Fundless Sponsors
Hearing / seeing alot about fundless sponsors working on a deal by deal basis and how they are increasing in popularity. I am personally very interested in LMM PE as I think there is a faster path to the top / more deals to be done in the space and am interested to hear everyones thoughts on the pros and cons of working at either (aside from the obvious, no shit it is harder to get financing / funds to do a deal if you dont have a fund). Havent had a chance to work with one for obvious reasons. Thanks.
The IS firms setup to have success are spin-outs from great firms where the career growth ceiling was closing in and the only way for them to do extremely well financially was leave and start their own thing. A ton of tourists are in this space right now but the best firms in this space continuously (and will continue to IMO) churn out returns significantly above what buyout funds have done the past 10 years. A lot to be said about deal folks more or less purely doing deals than all the other non sense that comes with having a drawdown fund (fundraising, reporting, tax, etc.).
Biggest con of fundless sponsors is there often aren't jobs for juniors (and if there are, they don't pay well). Depending on your check size and the size of the IS "founding team," they usually need to get 3-4 deals in the ground before hiring is on the table... they'll naturally want to pay themselves first, and most LPs in these deals would rather give on carry than on management fees (i.e. it's more like 1/15, not 2/20).
For that reason, BTW, I don't see such firms as being super rigorous in their underwriting. I definitely have friends who have started fundless sponsors who would admit "I don't love this deal, but I gotta pay my mortgage." Not to say that institutional firms don't cut corners or have weird incentives of their own...
Also note that there will be very little structure around any junior at such a firm because the principals basically have their hair on fire at all times.
Great spot to be in if they ultimately raise a fund, but can be pretty precarious until then.
The LMM space is getting saturated with all kinds of structures.
We get approached monthly, if not weekly, by search funds, fundless sponsors, LMM PE, family offices, MM PortCo rollups, and listed serial acquirers. Where does the search fund turf end and the others begin - I dunno anymore.
I sit on the board of a 500k USD EBITDA company and am getting lots of calls for that. Would have been a rare call 10, or even 5 yrs ago. Everyone wants to do deals, and acqui debt is easy to get for anyone reasonably credible with some Excel skills.
This is why people with actual PE experience is still paramount in this space. Tons of tourists coming in thinking doing individual deals will automatically lead to better results for a myriad of reasons (perceived lower fees, more control, etc.). Ask anyone who has gone to McGuire Woods for more than 2 years and they'll tell you there's a bunch of morons in this space but the best players are still very good and if desired will raise funds after a few successful deals.
Can you explain the economics of someone not liking the deal but doing it to pay “mortgage”?
This whole thing sounds a bit like “put money to get more money” kinda deal instead of finding where actual value creation is being done.
Realistically is there any of this independent/findless sponsor activity that’s actual o no eating and not speculation? Closest thing I’ve heard of is venture scouts where in many cases they do find where value creation is being done
Relatively spot on. I work at one that has done more than a half dozen platforms and few exits. It still is very minimal structure. You are ingrained in the port co's operational issues at times, running point on diligence for all add-ons, chasing platforms, all with limited infrastructure & support around you. Very limited companies south of $10MM EBITDA have the budget or hiring power to attract executives that can see the bigger picture or they simply don't have the time / capabilities to produce outputs which PE professionals would like to see frequently and accurately. This presents a knowledge gap between the port co and the sponsor / board. If you are a junior you can dig in and bridge that knowledge gap for your senior members that drives real value.
With that said, connecting on a solid viable platform with a non-egoistical founder in the LMM, all while being a independent sponsor is very challenging. I do think in the right structure and foundation of active portfolio companies the compensation can be comparable to MM funds. There usually is more carry to go around with less investment professionals. Additionally, 2/20 model usually is in place by the time an IS has proven successfully exit(s) and track record of closing deals. Maybe I am way off basis from others but this has been my experience.
Any idea of what to expect for cash comp at a fundless sponsor, coming in as an experienced VP/deal lead?
highly variable but your taking a discount on cash. also depends on if they have existing platform companies already or not. Indy sponsors can charge asset management fee to monitor asset (~1-1.5% EV) which is siphoned directly out of the company which is how they can pay staff. Otherwise partners are paying you out of their pocket.
Id be more concerned with negotiating greater share of transaction economics. That's the reason why anyone would make this move, more potential upside. If you have a stock waterfall cashflow model, run it with expected transaction return profile, hurdle, catch up, carry, etc., to quantify what the GP/LP profit share is expected to be in dollar terms. Do sensitivity analysis - expect carry to be ~15% or so with institutional backers. Then once you have a reasonable understanding of what total expected GP carry pool looks like, then negotiate a %. Also be mindful that it needs to compensate you for taking a discount on cash now for a potential payout in Yrs 7-10.
Risky business, but if you get 3-4 of these deals under wraps, then your carry DAW potential can be meaningful.
Thanks - very helpful
That makes sense on cash comp. Any sense of economics (% of carry pool) would you expect as first mid-level hire? Realize this probably isn't as standard as PE
I am an associate at a capital provider that specializes in providing equity to fund less sponsors.
We are bullish on the space but I do see some structural issues. Like why would a fund less sponsor win in an auction if they don’t have a fund?
And yes there are a ton of clowns in the space as barrier to entry is low but also guys who leave blue chip firms to go do their own thing. Those are the guys we try to back.
This seems to be a growing strategy among a few PE firms. Is the right way to think about it as private credit but for equity?
What could a junior person expect for comp at a fundless sponsor?
