How the Independent Sponsor Model Works
- Jim Burke
- Jul 1
- 8 min read
Updated: Jul 2
Everything A-Z on being an Independent Sponsor
What Is an Independent Sponsor?
An Independent Sponsor—also referred to as a fundless sponsor or pledge fund—is an individual or group that seeks to acquire a business without having committed equity capital in advance. This model has gained traction among experienced professionals in private equity and investment banking looking to execute acquisitions on a deal-by-deal basis using SPVs.
How the Independent Sponsor Model Works
Instead of managing a traditional private equity fund, independent sponsors identify target companies and then seek investors to fund each transaction individually. Once a target is identified and a Letter of Intent (LOI) has been executed:
The sponsor performs due diligence and negotiates the acquisition.
They present the opportunity to potential investors—such as family offices or private equity firms—who can provide the equity needed for the deal.
Upon securing capital, the sponsor executes the acquisition and often takes an active role in managing and growing the business.
This approach bypasses the structure of a pooled fund and instead relies on assembling capital for each transaction as it arises, deal-by-deal.
Independent Sponsor Structure
The image that follows details how an independent sponsors often structure a transaction. In most instances the independent sponsor will contribute some capital to the partnership, largely because investors will want to know that they have “skin in the game.” The bulk of the capital comes from investors and lenders.
Sources of Capital
Types of Equity Investors (LPs)
Capital for independent sponsor deals may come from a variety of capital providers, including:
Private equity firms
Hedge funds
Family offices
High-net-worth individuals
Friends and family
The choice of capital partner depends on deal size, industry, and sponsor experience.
Types of Debt Providers (Lenders)
Debt is held at the holding company. The traditional approach is to work with both a senior lender and subordinate lender. Independent sponsor deal financing may come from a variety of lenders, including:
Banks offering Commercial Loans
Providers of SBIC Loans
Private Lenders
Some Independent Sponsors will also secure a line or credit or debt from private lenders or banks secured on the target companies assets as working or growth capital.
More on the capital stack and different strategies in a future blog post in this series.
Target Acquisition Companies
Target companies are typically established, profitable businesses in the lower-middle market. Target businesses for independent sponsor deals typically range anywhere from $1M to $10M in EBITDA, but most commonly fall between $2M–$5M.
Operational Role
Independent sponsors bring operational or investment experience to the table. Typically
Sponsors leverage their networks of industry connections to find trusted operators to run the newly acquired business. In other cases they will leverage their own operational or sector specific expertise to work with existing teams at the target business.
Compensation
Independent Sponsors are typically compensated with closing fees and annual management fees to cover their upfront and ongoing costs and carried interest as their long term incentive for value creation and navigating to a successful exit.
Their compensation often includes:
Closing Fee (Transaction Fee): One time fee paid paid when the business is first acquired. Closing fees average 1%–5% of enterprise value upon the deal closing. $50K-$250K is the typical range to close the transaction.
Management Fee: Tied to earnings. The management fee is usually a percentage of EBITDA, often 3%–5% annually.
The Promote (Carry): A promoted equity interest (carried interest) in the range of 10%–20% of invested capital (sometimes up to 30% for proven sponsors with a track record) with so-called “waterfall” thresholds, where the base carry increases based on performance milestones.
This aligns the interests of Independent Sponsors with those of their investors and the company.
Benefits of the Independent Sponsor Model
Control Over Investment Terms: Sponsors negotiate terms on a deal-by-deal basis, providing greater flexibility.
Access to Unique Deals: They can pursue smaller or more complex deals that may not appeal to larger funds.
Operational Involvement: Independent sponsors often bring hands-on expertise, which can enhance the value of the acquired company.
How Many Independent Sponsors Are There?
As of 2025, we estimate that there is approximately 1,600 active independent sponsor firms operating in the United States. This marks substantial growth in the sector, nearly doubling from previous years. Of these:
Around 25% are considered institutional-quality sponsors with strong networks and deal execution capabilities.
Approximately 5% have the track record to raise committed funds within the next two years.
The remaining 70% are emerging sponsors (emerging managers) who may partner with established firms to access capital and expertise (GEM Equity Partners, 2023).
