Family Offices and Independent Sponsors: Could they be a perfect match?

Many Family Offices look to Independent Sponsors to help address challenges; and this pairing can offer quite a few benefits.

I recently moderated a discussion focused on  Family Offices and Independent Sponsors. Each is known for certain characteristics and strengths. The Family Office provides capital and strategic oversight through board positions, financing their investments with limited day to day involvement. The Independent Sponsor is recognized for sourcing the deal and developing the business thesis based on deep experience in building and growing a business. 

For several years, Family Offices have sought to diversify their portfolios by moving away from more traditional investments in public equities, fund of funds, etc., and instead are looking to direct investing. But most Family Offices are not interested in developing the infrastructure needed to support a direct investing model. This would require hiring investment teams supported by operating partners, significant investment and commitment, and would limit their ability to pivot expeditiously if their situations or circumstances change. 

As Independent Sponsors have gained recognition and credibility, many Family Offices are turning to them to help address their challenges. Hungry for equity capital, Independent Sponsors have long looked to Family Offices as an asset class that fits their model. Not only do Family Offices have the capital, most do not want to lead an investment, preferring instead to take on a more passive board advisory role. For the Independent Sponsor, the economics of working with the Family Office tend to be more favorable than, for example, a traditional private equity where there are two layers of carried interest to satisfy: the General Partner and the Limited Partner. In the Independent Sponsor/Family Office relationship, the Family Office is the Limited Partner. 

So, if this match seems to be made in heaven, why aren’t we seeing more Family Office and Independent Sponsor deals? 

In my discussions with Independent Sponsors, they mentioned a number of obstacles in finding the right Family Office partner. Many of these are no different to what the Family Office would also consider in a partner, but from the Independent Sponsor perspective, these challenges were mentioned:

  • Connecting and networking with Family Offices. Family Offices are notorious for keeping a low profile. Few attend the larger Independent Sponsor networking conferences, leaving it to the Independent Sponsor to leverage relationships and referral networks for introductions to Family Offices. 
  • Trust and chemistry between the parties. Building trusted relationships take time. In the context of a deal setting, time is a luxury and Independent Sponsors are working under tight timelines during their exclusivity period. Over longer periods, Independent Sponsors and Family Offices are able to get to know one another. But often, this does not align with a specific opportunity. 
  • Family Office commitment. While Family Offices may talk about going the direct investing route, it is hard to determine how many of them are truly committed. Often, Family Offices are initially intrigued by a deal. But as they work through the diligence period and understand more about the risks involved, many have second thoughts, and this often happens late in the process. It is not uncommon for the Family Office to leave the Independent Sponsor at the “altar.”
  • Capital allotment. Many Independent Sponsor deals involve “buy and build” strategies which, by their nature, require additional follow-on equity subsequent to the initial investment. Family Offices may not want to risk additional exposure to a single investment and, therefore, are reluctant to commit; or they will offer a “soft” commitment. Even if the Independent Sponsor decides to take the initial investment, we have seen situations where there is significant tension between the parties over additional capital. The Independent Sponsor and the Family Office may ultimately have different agendas. 
  • Working through tough times. Despite all the best intentions and a well-crafted business plan, variables outside anyone’s control – the macroeconomic environment, customer and vendor issues, etc. – can lead to tough situations. Independent Sponsors require a supportive partner. This goes beyond the monetary consideration to needing a sounding board and a strategic advisor that is patient and focused on the longer term.

From the Family Office perspective, many of the Independent Sponsor considerations above apply. But Family Offices also raise the following challenges:  

  • Identifying the right Independent Sponsor for them. Exponential growth in the Independent Sponsor community has resulted in hundreds of different firms. While today’s Independent Sponsor ecosystem includes firms and individuals that have been working in the space for many years, data to measure an Independent Sponsor’s track record and provide information about their experience and background is hard to come by. For a Family Office with limited resources, it is hard to determine where to begin in assessing which Independent Sponsor is the right fit. 
  • Letting go. Trusting the Independent Sponsor to go out and do their job can be difficult for many Family Offices. Even with the Independent Sponsor leading the charge, the Family Office is often asking how the relationship is set up to address any significant complexities or complications.
  • Ability to move quickly and transparently. Deal timelines are compressed during the best of times. For an Independent Sponsor, this accelerates the need to go out and raise capital. Family Offices want to ensure they have a process in place to diligence both the sponsor and the deal thoroughly and in a reasonable time period. This does not always line up and what is important, is that the Family Office notifies the Independent Sponsor of their decision quickly. 

Despite some ongoing challenges and obstacles, for many, Family Offices are the equity provider of choice. My team has been seeing many Family Offices set up dedicated Independent Sponsor strategies, including devoting resources to vet Independent Sponsors and their deals. More Family Offices are putting themselves out there through dedicated Independent Sponsor events and by using their COIs and referral networks.

The Independent Sponsor community is generally collegial and supportive. They will share insights with one another, and capital providers do the same. While finding a good deal is competitive in nature, finding the right partner to work with will lessen some of the concerns that Family Offices and Independent Sponsors have mentioned. For Family Offices and Independent Sponsors looking to partner, finding the right match, which may not be perfect, often leads to better outcomes for both parties.


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Claudine Cohen

Managing Principal, Value360 Practice

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