Basically, a fundless sponsor group is a type of investment fund which doesn’t have the committed equity capital necessary to complete acquisitions. Instead, these sponsors must raise their debt financing and equity each time they make a purchase. Often, they will work alongside private equity funds to pay for transactions and share the profits. This is because sponsors have access to companies that private firms alone would never partake in but still consider worthy investments.
Once these sponsors raise the money they need, they acquire a business, although they don’t actively run it. Generally, the sponsor group consists of people who have experience acquiring businesses, such as former CEOs, and their goal is to add companies to their existing portfolios. They take measures to increase the value of their companies and boost the capital of the initial investors who made the acquisition possible. This group will generally have a fee associated with it.
Originally, these sponsors emerged in the 1980s when investors looked for new ways to invest in companies and employees. However, it was not until 2008 that this method of investing became popular to offer financial support to a company. They grew in popularity at this time due to increased regulations, underperforming equity funds, and more direct competition from investors. Plus, the financial crisis of 2008 brought changes to the investment business that made these more efficient.
This method of investing has grown in popularity recently due to the many benefits around them. The primary benefits include the flexible structure and the diversity of the funds model. These groups are very flexible, so that they work for the new business owners. First, they find a business they are interested in. Then, the sponsors meet with their potential investors. Finally, after getting the capital, they make the purchase. However, the terms and financial structure of each transaction are often flexible. Generally, the investment amount is decided by the investors based on the cash flow of the company.
Similarly, there are no limits to the type of business these investors can purchase. If they don’t want to invest in a specific industry, they don’t have to. Instead, they can find companies in their areas of expertise and use their experience to maximize their investment returns.
The fundless model has two main firms, a sponsor and a search fund. The search fund also started in the 1980s. It has been tied closely to people who have MBAs. Basically, it is a group of people with MBAs raising money to start their own business ventures from investors with high net worths interested in private investments.
These funds identify a target, submit a Letter of Intent, and raise the capital necessary to make a transaction. Generally, search funds acquire businesses valued between $5 million and $30 million and become active in running the company.
This type of sponsor is basically a new way of investing that doesn’t require much capital upfront. Learning more about this practice is a good idea if you are looking at getting into it.
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