This expansion reflects a growing interest in the flexibility and entrepreneurial potential of the independent sponsor model.
Key Metrics For Independent Sponsors
Independent Sponsors use a range of financial, operational, and strategic metrics throughout the lifecycle of a deal—from acquisition to exit. These metrics help evaluate opportunities, demonstrate performance, and communicate effectively with capital partners.
To Evaluate Target Companies:
EBITDA and EBITDA Margin: Measures operating performance.
Revenue Growth Rate and Free Cash Flow: Indicates scalability and cash generation.
Debt/EBITDA: Assesses leverage risk.
Customer Concentration and Revenue Recurrence: Highlights revenue stability.
Total Addressable Market (TAM) and industry dynamics to assess strategic fit (Axial, 2022).
To Fundraise:
Track Record Reporting: Realized and unrealized returns, with deal-level attribution.
Case Studies and Performance Benchmarks: Provide transparency.
Alignment of Interests: Sponsor co-investment and fee disclosure.
Operational Milestones and Reporting: Roadmaps for performance improvement post-close (GF Data, 2023, McGuireWoods, 2023).
To Evaluate Fund Performance:
Gross IRR and MOIC: Key investment return metrics.
Time to Exit and Hit Rate: Measures efficiency and effectiveness.
Capital Deployment Rate: Evaluates ability to close and fund deals.
Value Creation Breakdown: Tracks how returns were generated (e.g., margin expansion, multiple uplift).
Operational Lifecycle of an Independent Sponsor
1. Strategy Development and Market Research
Activities:
Define investment thesis (industry focus, geography, deal size).
Conduct industry research using tools like:
Outputs:
Investment criteria document
Preliminary sourcing roadmap
Competitive mapping of potential targets and buyer landscape
2. Deal Sourcing and Outreach
Sources:
Proprietary outreach (email, phone, LinkedIn campaigns)
Brokered deals (Deal Flow Xchange (DFX), Axial, Aurigin, DealStream)
Personal and professional network (investment bankers, attorneys, accountants)
Tools:
CRM: Attio, Folk, Salesforce, HubSpot or for tracking deal flow
Email Automation: Outreach.io, Apollo.io for outbound
Data Rooms: Verivend, Dropbox, Notion
3. Deal Evaluation and Diligence
Activities:
Execute a Letter of Intent (LOI)
Initial screen: financials, customer base, team, competitive moat
Preliminary valuation: EBITDA multiple, precedent transactions
NDA execution and data room access
Deep due diligence (operational, financial, legal, tech, HR)
Advisors:
M&A attorneys
Accounting firms (QoE, Quality of Earnings reports)
Industry specialists
Tools:
Excel: Financial modeling & Analysis
Verivend with Data Rooms included or a dedicated data room provider like ShareVault for diligence sharing
4. Deal Structuring and Entity Formation
Legal Entity:
Typically form a Single Purpose Vehicle (SPV) as an LLC or LP
Register in Delaware (commonly), using a registered agent (e.g., CSC Global, LegalZoom)
Regulatory Filings:
EIN from the IRS
Operating Agreement or LP Agreement
Blue Sky Filings for each investor’s state under Reg D (506(b) or 506(c))
If using general solicitation: Reg D 506(c), with accredited investor verification
Legal Counsel:
Securities attorney to draft:
PPM (Private Placement Memorandum)
Subscription Agreement
Investor Questionnaire
Management Services Agreement (for sponsor fees)
Tools:
Entity Formation: Tailored deal structuring with Verivend Strategic Services or templated solutions from an SPV formation service like Savvi Legal v.s. paying lawyers an exorbitant hourly rate
5. Capital Raising and Investor Onboarding
Process:
Circulate PPM to LPs (family offices, HNWIs, PE firms)
Conduct soft commits and confirm allocations
Onboard via:
Investor portals like Verivend, Carta, or Juniper Square.
