DealLawyers.com Blog

This Torys memo notes that the size of sponsor commitments has grown significantly in recent years in response to limited partners’ desire to see general partners have more skin in the game. The memo discusses the various strategies sponsors are using to fund these commitments. This excerpt discusses alternatives available to emerging fund sponsors:

Early-stage managers often lack the personal liquidity or track record to borrow against future management fees or carry. As such, emerging managers tend to use creative internal solutions:

– Employee participation. Founders may spread the GP commitment across a broader team, requiring managing directors, principals or even senior associates to contribute. This builds alignment internally while easing the burden on any one individual. Some sponsors may tie an employee’s carry allocation to the size of their contribution to the GP commitment.

– Revenue-based loans or personal guarantees. In some cases, principals borrow personally using commercial loans backed by expected fee income or other collateral, though this comes with risk.

The memo also discusses financing alternatives available to mid-sized and established sponsors, and the considerations and trade-offs associated with those alternatives. It also offers some thoughts on how financing alternatives for sponsor commitments are likely to evolve.

– John Jenkins