Published May 03, 2011

Private Equity Fund vs. Fundless Sponsor

By Clay Brock

There are generally two types of buyers for small companies:  Strategic buyers (like a larger competitor) and financial buyers (like Hadley Capital).  Financial buyers then generally fall into one of two categories:  Those with committed equity capital, and those without.  Hadley Capital has committed equity capital.  Our investors (limited partners) have made a binding, legal commitment to fund our acquisitions.  When we find an attractive acquisition candidate we can invest in that company without outside approval.

In contrast, a fundless sponsor is a group or individual seeking to identify acquisition candidates and negotiate acquisitions without having the equity financing required to complete the transaction up front (hence, they are ‘fundless').  Another type of fundless sponsor the search fund.  A search fund is a  group or individual that has raised a small amount of capital from investors to ‘search' for an acquisition target.  They will identify and negotiate a transaction with a target and then the investors will receive an option to invest in the target company, or not, as they so choose.

Fundless sponsors raise the equity required to fund an acquisition after they have executed an LOI.  Since raising equity from investors is a notoriously difficult task, it is important for sellers to understand the likelihood that a fundless sponsor will actually close the transaction as proposed.  Good questions to ask include:

Who are your proposed investors and have they invested with you in the past?

What is your track record of closing transactions under the same terms as proposed?

What are the fees that you are going to propose to your investors?

_How much money are you going to invest personally in this transaction? _

Hadley Capital has committed equity capital:  We have the money.  We raised it from wealthy individuals and institutional investors who have entrusted us with their capital.  Sellers should investigate each prospective buyer to determine how likely they are to raise the money needed to close on their particular transaction.