The Definitive Guide To Independent Sponsor Vs Search Fund Structures

Author: Jim Burke  Last updated: July 2025 Estimated read time: 6 minutes

Private equity has several different models for acquiring and growing companies. Two of the most common approaches in the Lower Middle Market (LMM) and Small and Medium Businesses (SMB) are the independent sponsor model and the search fund model.

Both models are used by individuals or small teams who want to buy and operate businesses.

They differ in how they raise money, who gets involved, and how the deals are structured. This guide outlines the key aspects of each model, including how they work, their differences, and how they fit into the private equity landscape. It is written for emerging investors, and those evaluating their first steps into private dealmaking.

What Is An Independent Sponsor

An Independent Sponsor in private equity is an individual or small group that sources and closes acquisition deals without having a committed fund. Instead of managing a traditional fund with pre-raised capital, the Independent Sponsor raises money on a deal-by-deal basis.

Independent Sponsors typically find a company to acquire, negotiate the transaction, and then approach investors to fund the deal. These investors are often high-net-worth individuals, family offices, or institutional partners who commit capital after reviewing the specific opportunity.

Many Independent Sponsors have backgrounds in investment banking, consulting, private equity, or operating companies. They bring experience in managing transactions or running businesses.

Unlike traditional private equity firms, independent sponsors do not manage pooled investment vehicles. They operate with low management fees and rely on closing deals to generate income, usually through a share of the profits called carried interest or promote. More on the Independent Sponsor model here.

What Is A Search Fund

A search fund is an investment model where an individual or small team raises money from investors to search for, acquire, and operate a private company. The model started in the 1980s at Stanford University as a way for aspiring entrepreneurs to become CEOs of established businesses.

In a search fund, investors first provide capital to cover the cost of finding a target company. This search phase usually lasts 1 to 2 years. Once a suitable business is found, the searcher raises additional capital from the same investors to acquire and operate the company.

Search funds are commonly created by recent MBA graduates or early-career professionals with leadership backgrounds. The goal is to take a hands-on role in growing the company over several years.

Key characteristics of search funds include:

- CEO Focus: The searcher becomes the CEO of the acquired business and runs day-to-day operations

- Two-Stage Investment: Investors provide capital first for the search, then for the acquisition

- Target Companies: Usually stable, profitable businesses with $5-15 million in annual revenue

Key Differences In Capital Raising And Structure

Independent sponsors and search funds both raise capital, but their timing, investor relationships, and structures differ significantly.

Independent sponsors operate without a committed fund. They are not the sponsor of a fund in the traditional sense. Instead, they raise money only once a deal is ready to close. Search funds raise capital in two steps. First, investors commit money to fund the search process. Once a company is identified, those same investors have the right to invest in the acquisition. The investor relationships also differ. Independent sponsor investors review each deal independently. Search fund investors get involved earlier and provide support throughout the search and operating phases.

How Do Roles And Responsibilities Compare

After acquisition, independent sponsors and search fund entrepreneurs take on very different roles.

An independent sponsor typically stays involved as an investor or advisor. They help guide strategy, support major decisions, and communicate with management and investors. They rarely run the company day-to-day.

In contrast, a search fund entrepreneur becomes the CEO of the acquired business. They take full responsibility for managing the company, leading the team, and making everyday business decisions.

These different approaches create distinct responsibilities:

- Management Involvement: Independent sponsors advise from the sidelines while search fund operators lead from within

- Time Commitment: Independent sponsors may work across multiple deals while search fund operators focus entirely on one company

- Value Creation: Independent sponsors influence through capital structure and strategy; search fund operators create value through direct operational improvements

The time horizon also differs. Independent sponsors may exit investments in 3-5 years, while search fund entrepreneurs typically commit to 5-7 years of operational leadership before considering an exit.

Pros And Cons Of Each Model

1. Financial Upside

Independent sponsors earn compensation through carried interest (10-30% of profits) after investors receive their return. This structure rewards successful exits without requiring full-time operational involvement. Search fund operators earn equity through vesting schedules. They typically start with a small ownership stake and earn more over time as they lead the company, potentially reaching 20-30% ownership.

- Risk Profile: Independent sponsors take early financial risk during sourcing but less operational risk; search fund operators share early risk with investors but take on greater operational responsibility

- Return Timeline: Independent sponsors often seek exits in 3-5 years; search fund operators typically plan for 5-7 year horizons

2. Operational Commitment

Independent sponsors serve primarily as advisors or board members. They provide strategic guidance but rely on existing management teams or hired executives to run operations.