A senior analyst who used to work for me just quit to join a IS in a tier 3/4 city (Pittsburgh, Cleveland, Indianapolis) as an associate and said his total comp is $115k base+$65k bonus and 0.5% carry on each deal.
We are an independent sponsor. Most of our deals are just my cofounder and I's capital at this point, and we'll raise capital for some of our deals once they transition out of being spec sits and more like traditional LBO candidates. Like the others in the thread pointed out, the biggest risk factor is that you are essentially joining a startup in most cases.
I think it's important to figure out WHY the independent sponsor is an independent sponsor. This will determine how fast you can get promoted & harvest economics.
Most of the time it's because they are a startup and incapable of booting up with a committed fund.
Other times they are like us; our strategies do not scale well with additional capital. A lot of people are hesitant to admit this, but even if you gave me as little as ~$200m tmr, I don't think I could deploy to a standard I would feel proud of.
A good example of the capital thing is a carve out we are doing. It's a brand from a public company that does 9 figures in revenue. Our deal means I am essentially putting nothing down or VERY little and get a huge chunk of the upside. The goal of the pubco "selling" to us is to make the entity being carved out look good and avoid management looking inept. This is a fantastic deal, but if we were running a committed fund, I would have to say no and move on because I can't deploy capital...
The other thing is that I love being able to change our strategy depending on the specific macro environment. In 2020/2021 we did a lot of distressed stuff because it was easy to get leverage and use other people's balance sheets to fuel turnarounds. Right now, good quality cash flow is relatively cheap, and as someone that has moved tons of supply chains...I'm comfier underwriting tariff risk which traditional PE is not. This is hard to raise for if it's your first fund.
So overall, personally not really interested in raising a committed fund. I might do it later, but I would raise money from friends and probably do ~$100m max with a ~10% - 20% GP commit, no ongoing management fee,s etc.
Probably the best response.
To add on -
People should play in sectors they understand but how to play it can change very quickly in dynamic environments we live in. So maximum flexibility is very important therefore the IS route.
When I think about adding someone that I work with or even thinking about hiring someone, I’d only work with people who can add on an expertise that has overlaps with mine or like a protégé that I can transfer all my knowledge to and can act as a reliable information source that I just don’t have the time to.
I can second some strategies just don’t scale up. I’m on the side cutting small checks at the early stages and I honestly don’t even think there’s a need to raise capital. Monopolizing on an early raise is a pretty stupid move nowadays because you’re kind of locking in your portco’s knowledge network to just yours. It’s like being a selfish spouse who’d try to make sure their partner spends all their free time with them.
Kind of crazy how much perceived opportunities exists but we’ll have to see how much of that’s real.
The weird dynamic for us has been:
More deals executed well --> Improved deal flow & deal terms --> less capital needed
There is no way we'd be talking to a large pubco with $$$ in revenue ~4 - 6 years ago. Now they are ready to hand over the keys for basically free lol.
Can someone explain the Econs here ? How does it make sense even if you do a 50m equity check deal and 3x it you have a 100m cap gains you get 15m to split between probably 1-2 other guys for several years of work? You take a discount on cash comp in the interim and add in the years actually finding a deal. This is a top decile case outcome by the way. Maybe it’s because you underwrite multiple ?
Just don’t see how this is better than a performing fund?
You forgot one very important part of the economics, which is lot of the best independent sponsors don’t have traditional IB/PE backgrounds but entrepreneurs with very specific sector expertise and therefore much more likely to find great deals that IB/PE folks are likely to overlook.
Just to make up an example, if you’re an engineer who spent lot of time at making bullets, has an experience doing some technical sales to clients, and you also happen to understand finance (which is a quick learn to technical people IMO), then you might be one of few people actually qualified to invest in a company doing a new chemical process to enhance firepower or using AI to discover new compositions and bullet designs. Typical IB/PE professional are NOT going to understand what even determines firepower and what impacts that have on national defense capabilities or how it relates to customer experience of recreational shooting and hunting equipments.
Lifestyle is more dynamic too and people tend to come with more entrepreneurial mindset. Spend a few years finding couple great ones, walk away with 7-8figs/year and then funnel it back to their next thing.
For hours worked vs pay out wise it’s probably much better than being a IB/PE bro. Because you spend the exact same amount of time or less and the same effort doubles up as market research, education, and building a network that funnels directly into their next venture.
Control your own destiny and you can get mgmt fees too and underwrite multiple, as you mention
I think the key difference is in the fundless model you have to be doing deals consistently. One deal every 5 years won't cut it, but if you're writing one or two checks per year you start to see the returns compound.
I think it's very hard for these to outperform a growing MM/UMM/MF without some of the outsized poretntial that comes with the lower end of the market. For example, I know a fundless partner who netted mid 8 figures on a single exit last year (in addition to stacking high 6 figure dividends along the way).
Mid 8 figures means 50m?
This isn't really true though. Most fundless sponsors who've been around a while only have 3-4 active deals. Most of these firms are 2-3 people and if you sell a company in year 5 you realize carry much, much faster than a typical fund structure. Anyone with any reason jumping from a PE firm to start a fundless sponsor firm likely has multiple years cash saved up knowing they'll bleed for a little but if their first deal is a 3x they'll make way more and much more quickly than if they hung and waited 10+ years for carry to crystalize at a traditional fund. I've talked with plenty of smart FoF/capital providers who actually advise people to stay a fundless sponsor versus doing a fund as the headaches from having a fund typically outweigh just doing deals (which is what PE professionals are good at, not managing a firm of 20 people).
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