I am interviewing with a regional firm that shows up under private equity in searches, on linkedin, and other sources. However, they call themselves a "private investment firm" and there is no fund. It looks like they maybe borrow on a line of credit to acquire companies and in the phone interview they said they have never had a dollar of equity (not sure what that means).
Has anyone ever heard of this? It seems like standard PE by name with portfolio companies, distressed debt, and LBOs. Do any other firms use this type of model or know what is going on here?
Thanks.
They're possibly a fundless sponsor. Which basically means they don't have any committed capital of their own, but when they source a deal, they have a network of equity capital sources that they can tap to invest in that deal specifically. Then they take a fee for arranging the deal, and sometimes even a performance fee if the investments they arrange pan out.
I am pretty sure they use a line of credit as I have found things that say XX has provided XX with $250M of financing.
Is this the same as a fundless sponsor?
I do remember them saying that they typically have 75%+ LTV on their distressed purchases.
It's a fundless sponsor, which means they don't have any committed capital or AUM. To get deals done, they leverage relationships with banks to finance the deal. In addition, as CaptK said, they can also leverage investor relationships (which includes PE firms with committed capital) to provide the equity required to get the deal done.
One very good example of a recent acquisition by a fundless sponsor is the acquisition of TV Guide by Opengate for $1 (one dollar). TV Guide was hemorrhaging cash and the parent (Macrovision) just wanted to get rid of it. Given that there would probably be significant restructuring costs and negative cash flow, Opengate most likely had a lender provide the working capital required to turn the business around. If this is the case and they didn't need to bring in outside equity investors to fund working capital, they get to keep all of the upside if they are successful.
However, in a situation where a business is being purchased at some multiple of revenue or EBITDA, the fundless sponsor will need to bring in an outside investor to fund equity. Since the fundless sponsor essentially sourced the deal for the equity investor, they'll take a success fee if it closes. In addition, if the deal is successful, they usually get a piece of the upside (options).
From my experience, fundless sponsors usually have an angle when they look at deals. When they pitch deals to me, the fundless sponsor usually already has a team of consultants or operators engaged with very specific experience that qualifies them to evaluate the opportunity and even come in as the new management team post-transaction.. or the fundless sponsor has some "in" into the target that will allow the deal to get done much more easily.
That makes sense...but I am still on the fence because they certainly never mentioned anything like that and they have their own asset management team. Can you confirm this is what this business does:
www.summit-investment.com
I worked at a business dev. firm where the owners invested they own money along the investors. They didn't officially run a fund but they did own equity in many investments.
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