Beyond the Return Profile: What Capital Providers Really Underwrite
Ahead of the Independent Sponsors Summit: New York, Stacey J. Schacter, CEO of VION Investments, shares what distinguishes a compelling opportunity, why downside preparedness matters, and how independent sponsors can build lasting relationships with capital providers.
Q: Independent sponsors are often trying to understand what actually gets the attention of capital providers. Why is this such an important conversation to have openly right now?
The market is considerably more selective than it was a few years ago. Capital remains available, but higher financing costs, uncertain exit timing and political uncertainty have made firms more cautious. Private equity firms are also taking longer to realize existing investments, further contributing to that selectivity.
Independent sponsors are therefore competing for both attention and capital. Capital providers need to understand how a sponsor differentiates itself and why its particular opportunity stands out.
Sponsors often assume we primarily want to hear about the company, its growth potential and the purchase price, and we do. But they must first answer several fundamental questions: Why are they the right sponsor for this deal? What is the downside? What is the path to repayment or exit? How much control will the capital provider have? What happens if the base case is wrong?
Too often, we are presented with the optimistic scenario without a candid discussion of what could go wrong. We appreciate sponsors who identify the risks and explain the mitigants upfront. Because sponsors typically contribute limited capital themselves, their credibility, preparation, responsiveness, sector knowledge, alignment and ability to manage problems all become part of the investment decision.
Capital providers are not only underwriting the company. We are also underwriting the structure, the downside and the sponsor.
Q: What is one thing independent sponsors may misunderstand about how family offices evaluate opportunities?
I can only speak from my own experience with a small family office, as VION is private equity-focused. Family offices vary considerably: some operate much like traditional private equity firms, while others are larger than many PE firms.
Independent sponsors sometimes assume if the return profile is attractive enough, the capital will follow. For many family offices, returns are only part of the equation. Some have smaller investment teams and therefore concentrate on sectors they understand particularly well. Others invest in areas that matter personally to the family, regardless of the potential IRR. Some prioritize wealth preservation and have a lower tolerance for risk, while others take a far less formulaic approach to investing.
Understanding the individual family office, its objectives, capabilities and motivations is therefore essential.
Q: Capital providers see a significant volume of opportunities. What makes a sponsor or deal memorable before the first conversation even takes place?
Memorability usually comes from clarity and differentiation before the detail. Before the first call, I should be able to understand quickly what the company does, why the opportunity exists, why it is attractive now, and what the sponsor believes is mispriced or underappreciated.
When I practiced law, we referred to something similar as the “bathroom rule”: a judge should be able to understand our position in the time it takes to use the bathroom. If you cannot communicate the central argument that concisely, your message is not getting through.
The supporting detail is still necessary, but the key elements of the transaction must be immediately clear. Sponsors should demonstrate they understand the opportunity, have done the work and have considered what could go wrong.
The materials must also be genuinely professional, not merely look professional. If I open a financial model and find errors, I lose confidence in the team before we have even spoken. The same applies to avoidable mistakes or typos in the presentation. Every element should be checked carefully.
Q: What do you hope independent sponsors in the audience will better understand about the allocator perspective after this session?
From an allocator’s perspective, we are not simply evaluating a transaction. We are assessing the sponsor, the downside protection, the structure and whether this is someone we want to partner with through both strong outcomes and difficult situations.
Attractive returns capture our attention, but they are only the starting point. Trust, judgment, transparency and alignment are what ultimately make us comfortable committing capital.
The objective should not simply be to secure funding for one transaction. It should be to convince the capital provider you are someone worth backing repeatedly. One-off deals are simply less compelling than the prospect of a repeatable, long-term partnership.
Q: What are you personally most looking forward to discussing – or hearing from sponsors about – during the roundtable?
I am always interested in what is new and how different industries are evolving. I want to hear where sponsors are identifying market misalignments that could generate an outsized return relative to the risk.
Conversely, I am equally interested in which industries or sectors may be facing significant challenges and whether those dislocations could create opportunities for disciplined investors.
