Investment terrain is being reshaped by self-governed backers on a worldwide scale.
In the dynamic world of private equity, a new breed of dealmakers is making waves – the independent sponsors. These individuals or firms act as deal originators and managers, seeking to acquire companies without a pre-committed equity capital[1].
The Independent Sponsor Model
The independent sponsor model differs from traditional private equity funds. Instead of relying on a fixed pool of committed capital, they operate using a "fundless" or "pledge fund" approach, providing them with flexibility and allowing them to be selective and patient about investments[3]. This model aligns well with sellers and owners seeking long-term partnerships, as sponsors are not bound by the typical 5- to 7-year fund life cycle[3].
The Process
The process begins with deal sourcing. Independent sponsors find potential acquisition targets and negotiate preliminary terms, often signing a Letter of Intent (LOI)[1]. Next, they conduct detailed due diligence and finalize acquisition agreements[1].
Once the groundwork is laid, they pitch the specific deal to investors to secure the equity capital needed for that acquisition[1]. Once capital is secured, they close the transaction and typically take an active role in managing and growing the portfolio company[1]. Often, independent sponsors put some of their own capital into the deal to align interests with investors, though most capital comes from third parties[1].
The Advantages
As independent sponsors complete more successful transactions, investor confidence continues to grow. Many sponsors are developing specializations in specific industries or transaction types, creating recognizable expertise[2]. This model offers greater flexibility and faster decision-making for companies seeking a nimble partner. For investors, it means access to opportunities outside the crowded bidding wars of traditional auctions[4].
Moreover, independent sponsors let investors pick and choose deals instead of committing to a fund upfront, giving them more control over risk and return[5]. They also skip the traditional management fee structure, resulting in lower fixed fees that can boost net returns over time[7].
Navigating the Landscape
To navigate this landscape successfully, potential investors should compare fee schedules across independent sponsors and larger firms to choose deals that fit their financial goals and working style[8]. Transparency about past performance builds credibility with sophisticated investors[9]. Building a core network of past backers before needing it can ease the strain of sourcing funding for each transaction[10].
Partnering with experienced advisors or co-sponsors on first few deals can improve deal execution quality[6]. A new wave of digital platforms is speeding up deals by linking sponsors and investors directly[11]. Co-investment networks allow sponsors to assemble investor groups more efficiently[12].
Looking Ahead
The opportunity to participate in this transformation exists today, with fewer gatekeepers and more paths to success than ever before[13]. With the right approach, the independent sponsor model offers clear, one-page investment memos that highlight key metrics, helping attract potential investors[1]. The future is bright for those who embrace this new approach to private equity.
[1] Private Equity Wire [2] PitchBook [3] Harvard Business Review [4] Forbes [5] Mergers & Acquisitions [6] Preqin [7] Preqin [8] Mergers & Acquisitions [9] PitchBook [10] Private Equity Wire [11] PitchBook [12] Preqin [13] PitchBook
Independent sponsors in the global trade sector often engage in investing and financial activities, focusing on businesses that offer long-term partnership opportunities. These sponsors bypass the typical 5-7 year fund life cycle by adopting a "fundless" or "pledge fund" approach, providing them with flexibility to be selective and patient about their investments.
In the process of deal sourcing, independent sponsors, after finding potential acquisition targets and negotiating preliminary terms, pitch specific deals to investors to secure the equity capital needed for each acquisition. This model offers investors more control over risk and return, as they can pick and choose deals instead of committing to a fund upfront, resulting in lower fixed fees that can boost net returns over time.
