The independent private equity sponsor market has experienced explosive growth, with 1,400 active independent sponsors now operating, representing approximately double the number from 2019, according to law firm McGuireWoods. This surge has been accompanied by significant industry recognition, as the firm's annual conference connecting independent sponsors with capital providers attracted roughly 1,600 attendees last year, representing a sixfold increase from 2017. The growing popularity reflects a fundamental shift in how private equity professionals approach deal-making and investment structures, with many dealmakers leaving bigger firms to pursue independent sponsorship opportunities citing the freedom and flexibility of investing without a fund structure.
Independent sponsors operate under a significantly different fee structure compared to traditional private equity firms. Instead of the standard 2% management fee on assets under management, these firms typically charge a transaction fee of 1% to 2% of the target company's value, plus an annual monitoring fee of 3% to 5% of adjusted earnings before interest, taxes, depreciation and amortization. According to a University of North Carolina study commissioned by the Small Business Investor Alliance, independent sponsor deals generated a median gross internal rate of return that was approximately 5 percentage points higher than the industry benchmark, with a mean total value to paid-capital of 2.86 times compared to 2.13 times for the industry. The deals do come with certain risks that aren't present in the pooled-fund model, including the need to secure financing after handshake agreements and complexities in founder-led companies that often lack professional capabilities.
Independent sponsors are increasingly targeting deals in the $2 million to $10 million adjusted earnings range, with many transactions generating $500 million to $1 billion enterprise values, as reported by Citrin Cooperman. These firms accounted for 27% of transactions that closed last year on Axial, a deal network for the lower middle market. The deals typically involve founder-led companies with lower valuations, with more than half having multiples of 4- to 6-times earnings, compared to a median of more than 11 times for traditional buyouts, according to McKinsey & Co. The independent-sponsor market is becoming much more institutional and complex, with Houlihan Lokey estimating they have advised on 50 deals over the past three years. Proponents of the independent-sponsor model say it generates better returns with a loss rate that's similar to US buyouts, while allowing sponsors to focus on company health rather than bureaucratic overhead.
IVEST Consumer Partners achieved significant success with the Care Bears brand, acquiring the beloved 1980s children's brand from the Weiss family in 2023 alongside traditional private equity firm Cloverlay. During its ownership, IVEST relied on intellectual property expertise to quadruple Care Bears' royalty income in three years before agreeing to sell the asset to Authentic Brands Group last month. David Acharya's Acharya Capital Partners has completed two deals and exited one with the sale of event-marketing firm Impact XM, which generated a return on capital of more than 21 times for investors. BellTower Partners, founded by former Carlyle Group CEO Kewsong Lee in 2023, has invested in three companies as an independent sponsor and exited two investments since its debut. Altaline Capital Management, launched last year by mid-career veterans of TA Associates, H.I.G. Capital and KKR, has three active investments and exited one deal that gave confidence in the independent-sponsor model.
The model has attracted prominent industry figures, including former Carlyle Group CEO Kewsong Lee, who founded BellTower Partners in 2023, and KKR co-founder Henry Kravis, who advocated for young investors to buy small companies and grow them through acquisitions rather than starting funds. According to Jon Finger, a McGuireWoods partner, the independent sponsor universe continues to grow in a healthy fashion due to the availability of capital to back these firms. The trend reflects a broader shift toward flexibility and entrepreneurialism in private equity, with many professionals leaving larger firms to pursue independent sponsorship opportunities. Even experienced financiers see investing on a deal-by-deal basis as a more promising path, with firms like Ocean Avenue Capital Partners raising funds that invest solely in independent-sponsor deals and having more than $1.9 billion of assets. The deals do come with certain risks that aren't present in the pooled-fund model, including the need to secure financing after handshake agreements and complexities in founder-led companies that often lack professional capabilities, but the opportunity lies in looking through that "hairiness" as Aviara Partners managing partner Peter Martenson notes.
