The sponsor’s political capital. Why an investment committee approves only a price that someone at the buyer is ready to defend

On a Friday evening, I got a call from the person who was running the transaction on the buyer’s side. That person had one question. They wanted to know how, in the EBITDA bridge, we had calculated the normalization of the pay of a management board member who was to stay with the company after the transaction. The call lasted eight minutes. On Monday morning, that buyer’s offer arrived. It was 35 percent higher than the next one and turned out to be the highest in the entire process.

The premium had been created earlier, inside the buyer’s organization. The eight-minute call only showed that someone there was personally finishing the valuation and was ready to defend it.

We ran the process at Capital One Advisers last year. The buyers who submitted lower offers behaved differently. The people running the transaction on their side stopped answering the phone on Wednesday afternoon. Their offers arrived on time, but no one on those buyers’ side was fighting to win anymore. A sponsor who has something personal to win in a transaction runs it like an owner. A sponsor who has merely been assigned the transaction passes the documents on and waits.

I have changed the details so that neither the company nor the parties can be identified.

In my two previous articles, I wrote about the EBITDA bridge, where sellers lose money after signing the letter of intent, and about the longlist, which decides who reaches the second round. This article is about the third element of the same story: a specific person on the buyer’s side. That person determines whether the offer goes to the investment committee with a strong case behind it or is quietly put aside two weeks before the meeting.

Most sellers treat the buyer as one organization that makes one decision. Yet the price is decided earlier by one person, who judges how much of their own standing to stake on the transaction. The investment committee usually approves as much as that person can defend before it.

Who the sponsor is

In the deal market, the word sponsor often means a private equity fund that buys a company. In this article, it means a person. By internal sponsor I mean the person in the buyer’s organization who takes the transaction on and obtains all the internal approvals for it.

The most important approval comes from the investment committee, the body that approves spending on acquisitions at the buyer. In many Polish groups, the management board simply acts as the committee. Later, if the value of the transaction exceeds a certain threshold, the approval of the supervisory board is also needed. In parallel, in-house and external lawyers review the agreement. The team that is to integrate the company into the group after closing is already planning the first twelve months during due diligence. In a large organization, each of these groups has its own timetable and its own concerns. Each of them can also stop the transaction.

In a private equity fund, acquisitions are the team’s daily work, and the sponsor is visible from the start. It is the partner who leads the project and personally answers for it to the investment committee. The problem of a hidden or weak sponsor shows most clearly with strategic investors. For them, an acquisition is a departure from day-to-day business, and someone has to take responsibility for it.

In a corporate group, the owner usually talks to the business development director responsible for acquisitions. This director praises the company and is happy to visit the plant. The owner hears in this the interest of the whole corporation. In fact, the director runs the process, and the sponsor is often someone else: a management board member or the head of a division who, after the transaction, will take the company into their budget and answer for its results. If that person does not want the acquisition, the transaction falls through, however much the director wants it. The director must not be dismissed, though. It is the director who decides whether to show the company to the management board at all. As early as the first meeting, the owner can ask which division the company will join after the acquisition and when they will meet its head.

Political capital

By political capital I mean the trust and influence the sponsor has built up in the organization over previous years. The sponsor has a reputation as someone who sees projects through. They know the people who will vote at the committee meeting. They are ready to take responsibility when, six months on, the transaction turns out to be harder than it looked in the presentation. This capital is limited. The sponsor decides how much of it to spend on a particular transaction.

This decision is made early, before the seller receives any signal. The sponsor makes it after the first discussion of the teaser, a short, anonymous description of the company, and after a first reading of the memorandum, which describes the company in detail. At that point the sponsor judges whether it is worth staking their own reputation on this transaction. If they decide it is, they get personally involved. If they decide it is not, they formally keep running the process. Each new problem then becomes a reason for them to pull out.

A seller who starts courting a buyer only in the second round is therefore usually courting too late.

Four signals visible from outside

At Capital One Advisers, we assess the sponsors at potential buyers separately, while working on the longlist. This is the fifth criterion for assessing a buyer, alongside the four I described in my previous article. We take four signals into account. Each of them can be assessed, at least in part, from outside the buyer’s organization.

The first signal is position and tenure. A business development director who has been with the organization for two years has less political capital there than a management board member with ten years’ tenure. Formally, both can run the process. A board member, however, can take a transaction through the committee in six weeks. A business development director with no one from the board behind them will run the same transaction for a quarter and in the end will not get it through the committee. Position and tenure are easy to check on LinkedIn and in the company’s reports and announcements.

