Fundless Sponsors are a growing trend in private equty, and a sign of the current state of the industry. Fundless sponsors are firms that identify potential deals and negotiate the terms without having the funding to finance them. Once the deal is finalized, the fundless sponsor will seek out an investor and charge fees on the deal.

Q. Another sign of how quickly things are changing out there in the PE investment landscape…
A. Yes, it used to be that everybody wanted to raise a fund, and that investors wanted to get diversification by investing in a fund. But both things are changing, and now “Fundless Sponsors” are proliferating; folks that have put together a deal but don’t have their own fund to invest in it.

Q. So, they take the deal to traditional institutional investors? Instead of going to them with a whole fund, you go with just a specific transaction?
A. Yes. Its a trend for a few reasons, but one of them is that institutional investors have become more sophisticated and like to pick and choose individual investments themselves. Another term you hear them use is “direct PE”… meaning, not through a fund.

Q. And for the sponsor? What are the advantages to not having your own fund?
A. Well, number one, you don’t have to raise it. Its an incredibly, incredibly tough environment to raise money in. But, oddly enough, another problem is that is hard to spend the money in a fund once you’re raised it… it’s actucally tough to manage a PE firm right now that does have lots of money to invest. Some very successful PE executives are leaving funds and becoming fundless sponsors…

Q. And how about the fees?
A. Some investors are paying 2 and 20 still, some a bit less than two for the management fee. But either way, their total fees are less, because they aren’t paying the 2 on committed funds that haven’t been invested in actual deals. That’s another big attraction for them: they aren’t funding a whole PE shop while its out there looking for deals to do.

Q. So this is a transaction patterns we’ll see more of?
A. I definitely think so, it’s well under way now, and the combination of better economics and individual deal selection is compelling for many investors.