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This recent study from The University of North Carolina’s Institute for Private Capital finds that fundless sponsors – a group that many have looked their noses down at over the years – have actually outperformed traditional private equity funds in recent years. Here’s an excerpt from the study’s conclusion, which refers to fundless sponsors as “independent sponsors”:

Our performance analysis shows that independent sponsor investments have generated strong absolute returns and, more importantly, competitive-to-superior relative performance compared to matched non-IS buyout transactions. Focusing on investor-reported transactions, we find average(median) gross TVPIs of 2.9 (2.1) and average (median) gross IRRs of approximately 29% (24%) for seasoned transactions. When benchmarked against carefully matched buyout investments by entry year and size, IS investments exhibit positive excess performance with statistically significant outperformance on average.

At the same time, we find no statistically meaningful differences in loss incidence or downside severity between IS and non-IS investments, suggesting that higher returns are driven by greater upside rather than lower risk. These results are consistent with the hypothesis that independent sponsors are able to exploit informational frictions, sourcing advantages, and bespoke structuring opportunities that persist in smaller and more complex private companies.

The study says that most fundless sponsor activity is in the lower middle market, and suggests that targeting this market segment, as well as the traits of the people involved in fundless sponsors may be part of the reason for their success:

The typical independent sponsor in our sample is experienced, operates with one or more partners, and brings prior backgrounds in private equity, investment banking, and operations, consistent with the emergence of a professionalized and increasingly institutionalized IS ecosystem. Taken together, these findings support the view that independent sponsors are not merely opportunistic intermediaries, but rather specialized providers of sourcing, structuring, and operational expertise in segments of the market that are less competitive and less standardized.

– John Jenkins