Case Study – Independent Sponsor Buyout

The Situation: An independent sponsor group identified a company whose senior management team wanted to repurchase common equity interests totaling about 60% of the company from two dozen minority investors who accumulated their ownership as early-stage, seed-capital, “angel” investors or as employees via “sweat equity”. The management team also wanted to liquefy a portion of their ownership interests while rolling over the balance into the new ownership structure. In exchange for the opportunity to invest in the company, the independent sponsor group helped the management team value the equity, negotiate the equity repurchase with the minority investors and identify financing sources to complete the transaction.

The Company: The business is a designer and manufacturer of branded products used by sportsmen, law enforcement and other consumers. The company holds numerous patents that protect its technology/products, and has the most recognized brand name in its industry. The senior management team founded the company and intend to continue running the company for the indefinite future.  In addition to completing the equity buyback, the management team wishes to align itself with an institutional investor that will help them continue growing the company and positioning it for a sale in the future.

The Funding Request: The independent sponsor group sought an institutional investor that would provide the mezzanine and equity capital necessary to complete the equity repurchase with a structure that compensated them at closing for identifying the situation and structuring the transaction, and provided them an opportunity to participate in the future success and equity appreciation of the business.

The Solution: Peninsula Capital believed the transaction was a healthy one for the business as it rationalized the company’s ownership structure while keeping critical management in place and financially committed to the business. We proposed a dual tranche investment including subordinated debt and preferred equity. The sponsor group was provided a structuring fee, a post-closing management fee opportunity and an equity promote package, which compensated them for identifying and arranging the transaction, for their future management contribution, and contingently based on future increases in value of the company’s common equity.

INDEPENDENT SPONSOR’S COMMENTS ABOUT WORKING WITH PENINSULA CAPITAL PARTNERS:

Why did you select Peninsula Capital to be your financial partner on this transaction?

“We pride ourselves in knowing the needs and wants of the closely-held business owner. We know that when it comes time to go through a liquidity event, the last thing they need is a financial partner with a large ego and who is difficult to work with before and after the transaction. We like the fact that the Peninsula team is located in Detroit and that they have a “meat and potatoes” demeanor. They have consistently proven to be flexible and willing to work in a team environment in an effort to get a deal done.”

What was Peninsula Capital like to work with prior to closing the transaction?

“We understand that getting to the finish line on a transaction is not easy. We cannot afford to waste time, resources and damage our reputation because we have partnered with the wrong group. We know that it takes a team with a unique set of skills to balance the needs of the business owner, the complexity of the due diligence process, the fiduciary duty to their investors, and the emotions that often bubble to the surface before getting to the finish line. The Peninsula team has repeatedly demonstrated their ability to meet these needs while maintaining their integrity throughout the process.”

What was Peninsula Capital like to work with after closing the transaction?

“A company’s historical performance is not always a good indicator of its future performance. Even though it is our desire to “bat 1000” with our investment decisions, we understand that we may experience difficult situations and decisions during our ownership in a portfolio company. We must be confident in our partner’s ability to make good decisions, focus on win-win solutions and not panic when times are challenging. On the flip side, when the situation is better than expected, it is equally important to know that our partner will be patient and rely upon the management team and others that are close to the business to signal that it is the right time to exit the investment. The Peninsula team has proven to be one of our most trusted partners because of how they act in the good and the challenging times of our shared portfolio companies.”

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