Afinancial sponsor is aprivate equity investment firm, particularly aprivate equity firm that engages inleveraged buyout transactions.[1]
In addition to bringing capital to a deal, financial sponsors are expected to bring a combination ofcapital markets expertise, various important contacts, strategies foroperational improvement, and the experience of owning leveraged companies.[2] As the owners of the company, financial sponsors rarely manage a company directly and are most active in issues relating to the company'scapital structure andbalance sheet as well as strategic initiatives includingmergers and acquisitions,joint ventures, and management restructurings. The company's CEO and other senior management maintain responsibility for day-to-day operational issues.
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 ofbank loans,high-yield debt andmezzanine 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 thepublic markets through aninitial 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 ofIPOs.[3]
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