Business types go to trade shows to meet clients and hear from industry leaders. But no one much likes the booths filled with eager marketing staffers handing out stress balls, coffee mugs and tote bags to anyone who will take them.
"When I'd ask exhibitors what they hated, they'd say the booths," said David Acharya, who was an investor in some 50 trade shows. "Booths are about a $4 billion business, and I saw an opportunity to make them better."
Around 2014 Acharya discovered Impact XM, a New Jersey company that makes cutting-edge trade-show booths, such as one for Canada Goose that immerses visitors in Arctic-like conditions so patrons can get a feel for just how warm its coats really are. Acharya knew he wanted to buy the company but didn't have the money and didn't want to turn to a private equity firm or bank. Instead, he started dialing for dollars and in a few months was able to buy Impact XM for an undisclosed amount. Revenue has since soared, he said, though, typical of many in the private-equity sector, Acharya does not want the amount published.
"Let's just say we have a happy investor base," he said.
Acharya is part of a growing army of private-equity investors hunting for deals in places ignored or overlooked by the likes of Blackstone Group and KKR. These executives refer to themselves as independent sponsors because they don't have a buyout fund on hand but instead raise money anew every time they want to buy a company.
"We used to call ourselves 'fundless sponsors,'" said industry veteran Richard Baum. "But that sounded too much like being a homeless person."
Whatever term they use, the investors are part of one of the most dynamic niches in the scorching- hot world of private equity. It's estimated that independent sponsors accounted for about a quarter of the more than 5,000 private-equity deals struck last year. And with PE firms having raised more than $2 trillion in the past five years, established buyout shops are increasingly turning to independent sponsors to help find attractive takeover targets.
"The scarce commodity in private equity isn't capital," Baum said. "It's a good deal."
It's thought that roughly 2,000 independent sponsors are scattered across some 250 firms. Many are refugees of established private- equity shops, banks and law firms. Others are business executives with a keen sense of when a competitor is ready to sell. Others have few bona fides at all beyond seeing private equity as the ticket to riches. A report by accounting firm Citrin Cooperman said 25% of independent sponsors rely on "industry research/cold calling" to find deals.
"It's the Wild West, and there are no barriers to entry," said Bruce Lipian, co-founder of Stone Creek Capital, one of the most established independent sponsors, with more than 20 years in the arena.
Yet independent sponsors almost never make headlines, because they usually buy firms that are small—perhaps with $10 million or so in annual operating income.
"Generally people are buying companies with a little hair on them," said Citrin Cooperman partner Sylvie Gadant. "You're talking about places with a small number of customers or maybe a founder who's ready to retire."
If a modest acquisition goes wrong, the downside is limited. But the potential upside is huge because independent sponsors can pocket management fees and carried interest and collect a big share of the proceeds when they sell a company.
Perhaps the biggest payday in the space was when Baum, a former Goldman Sachs research analyst and Bloomingdale's executive, helped assemble a group that acquired western-wear retailer Baskins in 2009 for an undisclosed sum. The retailer had 30 stores and about $60 million in annual sales, based on data in a regulatory filing, when it was sold in 2013 to a private-equity firm that owned competitor Boot Barn. A year later the combined company went public. Today it has a nearly $900 million market value and more than 230 stores.
"Everybody won on this deal," Baum said.
With independent sponsors demonstrating they can find diamonds in the rough, big PE firms are looking to muscle in on their turf or—as they might prefer to say—partner with them.
"The PE world is realizing that independent sponsors often have a real angle on a company, a real experience set," said Jon Finger, a partner at law firm McGuireWoods. "That can be extraordinarily valuable in the current M&A environment."
Part of the newfound respect stems from big PE firms having more money than they can easily deploy. Blackstone has raised $126 billion in the past year, and last week CEO Steve Schwarzman described it as "an out-of-body experience." With the big banks pitching the big PE firms the same big deals in the hopes of sparking an auction, an independent sponsor with a source of genuinely new deals is now very interesting indeed. Gadant of Citrin Cooperman says she gets calls "all the time" from PE firms seeking introductions.
Before building a career as an independent sponsor, Acharya worked in a traditional private-equity firm and at two major banks. He started hunting for deals on his own around the time of the financial crisis, when it was nearly impossible for anyone to raise money for a leveraged-buyout fund. "I just sort of fell into it," he said.
All the attention his sector is getting of late from large firms is flattering, but he has had plenty of success while flying under the radar. In 2015 and 2017 Acharya was named "dealmaker of the year" by the New York chapter of the Association for Corporate Growth, a business group. He also recognizes that despite his newfound fame, his work as an independent sponsor is not all that different from how KKR's founders operated when they were starting out in the 1970s.
"In the early days, Kohlberg Kravis and Roberts didn't have a fund—they'd go to Bear Stearns clients to see if they'd invest in their deals," he said. "As the world changes, we go back to the basics."