Financial sponsor
Encyclopedia
A financial sponsor is a term commonly used to refer to private equity
investment firms, particularly those private equity firm
s that engage in leveraged buyout
or LBO
transactions.
In addition to bringing capital to an investment, financial sponsors are expected to bring a combination of capital markets expertise, various important contacts, strategies for operational improvement
and experience owning leverage
d companies. As the owners of the company, financial sponsors rarely manage a company directly and are most active in issues relating to the company's capital structure
and balance sheet
as well as strategic initiatives including mergers and acquisitions
, joint venture
s and management restructurings. The company's CEO and other senior management maintain responsibility for day-to-day operational issues.
and mezzanine capital
based in part on the reputation of and relationship with the financial sponsor.
Additionally, many companies owned by financial sponsors will raise equity in the public markets
through an initial public offering
or (IPO) as a means of exiting an investment. Public investors will seek to align their own interests as much as possible with those of the financial sponsor by limiting the financial sponsor's ability to sell shares and managing the use of proceeds from the offering. Various studies have been conducted to evaluate the impact of financial sponsor ownership on the performance of IPOs.
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
investment firms, particularly those private equity firm
Private equity firm
A private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital...
s that engage in leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
or LBO
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
transactions.
In addition to bringing capital to an investment, financial sponsors are expected to bring a combination of capital markets expertise, various important contacts, strategies for operational improvement
Operations management
Operations management is an area of management concerned with overseeing, designing, and redesigning business operations in the production of goods and/or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as little resources as needed, and...
and experience owning leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
d companies. As the owners of the company, financial sponsors rarely manage a company directly and are most active in issues relating to the company's capital structure
Capital structure
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80...
and balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
as well as strategic initiatives including mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
, joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
s and management restructurings. The company's CEO and other senior management maintain responsibility for day-to-day operational issues.
Sponsors and other investors
Various investor classes look to the financial sponsor to generate value in a company as much as the management or operations of the company. In particular, debt providers are willing to extend credit in the form of bank loans, high-yield debtHigh-yield debt
In finance, a high-yield bond is a bond that is rated below investment grade...
and mezzanine capital
Mezzanine capital
Mezzanine capital, in finance, refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares...
based in part on the reputation of and relationship with the financial sponsor.
Additionally, many companies owned by financial sponsors will raise equity in the public markets
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
through an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
or (IPO) as a means of exiting an investment. Public investors will seek to align their own interests as much as possible with those of the financial sponsor by limiting the financial sponsor's ability to sell shares and managing the use of proceeds from the offering. Various studies have been conducted to evaluate the impact of financial sponsor ownership on the performance of IPOs.