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  • Topline Valuation Group

Fundless Sponsors are Sprouting Up in the Lower Middle Market

Hardly a week goes by when I’m not contacted by a financial-type investor looking for quality companies to buy. In the past, these solicitations were infrequent, and they were typically made by marketing specialists from large, established private equity firms. In today’s competitive M&A marketplace – where winning and losing are often defined by making the right deal at the right time – a growing number of “fundless sponsors” is scouring the middle market for companies to buy, creating challenges and opportunities for buyers and sellers alike.

A fundless sponsor operates without committed equity capital to invest in a transaction. Two basic models exist: the search fund and the sponsor. Unlike established private equity firms, whose general partners raise funds from investors in advance, fundless sponsors need to secure equity and debt financing in every transaction – typically after an LOI is executed.

Fundless sponsors are not new; Kaulkin Ginsberg completed one of our very first transactions in the early 90s with a fundless sponsor from NYC. What’s new is the frequency that these types of buyers are sprouting up in today’s competitive M&A marketplace, where pricing is relatively high for attractive deals and capital is readily available. Competition is fierce to find quality deal flow at good pricing.

Some private equity firms embrace fundless sponsors. Many of these freelancers are former CEOs who specialize in an industry and leverage relationships nurtured over decades. They are traveling to trade shows and gaining access to deals the private equity firms might never see on their own. Personal relationships go a long way toward warming an owner up to a sale he or she may otherwise ignore.

In other cases, fundless sponsors are young men and women fresh out of MBA programs looking for one company to buy and run. They’re are industry agnostic and typically define their criteria by the size of the transaction they are seeking and the location of its headquarters since they will most likely have to be on site to run the company.

Financing a transaction is a notoriously difficult task, and it’s critical for owners to understand that a fundless sponsor most likely won’t close a transaction as proposed. If the business for sale has an experienced management team with a track record of generating sustainable profits, it will have a far better chance of closing with an established private equity firm buyer.

Regardless, fundless sponsors are gaining traction in today’s competitive market. Taking advantage of one-off transactions “is one of the few inefficiencies in the private equity market” right now, according to Jonathan Grabel, CIO of the $14.6 billion New Mexico Public Employees Retirement Association, Santa Fe. New Mexico PERA has not invested in fundless deals because it lacks the resources to perform due diligence in order to invest in them, Mr. Grabel said. He has challenged firms that put together co-investment funds for fundless sponsor deals, but none has. “If investors institutionalize the fundless business, I think there is potentially a way to have risk-adjusted, outsized returns,” Mr. Grabel said.

Rich Lawson, CEO and managing partner of HGGC LLC, a Palo Alto, Calif.-based middle market private equity firm, estimated three or four of the 10 transactions the firm is targeting for its current $1.1 billion fund came from fundless sponsors. “These executives help provide private equity firms something they need — access to proprietary deal flow”.

And access is a critical ingredient in a competitive M&A market.

For more information about Topline’s co-founder, Kaulkin Ginsberg, and our M&A advisory services, please visit

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