Search fund operators take full CEO responsibility. They manage all aspects of the business including hiring, strategy, sales, and financial performance.

- Time Investment: Independent sponsors balance multiple projects; search fund operators commit full-time to a single company

- Skill Requirements: Independent sponsors need transaction and financial expertise; search fund operators need leadership and operational skills

 3. Investor Alignment

Independent sponsor investors evaluate opportunities deal by deal. They expect clear governance structures and regular reporting on financial performance.

Search fund investors support both the search and acquisition phases. They often serve as mentors to the operator and remain involved throughout the investment.

- Relationship Dynamics: Independent sponsors manage multiple investor relationships across different deals; search fund operators work with a consistent investor group on one company

- Decision Making: Independent sponsors typically create formal boards; search funds often use advisory boards with active investor engagement

4. Deal Size And Complexity

Independent sponsor private equity transactions typically range from $5-50 million in enterprise value. These deals may involve complex capital structures with various debt and equity components.

Search fund acquisitions are usually smaller, ranging from $5-30 million. The financing structures tend to be more straightforward, often using senior debt and common equity.

- Industry Focus: Independent sponsors work across various sectors; search funds target stable industries with recurring revenue

- Transaction Complexity: Independent sponsor deals often involve more complex terms; search fund transactions prioritize simplicity and operational fit

Which Approach Fits Your Investment Strategy

The choice between these models depends on your background, goals, and resources.

Independent sponsors typically need personal capital to fund sourcing activities before raising investor money. This creates early financial exposure, but operational risk is lower since they don't manage companies directly.

Search fund entrepreneurs raise funds in two phases, reducing early financial exposure. However, they take on full operational responsibility after acquisition, which increases personal and management risk.

Control preferences also matter. Independent sponsors influence through board roles and strategic guidance without day-to-day management. Search fund operators take full control as CEOs, making all key decisions while reporting to investors.

Funding relationships differ too. Independent sponsors need strong networks to raise capital for each specific deal. Search fund operators raise money before finding a company, requiring early trust from investors who believe in their ability to find and run a business.

Key factors to consider include:

- Background Match: Transaction experience suits independent sponsors; leadership experience suits search funds

- Capital Access: Independent sponsors need deal-by-deal funding relationships; search funds need investors willing to back a blind search

- Time Commitment: Independent sponsors can work across multiple deals; search funds require full dedication to one company

Final Takeaways For Independent Sponsors And Search Funds

Both models offer paths to private company ownership with different responsibilities, funding approaches, and investor relationships.

Independent sponsors raise capital deal by deal and typically serve as advisors after acquisition. Search fund entrepreneurs raise capital in two stages and lead the acquired company as CEOs.

The choice depends on your experience, financial resources, desired level of operational involvement, and investor relationships. Those with transaction backgrounds may prefer the independent sponsor model, while those ready to lead companies directly may consider the search fund approach.

Platforms like Verivend help both Independent Sponsors and Search Funds manage capital flows efficiently. Verivend's payment system has processed over $2 billion in transactions for hundreds of sponsors and thousands of investors, streamlining the administrative aspects of deal-making.

To learn how Verivend can support your independent sponsor or search fund strategy, schedule a demo today.

FAQs About Independent Sponsor Vs Search Fund

How do independent sponsors typically source their deals compared to search funds?

Independent sponsors find acquisition targets through industry relationships and personal networks, often focusing on sectors where they have experience. Search funds use a more systematic approach with broad outreach to many businesses, typically focusing on a specific geographic region.

What are the typical returns for independent sponsor deals versus search fund acquisitions?

Independent sponsor deals typically target 2-4x returns over 3-5 years through financial engineering and strategic improvements. Search fund acquisitions aim for 5-10x returns over 5-7 years through hands-on operational growth and business development.

How much capital do I need to start as an independent sponsor versus launching a search fund?

Independent sponsors generally need $50,000-$200,000 annually to cover deal sourcing expenses until a transaction closes. Search funds typically raise $400,000-$600,000 from investors to fund a 1-2 year search process before acquisition.

Can someone transition from being a search fund entrepreneur to an independent sponsor?

Yes, many successful search fund entrepreneurs later become independent sponsors, leveraging their operational experience and investor relationships to pursue multiple deals without taking on CEO responsibilities.