The independent sponsor (sometimes called a fundless sponsor) business model represents a convergence between traditional private equity and the discipline of raising capital for individual deal acquisitions. Among the celebrated attributes of the independent sponsor business model is stronger alignment offered by limited partner investors on matters such as discretionary review of all investment avenues.
Four options are available with respect to the source of limited partner capital in the independent sponsor business model. These are hedge funds, private equity firms, family offices, and friends and family. The suitability of each of these options depends on the nature and size of the deal.
Sizable deals are usually underwritten by private equity firms that are ready to deploy large capital outlays. Typically, the private equity firm will have a representative from the company to play an operational role in the business on the receiving end of the firm’s capital. Furthermore, the private equity firms play an essential role in the negotiation of deals.
Conversely, smaller deals can usually be covered by family offices. The independent sponsor will in this case usually be allowed to steer the deal as well as operational roles after the deal is closed.
The Irresistible Lure of the Independent Sponsor
Independent sponsors make it possible for financial partners to participate in deals that they would ordinarily be precluded. An independent sponsor brings valuable relationships to the table.
The inside knowledge and experience that the independent sponsor has on a particular geographical area or industry lays bare for the financial partner investment opportunities they were until then unaware of. Financial partners may also come into contact with companies that have yet to be officially put up for sale.
In addition, the industry and operational expertise possessed by the independent sponsor will likely prove highly instrumental to the success of the venture after the deal is closed, and is therefore deemed of high value by private equity firms and other investors.
Steadily Growing Momentum
For a long time, budding managers of private equity funds with plans of launching into the industry have been met with enormous barriers to entry. Start-up funds have continually found requirements for registration extremely problematic. Moreover, raising capital is a herculean feat for first-time funds.
By and large, a growing number of limited partners prefer to invest larger portions of their capital in a handful of highly reputable funds with impeccable track records of fund management.
It is for these reasons that the business model of the independent sponsor is becoming increasingly favored: it has fewer barriers to entry. According to experts, independent sponsors may now be in the region of a thousand firms. Aspiring deal makers looking to carve out a space for themselves in the growing profession can do so without meeting the insurmountable resistance that bedevils their counterparts in fund management.
Launching such an investment platform is now less expensive and easier thanks to third-party service providers with large leaps in tech advancements. Undeniably, the independent sponsor model continues to gain increasing favor among mid-market and lower mid-market investors and market sellers.
We have successfully completed deals with independent sponsors. If you are one, feel free to reach out to discuss how we can assist.