A financial sponsor can refer to a private equity firm that manages leveraged buyout transactions or individual investors who provide funding and advice for new businesses. They bring valuable assets such as contacts and expertise to improve the business and ensure its success.
A financial sponsor is a term that can be used in financial circles in two different ways. The most common application has to do with identifying a private equity firm that is dedicated to the task of orchestrating leveraged buyout (LBO) transactions. A second use of the term is to identify individuals or group investors who serve as a source of income and advice for a new business venture.
Related to the work of the private equity investment firm, a financial backer brings several important assets to the task of managing the purchase. These include providing a variety of contacts that may be helpful in arranging the leveraged buyout and presenting ideas on how to improve the overall operation of the business and improve the returns generated once the buyout is successfully completed. All these elements come together with the idea of positioning the business to compete more effectively within the market. Typically, the sponsor has prior experience with purchases of this type which allows them to draw on experience developed over time, including skills developed as a result of owning a business that has been leveraged.
Providing sound financial advice is also key for situations where the financial sponsor or mentor is helping a new business get established and begin its progress toward profitability. In this context, the role of the sponsor is twofold. Along with investing funds in the new company that make it possible to open the business and start building a customer base, the sponsor will also be somewhat involved in creating the structure of the organization and may even play a role within that structure. over a period of time. hour. For example, a financial sponsor with a background in corporate finance may lend their expertise to the new company’s CFO for a while, or possibly fill that role while the company develops to the point of needing a full-time CFO.
With both applications, the financial backer has a stake in the success of the project. In terms of leverage buyouts, the interest is to make sure the M&A process is as smooth as possible, ultimately helping the leveraged company emerge stronger and capable of generating higher returns. With the launch of a new business, the financial backer dedicates time and talent along with the financing as a means of obtaining a higher return in a shorter period of time.
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