The interview below is part of a series from McGuireWoods that features interviews with impressive independent sponsors as part of our ongoing commitment to the independent sponsor community. To recommend an independent sponsor for a future interview, email Jon Finger at jfinger@mcguirewoods.com.
Q: How long have you been investing in independent sponsor-led transactions?
Cliff Meijer: Headway Capital has been investing in independent sponsor transactions for over 10 years, but we dramatically increased our focus on this sector with HIP IV, our 2018 vintage fund, and independent sponsor transactions are the core focus of HIP V, our most recent fund. Moreover, we increased our average deal size and are now investing $15 million to 25 million into the equity tranche of each transaction.
We are also active investors across diversified industries in both the United States and Europe, which we believe makes Headway Capital unique as an experienced global capital provider focused on independent sponsor-led transactions.
Q: Why did you decide to take this distinct investing approach?
CM: The founders left global secondaries firm Coller Capital in 2004 to establish Headway as a capital solutions provider for complex liquidity needs in the small-to-midcap sector, so the independent sponsor market is a natural extension of our capabilities. We have found that there is a deep need for dedicated and experienced institutional capital in this space. In many of our transactions, we are the first institutional investor to invest with the independent sponsor, and we believe Headway is able to add value not only by providing capital, but also by leveraging our 20 years of experience of investing in similar transactions to provide insights on a particular deal and on the development of their own businesses.
It’s very rewarding to be able to support these teams in their entrepreneurial journeys of becoming more established private equity firms. With an opportunistic mandate and focus on investing in resilient, mature companies alongside experienced private equity managers, investing in independent sponsor transactions provides the risk/return characteristics we seek.
Q: What are some of the most impactful reasons you think the independent sponsor model has grown so robustly, and what changes do you envision for the future?
CM: As capital raising for traditional, commingled funds continues to be challenging, and as traditional fund platforms reach a certain level of maturity where succession issues start to present challenges, the opportunity for experienced private equity managers to launch their own platforms has never been better. Furthermore, as returns from independent sponsor investments continue to improve, more capital will be attracted to the sector. In essence, you are starting to see the supply/demand dynamics create a “flywheel” effect, thus leading to an incredible growth in the sector over the past few years.
Q: What are the most common misperceptions about the independent sponsor model?
CM: The most common misperception of the model is that there are no experienced private equity investors in the independent sponsor sector. The thinking has been, “Why wouldn’t these experienced managers stay on a more traditional asset management platform?” While there certainly are new entrants to the market that have little or even no prior track record of principal investing, we are seeing an increasing number of very experienced deal professionals move to the independent model.
Some may view “deal-by-deal” investing as a way to build a track record prior to launching an inaugural commingled fund, while others are more than happy to just be “deal guys.”
Q: Recognizing every deal is different, what are some of the most important considerations for you when choosing a capital partner for a deal?
CM: Headway’s investment strategy focuses on three key principles: invest only in high-quality, mature companies in resilient sectors, at attractive valuations that are at a discount to the sector comparables, and with managers that have an established, realized track record of principal investing. These three criteria drive our selection of opportunities to pursue.
As it pertains to a specific transaction, we focus on ensuring proper alignment among all relevant parties: the operator, sponsor and capital provider. We achieve this through establishing appropriate governance provisions and economic sharing models with our sponsors, as well as requiring that real “skin in the game” from our managers in the form of co-investment.
Headway’s mission is to be a preferred capital provider for independent sponsors, not just for a specific transaction, but as they continue their investment activities and building of their firms.
About Cliff Meijer
Cliff Meijer is a managing director of Headway Capital‘s U.S. subsidiary and joined Headway Capital in 2015. Prior to joining Headway, Meijer was managing partner of the private equity fund management practice at Thomas Weisel Partners and, subsequently, Stifel Financial. Meijer also previously worked at BancBoston Capital and Abbott Capital Management. He has a bachelor’s degree in entrepreneurship/entrepreneurial studies and an MBA from Babson College.
