What investors need to know about sponsors
Sponsors help companies or investment vehicles raise capital from other investors. They are often paid to help companies or deals raise capital, so investors in a sponsored deal or investment vehicle need to ensure they understand a few important factors before investing with a sponsor.
First, they should check out the sponsor's track record. If a sponsor's prior deals have a poor performance record, it's a red flag. Likewise, if the sponsor doesn't have an investment track record because it's their first deal, that might be another red flag.
Investors should learn about the sponsor's compensation structure. They should see if the fee structure aligns with market norms or if the sponsor will get an outsized percentage of a deal's profits -- even if the investment underperforms their projections.
Evaluating a deal sponsor is as important as analyzing the potential investment because the sponsor's involvement can have a significant impact on the investment's eventual outcome.
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