In the world of private equity, a significant shift is emerging with the rise of the independent sponsor model. Unlike the traditional private equity structure, which requires a commitment to a blind pool of capital for a set duration, the independent sponsor approach offers greater adaptability, active operational involvement, and meaningful alignment with investors and portfolio companies. This model stands out as an effective solution for both investors and investee companies, especially when backed by experienced partners like ArchStar Capital, who have been former owner/operators themselves.
In this article, we will explore the benefits of the independent sponsor model and why this approach might be ideal for lower middle-market companies and discerning investors.
1. More Control Over Investment Decisions
One of the primary advantages of the independent sponsor model is that it offers more control over investment decisions compared to the traditional private equity approach. In the traditional model, investors must commit to a blind pool, giving up decision-making authority over the specific investments that the fund makes. In contrast, the independent sponsor model empowers limited partners (LPs) by allowing them to evaluate and participate in each deal on a case-by-case basis.
ArchStar Capital creates investment opportunities that align with both investor resources and business needs. As noted by founding partner Pete Villhard, “We believe that our ability to tailor each investment, working directly with our partners, leads to superior outcomes. Our goal is always to match investor goals with company vision, offering transparency throughout the process.” Investors have complete insight into the potential target companies, including a clear understanding of how funds will be used before any capital is committed.
2. Greater Flexibility in Investments and Time Horizons
Flexibility is key to the independent sponsor model, and it is a core differentiator when comparing it to traditional private equity structures. With most private equity funds, investments are locked in for a predetermined time frame of 7-10 years, forcing premature exits or less-than-ideal holding periods for businesses that require longer timelines. This structure may result in exits driven by timing requirements rather than optimizing for the best outcome.
ArchStar takes a different approach by using patient capital that adapts to each company’s growth needs. The firm is willing to hold onto investments, often 8-15 years, maximizing returns and fostering sustainable growth. This aligns with ArchStar’s long-term growth philosophy and their willingness to disrupt and evolve businesses to their fullest potential.
This approach resonated with Travis Hipp, founder and CEO of Attic Breeze, recently acquired by ArchStar who stated: “The decision to partner with a private equity firm like ArchStar, where half of its founding team are also founders and CEOs, was a natural fit because they understand the challenges I’ve faced.”
3. No Fees on Uncommitted Capital
Unlike traditional private equity firms that typically charge annual management fees on committed but uninvested capital, another distinct advantage of the independent sponsor model is that it typically avoids this practice. Fees in the independent sponsor model are typically only applicable to actual capital deployed, which aligns the sponsor’s interests more closely with the investors.
ArchStar exemplifies this investor-friendly approach by avoiding such fees, ensuring that investors are only charged based on actual capital deployed. This more transparent fee structure aligns the firm’s success directly with the performance of the portfolio companies.
4. Access to a Unique Network and Operational Expertise
Independent sponsors often bring unique networks and industry-specific expertise that traditional private equity firms cannot match. ArchStar’s team actively participates in the operations of their portfolio companies, contributing expertise that goes beyond financial engineering. This hands-on approach ensures that their investments receive the right strategic and operational support to succeed. Their willingness to directly contribute to the growth journey of each company resonates well with entrepreneurs who are looking for more than just capital—they want partners who understand the day-to-day challenges and opportunities of running a business.
Rob Conner, CEO of Tess Oral Health, recently acquired by ArchStar, shared his excitement about partnering with ArchStar, stating, “What truly impressed me was the unique background of the ArchStar team. Their former founders/operators bring a wealth of meaningful manufacturing and supply chain experience, sales and marketing expertise, and strategic growth best practices to the table, setting them apart from the rest.”
5. Deal-by-Deal Flexibility
The deal-by-deal nature of the independent sponsor model provides flexibility to take advantage of opportunities as they arise. Traditional PE models often face constraints due to needing to balance their decisions across an entire portfolio, but independent sponsors have the freedom to make decisions specific to each investment, independent of other pooled investments.
“The flexibility of our model allows us to move quickly when the right opportunity comes along, without the constraints of a broader fund’s needs. This means we can make the best decision for each individual company—when to invest, grow, and exit—without being tied to other investments. It’s about ensuring each business reaches its full potential, on its own terms,” said Tom Mingo, founding partner of ArchStar Capital.
ArchStar’s concentrated portfolio of platform investments allows them to make quick and aggressive decisions for the right opportunities. By not being restricted by a fund’s mandate, ArchStar can choose the best time to exit based on individual company conditions rather than the needs of an aggregated fund.
6. More Skin in the Game
Independent sponsors typically invest a significant amount of their personal capital in each deal. This direct commitment aligns their interests with those of their investors, increasing accountability and performance. In contrast, traditional PE firms distribute the risk across all investments in a fund, resulting in less personal financial exposure for general partners.
At ArchStar, the founding partners have committed a substantial portion of their own wealth into the firm’s strategy, creating an environment of skin in the game that benefits both the investors and the portfolio companies. “Our approach requires us to share in both the risk and reward,” Pete Villhard states, “which ensures that our investors know we are just as invested—financially and emotionally—in the success of every company we partner with.”
Conclusion: The Independent Sponsor Advantage
The independent sponsor model offers distinct advantages for both investors and investee companies, including greater control, flexibility, alignment of interests, and access to hands-on operational expertise.
By combining the advantages of the independent sponsor model with ArchStar’s unique value propositions—patient capital, experienced owner/operator founders, active management, and a genuine partnership-driven philosophy—entrepreneurs and investors alike can capitalize on opportunities that go beyond the constraints of traditional private equity.
