A financial sponsor is a term that may be used in financial circles in two different ways. The most common application has to do with the identification of a private equity firm that engages in the task in orchestrating leveraged buyout transactions (LBOs). A second use of the term is in identifying individuals or group investors that serve as both a source of revenue and advice to a new business venture.
In relation to the work of the private equity investment firm, a financial sponsor brings several important assets to the task of managing the buyout. These include providing a range of contacts that can be helpful in orchestrating the leveraged buyout and submitting ideas on how to improve the overall operation of the company and enhance the returns generated once the buyout is successfully completed. All these elements come together with the idea of positioning the business so that it will compete more effectively within the marketplace. Typically, the sponsor has prior experience with buyouts of this type that make it possible to draw on expertise developed over time, including the skills developed as the result of owning a business that has been leveraged.
Providing sound financial counsel is also key to situations in which the financial sponsor or mentor is helping a new business become established and begin its progress toward profitability. In this setting, the role of the sponsor is twofold. Along with investing funds into the new venture that make it possible to open the business and begin building a client base, the sponsor will also be somewhat involved with creating the structure for the organization and may even fill a role within that structure for a period of time. For example, a financial sponsor who is experienced in corporate finance may lend his or her expertise to the new company’s chief financial officer for a time, or possibly fill that role while the company builds to the point of needing a full-time CFO.
With both applications, the financial sponsor has a stake is the success of the project. In terms of leverage buyouts, the interest is in making sure the merger and acquisition process goes as smoothly as possible, ultimately aiding the leveraged company in emerging stronger and capable of generated greater returns. With the launch of a new business, the financial sponsor devotes time and talent along with financing as a means of earning a greater return in a shorter period of time.