David

Tell the ISCP Club a little about yourself, your firm, and how you differentiate yourselves as independent sponsors:

I’m David Acharya, a partner with AGI Partners. By way of background, I grew up on Wall Street 25+ year ago. I started off by learning the ins and outs of investment banking, leveraged finance, and private equity as an advisor. As I was progressing in my career, I wanted to be in a position where I got the benefits of working in the fast-paced transaction environment as well as the operating experience of running a business. I was a very happy investment banker, but just didn’t get those aspects of what I wanted to do in investment banking. So, I made the move to a private equity fund where I was part of a small investment team where we invested $200 million in niche media and information services companies. We did very well and then when the 2008 credit crisis occurred, that whole world changed quite a bit and as a result I ended up discovering the independent sponsor model just by accident. Back then it wasn't even called the “independent sponsor” model, it was called the “fundless sponsor” model.

AGI Partners is a New York City-based private equity group. We have a team of four professionals and we look to invest in platform middle-market companies with EBITDA between 3 and 15 million. We focus primarily on four industries – TMT, business and tech-enabled services, niche/light manufacturing, and healthcare services. Since our inception, we've acquired three platform companies and executed ten add-on investments utilizing the independent sponsor model. We have partnered up with our network family offices and ultra-high net worth individuals, as well as institution managed capital including private equity funds.

There are many ways we differentiate ourselves at AGI. We're not generalists, we’re very focused on selected industries and on our transaction strategy of controlled buyouts. We invest in areas where we have significant investment knowledge, an investment track record, and have an established network of resources that we can call upon to help our portfolio companies.

Why do you think the independent sponsor model has become so popular and what changes do you envision in the future, especially considering the pandemic:

I think that the popularity of the independent sponsor model comes from a few things. The first, is that the independent sponsor model better aligns interests such as fees. With a blind pool, GPs can go a whole year without putting any money to work, but still collect fees. LPs also have very little say in what type of investments are pursued once the money has been committed. As time has progressed, we’ve learned that LPs want to have a say in the types of investments that they are making, and the independent sponsor model gives that option. Another driver of the popularity is that having a committed pool of capital opens you up to a whole series of compliance issues.

As a result of the pandemic, I think you’re going to see the marginal players being shaken out and the quality independent sponsors will continue to lead, grow and flourish. As with every down turn, there is a greater focus on investment alignment and optionality and therefore the independent sponsor model is going to get even more interest. Since the emergence of COVID, I've already had two committed funds who’ve raised multiple funds, call me trying to figure out how the model works because they're potentially thinking about becoming independent sponsors themselves.

How are portfolio company executives reacting to the current environment and what are independent sponsors doing to help triage in the current environment:

Nobody predicted COVID-19, nobody understood the concept of a pandemic nor social distancing. We were in the midst of a booming economy, the labor market was extremely tight, there was lots of money for investing capital -- and then within a very short period of time the world changed.

We shared our experiences in past downturns with our portfolio companies and fortunate that our leaders are experienced. Portfolio companies with dynamic leaders reacted very quickly. We’ve been supporting our teams by ensuring that the operating and financial disciplines that we have instilled in these portfolio companies are followed closely. We looked at cost structure very closely and we looked at delaying a lot of discretionary spending. We looked at every single dollar that came in and every single dollar that went out. We are focused on ensuring that our companies performed not just for their customers but also for the employees. We’re also bringing third party resources to the table who can help with growth and cost cutting strategies.

Can you share a little about the importance of maintaining and strengthening of existing relationships with capital providers:

The capital provider is the lifeline for an independent sponsor. You can have great investment ideas, you can have a great thesis, and you can have a large network of service providers that can help you generate value, but at the end of the day, if you don't have a capital provider, you don't have an investment. We always focus on maintaining and strengthening our existing relationships with capital providers and work on establishing relationships with new capital providers. The thing people often underestimate about the relationship with a capital provider is that you just don't meet them at an event and then they decide to support you by giving you millions of dollars. It's like a marriage and as such, there is a “courting process.” You spend a lot of time talking about your experiences and how we problem solve. The independent sponsor may have a certain vision for an investment that does not necessarily align with what the capital providers are thinking so discussing these things up front also helps develop the relationship. The capital providers are professionals that one works with for the next five years or so. You’ll be attending meetings with them, be on every conference call, every management presentation for add-ons, etc. Constant communication is so important, and not just reaching out just saying “hello, how are you doing?” it's really about sharing what you're seeing out with respect to valuations, transaction structures, and deal interest. If you handle your capital provider relationships right, you’ll have a long lifeline for your firm and if you mishandle them, you don’t. This is the utmost importance and I urge all independent sponsors to invest a lot of time in building and strengthening their relationships.

In your time as an independent sponsor what has been one of your greatest success stories:

I always like to say that my greatest success story hasn't happened yet! I am an optimist and say that bigger and better things are happening, but what I think I’m most proud of so far is that I have not had to write down on any investment that I’ve entered into as an independent sponsor. Our investors have made money and I'm very proud of that. At the end of the day, we work for our investors and if they are happy with how we transparent we are in managing their money ultimately make a return for them -- I consider that a to be a big success story and I hope I have many more of those going forward.

I’m also really proud of the viability of the independent sponsor model and how its grown over the years. I remember 10 years ago, every meeting attended focused on what a “fundless sponsor” does. Now, fast forward to 2020 and even the most junior person on the deal team knows what is an independent sponsor. I’m also pleasantly surprised by how many inbound calls I get from institutions that are interested in learning more and want exposure to the independent sponsor model. I believe all those meetings and events I have spoken at including iGlobal Forums have played a role in the acceptance of the model and I like to think of that as a great success story as well.

And what has been the biggest lesson learned:

The biggest lesson that I’ve learned is related to the importance of relationships. Private equity, as much as it’s a widely accepted industry, is still driven by relationships. I’ve learned that consistency in your communication with your network including capital and services providers are important.

Another thing that I’ve always told budding independent sponsors is to make sure you get the right service providers. Not necessarily the brand name and not cheapest, but make sure that your service providers truly understand the independent sponsor model and can adjust staffing and costs.

Interviews