Independent Sponsor Comp Structure
Work at a LMM-focused independent sponsor with “flexible” equity capital (i.e., large go-to LP base that each opt in to fund deals).
The comp is structured to be $120k base + variable bonuses based on the amount of deals closed. Each deal closed is a $75-100k bonus (in other words: two deals closed = $150-200k of bonuses).
Initially, coming from MM investing, I thought this model would offer a lot of upside given the perceived lower competition of deals in the LMM. Turns out, the LMM is also competitive & getting a deal done is much more challenging when you don’t have committed capital.
Long-story short, we had a few deals fall through last year, which led to ZERO deals closed and a huge hit to total comp.
Curious to know if other independent sponsors are structured the same way or if I’m being ripped & should jump ship someplace else. Thoughts?
Based on the most helpful WSO content, your compensation structure aligns with what is commonly seen in the independent sponsor model, but it also highlights the inherent risks of this setup. Here's what you need to know:
Compensation Structure:
Challenges in the LMM Space:
Risk vs. Reward:
Should You Jump Ship?:
Alternative Structures:
Ultimately, you're not being "ripped off," but the challenges you're facing are inherent to the independent sponsor model. If the lack of stability is a dealbreaker for you, it may be time to consider other platforms or roles with more predictable compensation.
Sources: What is reasonable comp for an Associate at a Fundless Sponsor doing deals at $50m-$500m+ EV?, Small Fund vs. Rollup, Independent/fundless sponsor and Family Office surge
Currently at an IS - do not recommend. From what I’ve gathered, IS comp structures vary. However, I have a similar comp structure to you except fewer $$. Have been at the firm for a few years, single-digit LOIs executed, most fell through due to lack of fundraising, some due to diligence, one received funding at the 11th hour, one is barely hanging on.
LMM is competitive and coupled with being overlooked due to lack of committed capital, it is a tough space to be in.
I love the work but am not a fan of the fundless model. As a junior, it’s frustrating to carry a deal from sourcing to fundraising and having the deal die. Economics for IS firms can be great at scale, but if you aren’t there it is a tough game to play. That being said, l’ve concluded it is too volatile for my liking and seeking to transition in the near future.
I’ll also add the “flexible” equity capital tag is a classic IS selling point. Lol
Thank you. Super helpful to hear from someone who has been working in the model for awhile now.
How many deals in total did you close over the course of your tenure there? And did you ever get a promo?
One big hold-up for me is that my Partners would like to close a deal prior to feeling "comfortable" with a promo to Senior Associate. I would imagine that it is closely tied to the fact that they can't pay me a promo related-raise without additional PortCo economics from management fees.
Where are you seeking to transition to?
Deals closed: 0; deals closing within 30-45 days: 1 (barring unforeseen circumstances)
No promo but in same boat as you regarding deal closures for promo. I’d second your intuition on reasoning being tied to the need for more PortCo fees. More fees = more comp, and another reason why IS is a great model for economics at scale.
Looking at other investing positions and consulting. I was concerned being at an IS would hinder my ability to pivot into those industries, but I’ve been well received thus far.
Definitely is a high risk, high reward business model. I went into the job understanding the downside, but not as much as I should have.
Our processes have been smooth until bottlenecked in fundraising. Is this where your deals are falling through as well?
Got it – that all makes sense and hoping you close that deal you currently are on!
Surprisingly, funding hasn't been our issue. It's mostly getting to the LOI signing stage that is.
The Partners are incredibly value-oriented and arguably out-of-touch with current market multiples, so they refuse to do anything above a 4.0-6.0x. I agreement with their sentiment to a degree, however, it is also frustrating since some industries are running pretty "hot" right now and you pretty much have to bid up to be competitive. That, and if a company has had a great growth trajectory, sizeable management team, and is in a great & defensible industry, the multiple range is naturally going to go up a bit (but they still aren't willing to budge).
Most of it has to do with fear of raising the equity + debt portion, and they have a constant anxiety of not being able to secure it if the bid multiple is too high (which leads to wasted resources on diligence and time).
All-in-all, without a committed fund where you can be a little more liberal about bid multiples and not worry about diligence expenses, it's really challenging to be competitive.
Proprietary search seems like the only viable approach left.
It depends. The lack of a fund often means its incredibly hard to win a process as brokers will severely handicap your certainty to close. Comp at an independent sponsor will only really be meaningful if you are able to get equity participation, as the economics are on a deal-by-deal basis. Otherwise, especially early in your career, you are risking taking below-market pay and not closing any transactions. If you stay there too long and don't close any deals your experience won't be taken as seriously when you try and lateral and worst case you could find yourself out of the industry.
Currently at a similar type of shop and the comp has been interesting only because I've gotten outsized equity participation and there have been a few home runs. The cash compensation is not competitive otherwise.
There's a big difference between saying you have a dedicated LP base that can opt into deals and actually having that LP base. It's common among independent sponsors to vastly misrepresent their ability to come up with the equity check which is part of why they get taken less seriously.
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