Demystifying Independent Sponsor Deal Structures
Independent sponsors, also known as fundless sponsors, have become a real force in middle-market private equity. Without committed capital, independent sponsors raise equity and debt on a deal-by-deal basis. That flexibility is a strength, but it also means you have to be precise about economics, structure, and where things can go sideways.
This article walks through key terms, strategy points, and practical considerations for independent sponsors who want to protect their upside and keep investors engaged for the long term.
Topics covered:
Closing Fees and Economic Considerations
Management Fees: Structuring Ongoing Compensation
Carried Interest: Structuring Promotes for Aligned Interests
Vesting and Clawbacks: Balancing Risk and Reward
Governance Structures and Board Composition
Allocating Broken Deal Costs
Non Compete and Non Circumvention Terms
Seller Rollovers and Related Deal Levers
Conclusion: Putting the Structure Together
1. Closing Fees and Economic Considerations
Closing fees compensate independent sponsors for sourcing, diligencing, and structuring a deal. In most transactions, sponsors receive a fee based on enterprise value, often in the 1% to 3% range, with some deals running higher depending on size and complexity.
Most sponsors roll a meaningful portion of these fees into equity, which investors expect and which strengthens the alignment story.
Example: On a 30 million acquisition with a 2% closing fee, the sponsor receives 600,000. It is common to roll 400,000 to 500,000 into equity and take the balance as cash.
When you structure closing fees, you should:
Confirm your investor base is comfortable with the level and form of the fee.
Decide whether there will be caps, floors, or step-downs at larger deal sizes.
Coordinate with tax advisors on whether and how rolled fees are treated.
Most importantly, do not ignore securities law risk. Success-based transaction fees raise broker-dealer and other regulatory issues. Independent sponsors should get specific advice on how they take fees and how their relationships are documented.
2. Management Fees: Structuring Ongoing Compensation
Independent sponsors typically negotiate a management or monitoring fee to provide recurring income after closing. Market practice often anchors around a percentage of the portfolio company’s EBITDA, usually in the 3% to 5% range with a dollar floor and cap. You also see flat annual fees or “greater of fixed amount or X% of EBITDA” structures, particularly in smaller deals or where lenders are tight on covenant capacity.
A common pattern looks like:
Fee calculated as a percentage of trailing twelve-month EBITDA.
Paid quarterly in arrears.
Subject to a minimum and maximum dollar amount.
From a practical standpoint:
Lenders often require that management fees be subordinated to senior and mezzanine debt.
Credit documents may block cash payments while covenants are tight, but fees usually continue to accrue, either capped or uncapped.
Sponsors should make sure their personal economics can survive a period where fees accrue but do not pay in cash.
3. Carried Interest: Structuring Promotes for Aligned Interests
Carried interest, or the promote, is where the real upside lives. In an independent sponsor structure, carry is usually paid only after investors receive back their invested capital, and investors receive a preferred return, often in the 8% range, although that rate does move with market conditions.
Once those hurdles are cleared, a waterfall allocates profits between investors and the sponsor. Common promote ranges run from 10% to 30%, with higher promotes tied to higher return thresholds. Newer or less proven sponsors tend to sit toward the lower end of that range (10-15%) until they build a real track record and put more of their own capital at risk. At the opposite end, repeat sponsors with clean exits and a deep pipeline are more likely to command richer or more heavily tiered promotes. In some smaller or founder-heavy transactions the parties skip a formal preferred return and instead price the deal through a lower promote on a larger common equity stake, so it is important to focus on the whole package, not just the headline carry percentage.
Key questions when you negotiate carry:
Is the promote a flat percentage or a tiered structure based on MOIC or IRR hurdles?
Is there a full or partial catch-up after the first hurdle?
Does carry sit at the Topco level, the portfolio level, or both?
Investors will focus on whether the package feels fair relative to sponsor experience, deal risk, and the amount of cash the sponsor is truly putting at risk.
4. Vesting and Clawbacks: Balancing Risk and Reward
Vesting and clawback mechanisms balance sponsor incentives with investor protection. You often see one or more of the following:
Time-based vesting of equity or promote over a three to five year period, particularly where the sponsor has a formal management role.
Performance-based vesting tied to EBITDA targets, leverage metrics, or exit outcomes.
Forfeiture or redemption of unvested or future promote if the sponsor is removed for cause, breaches restrictive covenants, or walks away from its agreed role.
True clawback provisions in multi-deal platforms, where the sponsor may have to give back carry if later deals underperform.