Collect KYC/AML documents
Accredited investor verification (if 506(c))
Compliance:
SEC Form D within 15 days of first sale
State Blue Sky filings for each investor's jurisdiction
Tools:
Investor onboarding, KYC & Accreditation: Verivend Strategic Services
Soft Commits: Verivend Platform
6. Capital Call and Fund Closing
Steps:
Issue capital call notices with clear payment instructions
Commonly structured with 100% upfront capital from LPs.
Banking:
Automatically open immediate SPV operating bank accounts with Verivend in seconds or manually open bank accounts at a commercial bank (e.g., Silicon Valley Bank, JPMorgan) or a digital first bank like Mercury.
Track cash inflows/outflows automatically on Verivend or manually reconcile with QuickBooks, Xero, or NetSuite
7. Transaction Execution and Capital Deployment
Closing Activities:
Final legal due diligence and purchase agreement
Debt financing secured (senior/mezz lenders)
Automatically deploy funds with Verivend or manually wire funds from SPV to escrow or seller
Post-Closing:
Update cap table via Carta, EquityEffect or via a law firm.
Initiate post-close integration planning
Issue deal summary to LPs
Tools:
Deploy Capital: Verivend Platform
Investor Communications: Verivend or manually by email or through a static investor portal.
Update Cap Table: Carta
8. Ongoing Portfolio Management
Activities:
Monthly/quarterly financial reviews with management
Board governance and value creation tracking
KPIs: revenue growth, margin expansion, headcount, customer churn
Systems:
9. Financial Reporting and Compliance
Ongoing:
Annual K-1 issuance (coordinate with CPA firm)
Maintain GAAP financials
Annual tax filings for SPV (Form 1065, state returns)
Ensure continued Reg D compliance (track investor changes)
Target company, investment and performance reporting
Tools:
Accounting, Tax & Compliance: Accounting firm or just use Verivend Stratetegic Services
Investor Portal: Static Investor Portals or DropBox or just use Verivend for dynamic, interactive performance reporting.
10. Exit and Distribution of Proceeds
Exit Scenarios:
Strategic sale, secondary buyout, recap, IPO
Coordinate with M&A advisor, attorneys, and CPA for diligence and tax strategy
Distribution:
Return capital per waterfall:
Return of capital
Preferred return (e.g., 8%)
Catch-up and carry (e.g., 20% promote)
Prepare distribution notices and wire instructions or handle seamlessly on Verivend.
Final Steps:
Close SPV formally with IRS and Secretary of State
Final investor report and case study documentation
The Solution for Independent Sponsors Verivend is the only investment management platform purpose built for Independent Sponsors. Simplify your tech stack and get your unique needs met with our end-to-end technology platform and strategic services.
Suggested Tools (Tech Stack) for Independent Sponsors Verivend is a deal execution, investor management and performance reporting platform. We power your full investment lifecycle the minute after you have found a deal and found a few investors.
Operations | Tech Stack |
Pre-Deal | |
Market Research and Strategy | |
Deal Sourcing & Due Diligence | |
Deal Pipeline & Outreach | |
Deal | |
Deal Structuring and Entity Formation | |
Capital Raising and Investor Onboarding | |
Capital Call and Fund Closing | |
Transaction Execution and Capital Deployment | Verivend |
Post-Deal | |
Ongoing Portfolio Management | |
Financial Reporting and Compliance | |
Exit and Distribution of Proceeds |
Conclusion
The independent sponsor model continues to attract dealmakers seeking flexibility, ownership, and operational engagement without the constraints of a committed fund. As the model matures, strong execution, regulatory compliance, and transparent reporting are essential. Understanding the complete lifecycle—from strategy through exit—is key for both sponsors and investors evaluating opportunities in this growing space.
Bibliography
GEM Equity Partners. (2023). Independent Sponsors: The Sweet Spot for PE Talent. Link
Axial. (2022). The Most Important Metrics for Independent Sponsors. Link
GF Data. (2023). Valuation and Deal Data for Middle Market M&A. Link
McGuireWoods. (2023). Independent Sponsor Deal Trends and Insights. Link
Harvard Business School. (2023). Independent Sponsor Playbook.
SEC. (2023). Form D Filing Requirements. Link
Juniper Square. (2023). Investor Onboarding and Fund Operations for GPs. Link
Very insightful!