The second signal concerns what the sponsor can personally gain or lose from the transaction. It may be a promotion, a part of their pay that depends on results over several years, their standing with the supervisory board, or confirmation of a thesis the sponsor publicly defended six months earlier. This signal is the hardest to read from outside. Part of the picture comes from the buyer’s public strategy. If the management board has announced that it will grow through acquisitions, the person responsible for that goal has something to prove in every transaction. A sponsor who risks nothing runs the process cautiously. A sponsor who has something to win puts pressure on their own organization.

The third signal is that person’s track record in that organization. What counts is how many transactions they have closed there in the last five years and how large they were. A sponsor who has closed four transactions in four years in a given organization has different political capital from someone who took up the post six months ago. This track record can be reconstructed from announcements of earlier acquisitions in which the person appeared publicly, and sometimes from conversations with bankers who worked on those transactions.

The fourth signal is behavior at first contact. It is the only one that becomes visible only once the process is under way. An engaged sponsor replies to the first message within forty-eight hours. They ask specific questions that show they have read the materials. A sponsor without personal commitment replies through an assistant within a week and asks for additional materials they do not really need. The first message and the first request for a meeting say a lot about the sponsor’s strength. Sellers rarely read them consciously.

The Friday evening call showed the same behavior just before the offer was submitted. The caller asked about one item in the bridge because the rest of the model had already been worked out. Pay normalization is an adjustment that shows how much the company would earn if it paid the board member a market salary. The sponsor knew that this adjustment changes the EBITDA from which their committee would calculate the price as a multiple of earnings.

The same mechanism on the buyer’s side

When we advise buyers, we see this mechanism from the other side. A project that no one in the organization fights for personally does not reach the investment committee. It gets stuck at the stage of preliminary analysis or market comparisons. A memo is written saying that the company is interesting and that its valuation needs further verification. Three months later, it turns out that no one commissioned that verification. The buyer then does not submit an offer, regardless of the quality of the company.

In projects where I advise buyers, transactions without a clear sponsor reach a letter of intent in fewer than 10 percent of cases. Transactions with such a sponsor reach it in close to 60 percent of cases.

A buyer’s adviser therefore sometimes has to find a sponsor where there is none. The adviser looks in the organization for a manager whom this acquisition will help achieve their own goals and strengthen their position in the group. Then the adviser gives that manager the numbers and arguments with which the manager can go to the committee and stake their own reputation on the project. This takes four to eight weeks. The seller does not see it, and it almost never leaves a trace in the transaction documents.

What this means for the seller

When building the longlist, a buyer with a visible, specific sponsor who holds a strong position in the organization gets higher priority. A buyer assessed only on the features of the company as a whole ranks lower on the list.

In the first-round questionnaire, one question always concerns the person who will lead the transaction at the buyer. We ask about that person’s decision-making authority and about the approvals the buyer needs even before signing the letter of intent. We set this answer against the answers to the questions on financing and strategic rationale.

Before granting exclusivity, the seller should meet the person who will defend the price before the committee. If the buyer sends only the team running the process to every meeting, that is a signal too.

The sponsor can also be helped. When the buyer asks about a difficult detail in the company’s finances, it is often gathering arguments for its own committee. A quick and precise answer helps the sponsor defend a higher price.

A seller who takes the sponsor into account when preparing the process finishes the first round with a list of buyers who can pay a premium and have someone in-house ready to defend that premium. A seller who leaves this element out gets a list of organizations, several of which could in theory pay a high price. None of them, however, has a person who will take that price through the investment committee.

The difference usually comes to light two weeks after the letter of intent is signed. Some buyers sign the letter without prior committee approval. Such buyers treat exclusivity as a free option to keep the company for themselves and work out the project later. This becomes visible when the buyer has to pay advisers for due diligence and ask the committee for money. Only then is it clear which offers had committee approval behind them from the start. For the others, the buyer’s team is only now seeking it.

Where these signals fail

A strong sponsor can also be a risk. A transaction that rests on one person falls through when that person leaves or changes position during the process. A sponsor who wants to close the transaction at any cost can also hide difficult issues from their own committee. These then come out in due diligence and lower the price. Signals from outside are also easy to misread. A quick reply may be thanks to an efficient assistant, and a slow one may be a feature of an organization in which everything takes a long time. When the buyer is a family company, the sponsor is sometimes the owner. The committee then stops being an obstacle. Instead, there is a risk that one person will suddenly change their mind.

The bottom line

A sponsor cannot replace price or financing. The sponsor does, however, determine whether the price and financing reach the committee in the form the buyer proposed.

The hardest choice arises when the highest price comes from a buyer with a weak sponsor and a lower one from a buyer where someone is clearly fighting for the acquisition. The higher offer may not survive the committee. The lower one has a better chance of ending in a signed agreement. The choice turns on how much the seller will lose if the exclusivity granted to the first buyer comes to nothing. The seller will then have to go back to the second buyer, who knows it was the second choice.

Service: M&A advisory on a company sale