One of the first things to check before wiring money into a deal is how much of their own money the sponsor is investing alongside you. Shared financial risk changes how a sponsor is likely to manage the deal, and it can change the go or no-go decision on price. If the sponsor’s own money is at stake, they may be less willing to buy at a rich valuation. If it’s all other people’s money, they have less reason to care what price they pay.
A sponsor who declines to co-invest isn’t always automatically disqualified, but it changes what else you need to verify. In those cases we turn the due diligence up, not down. If the promoter isn’t in the deal themselves, that’s a red flag that has filtered out a lot of opportunities.
Key points
- Ask how much of the sponsor’s own money is going into the deal before you wire yours.
- Co-investment can change the sponsor’s incentives on price and on day-to-day management.
- A sponsor who doesn’t co-invest isn’t always automatically out, but it should raise the due-diligence bar.
- A promoter with no personal capital in the deal is a red flag in Tom’s book.
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