When you hear “clawback,” read the language carefully. In some deals it means giving back paid dollars. In others it means losing future equity or promote. The difference is material. In truly one-off deals with a single family office or a small investor group, you still see simple, fully vested promote structures with no formal vesting or clawback language. That may be easier to document, but it leaves investors with less protection if the relationship is meant to extend across multiple deals.
5. Governance Structures and Board Composition
Governance is where “control” shows up in real life. Board composition and consent rights will drive who actually runs the business after closing.
There is no single structure that fits every deal, but a common model is:
One or two sponsor-appointed directors.
One or more investor-appointed directors.
One independent director agreed by both sides.
Beyond seats, sponsors should focus on:
Which decisions require investor consent or supermajority board approval, such as incurring additional debt, issuing new equity, selling the company, or approving related-party transactions.
Whether the sponsor has any unilateral rights, such as the right to appoint the chair or to approve a budget.
How deadlocks are resolved.
Independent sponsors should be realistic. If the capital partner is writing 90% of the check, it will not accept a governance structure that leaves it with no real control. In competitive processes, sponsors often trade heavier investor consent rights for better economics. In proprietary or sponsor-led deals, sponsors have more leverage to preserve day-to-day control while still giving investors negative control over major actions.
6. Allocating Broken-Deal Costs
Dead deals are part of the business. Who pays for them is a sensitive economic point.
In practice you see a range of approaches:
In many control buyouts with a single, institutional equity provider, the capital partner covers most or all broken-deal costs once it has formally partnered with the sponsor.
In smaller deals, or where family offices and multiple investors are involved, sponsors are often expected to cover a meaningful share of costs, at least up to a cap.
Some arrangements split costs based on stage: the sponsor covers costs pre-LOI or pre-partnering, and the equity provider covers costs after investment committee approval.
At the earliest relationship stage, many sponsors effectively eat 100% of pre-partnering costs in order to prove they can source credible opportunities and run a real process.
Some capital partners agree to reimburse or credit a portion of broken-deal costs against future closing fees, particularly where they pass on a deal late in the process.
The main takeaway: do not leave broken-deal costs to a handshake. Spell out who is on the hook for what, and from when, in your deal-by-deal agreements and co-investment documents.
7. Non-Compete and Non-Circumvention Terms
Independent sponsors live and die by deal flow. If capital sources can sidestep the sponsor and go straight to the target, the model breaks.
Sponsors should negotiate:
Non-circumvention clauses that prohibit investors from pursuing identified targets without the sponsor for a defined period.
Non-solicitation and non-interference provisions related to key management and relationships.
Clear exclusions for targets already known to the investor or introduced by other sponsors, to keep the terms workable.
These provisions are often heavily negotiated. The important thing is to have them in writing, not rely on “relationship” alone. In practice these protections need to be narrow enough in scope, time, and geography to be taken seriously. Investors will push back hard on language that could be read to tie up their entire pipeline or prevent them from backing other sponsors in the same space.
8. Seller rollovers and related deal levers
Most independent sponsor deals rely on more than just investor capital and bank debt. Seller economics are a big part of the structure.
Common tools include:
Rollover equity. The seller takes part of the purchase price in equity in the new structure, often 10% to 40% of the total capitalization in the lower middle market, depending on the deal. There are outliers in both directions, especially where a founder is staying in a heavy operating role or, conversely, wants a very clean exit.
Seller notes. Subordinated debt held by the seller, usually behind senior and mezzanine lenders, with a fixed coupon and negotiated covenants.
Earnouts. Contingent payments based on post-closing EBITDA, revenue, or other milestones.
These levers affect sponsor economics directly. For example, a larger rollover can reduce the equity check from investors and make room for a healthier promote. A heavy seller note can constrain cash flows and limit your ability to charge management fees. Management equity and any rollover by the sponsor’s own vehicle sit on top of this, so the true cap table can look very different from the simple “investor versus sponsor” split people throw around in conversation.
Sponsors should model the whole stack together, not in silos.
Conclusion
Independent sponsor deals are not just about “what is my promote and fee.” They are about the full package:
Closing fees and how much you roll.
Management fees that you can actually collect under real-world covenants.
Waterfalls that investors accept and that pay you fairly.
Governance that lets you run the business without spooking capital.
Clear rules on broken-deal costs and non-circumvent protections.
Seller paper that supports, rather than fights, your structure.
Getting these terms right upfront will make your deals easier to finance, easier to close, and easier to exit.
For advice on a specific transaction, or to benchmark your independent sponsor economics against current market practice, contact us. Learn more about our Independent Sponsor practice here.
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