. Our debt calculator and debt structure tools can help sponsors quickly identify the debt capacities and structures most applicable to their deal. Additionally, our platform will list the lenders that are most appropriate based on borrower inputs. This saves sponsors time when crafting bespoke arrangements, and enables them to approach LPs with confidence that a given debt structure will appeal to multiple lenders.
Independent sponsors often work under-the-radar deals. They want to approach capital providers, but don’t want to announce their deal to lenders with no interest, who might pass the idea along to one of their PE clients.
On CAPX, confidentiality and data security are paramount. Once the algorithm matches borrowers and lenders, borrowers must first approve the lender before they receive any information on the deal. So you control the information flow. This ensures that only appropriate lenders receive your deal, minimizing the risk of any breach of confidentiality.
5) Market Economics
Sponsors often lack the resources of larger PE firms, which make them susceptible to information asymmetry disadvantages when negotiating fee structures.
The only way for sponsors to safeguard against this trap is to come armed with a deep understanding of the debt capital markets, and what the competitive fee range is for any given deal type and debt structure.
CAPX solves this problem in two ways: Our platform expands lender outreach, enabling sponsors to obtain multiple term sheets and assess the competitive landscape for their deal. CAPX debt experts also partner with borrowers to provide insights into the competitive landscape of the debt capital markets, which enables sponsors to negotiate favorable fee structures based on enhanced market intelligence.
6) Advisor Downsides
There are many advisors out there—some that even specialize in advising independent sponsors. But these advisors come with fee structures attached, and partnering with one may present issues with a capital provider, who would prefer to negotiate directly with a sponsor, not with an intermediary.
CAPX addresses both of these concerns. There is no charge for launching a deal on the CAPX platform, saving sponsors the cost of hiring an advisor to guide them through the process.
Sponsors also receive the same guidance from our debt experts—yet because this support is not formalized under an advisor/advisee relationship, it does not present an issue for capital providers. Lenders will deal with the sponsor directly over the CAPX platform, so there is no risk of an intermediary upsetting the apple cart.
David v. Goliath
Sourcing capital is an impossibly inefficient, manual and sequential process; only digitization can truly scale your lender outreach. And the debt capital markets are opaque; only a debt expert can provide the visibility needed to secure favorable terms.
These inefficiencies work against independent sponsors most of all, as economies of scale are not on the sponsor’s side. Yet end-to-end digital marketplaces like CAPX are the slingshot that sponsors can arm themselves with, as they compete against the Goliaths of the investment world (PE firms, and large Family Offices).
When it comes to sourcing debt financing, large firms may have unfair advantages, but digitization is rapidly evening the playing field.
If you’re an independent sponsor looking for capital, click the button below to schedule a call with one of our debt experts to discuss scaling your outreach and arming yourself with debt markets expertise.