Working with Sponsor vs. Non-Sponsored Firms

In private capital, the debate between investing with large PE firms (institutional sponsors) and direct originators is frequent. Their structural differences impact speed, flexibility, risk, and relationships, which ultimately guide borrowers, brokers, and investors in choosing a partner.

What Sponsor-Backed and Non-Sponsored Firms Mean?

Sponsor-backed firms usually refer to large private equity firms. These firms raise capital from institutional investors. They invest through structured funds with defined mandates.

Non-sponsored firms, often called direct originators, raise capital from a combination of lines of credit, portfolio lenders, and accredited investors. They do not rely on traditional PE sponsorship. These firms underwrite, fund, and manage transactions internally.

The distinction matters because structure influences execution. It also affects decision-making, timelines, and flexibility.

How Capital Deployment Works in Practice

Sponsor-Backed (Large PE Firms):

• Fund Timelines and Investment Periods: They spend their money (capital) according to a strict schedule that is set for their investment fund. This means they only have certain time windows when they are allowed to make investments.

• Committee Approval: Every deal needs to be formally approved by a group of decision-makers (a committee) before it can move forward.

• Strategy and Risk Fit: All investments must align with the fund's big-picture, long-term strategy and must meet the fund's specific rules about how much risk they can take and how much profit they expect.

Direct Originator (Non-Sponsored Firms):

• Deal-by-Deal Decisions: They invest in each transaction individually on a case-by-case basis, not according to a fund's set schedule.

• Internal Allocation: Decisions on where to put the money are often made quickly within their small internal team.

• Focus on the Deal: Decisions are based on a careful review of the specific loan (underwriting) and the value of the assets that back it (collateral).

• Speed and Flexibility: This simpler process allows them to close deals faster and be more creative with the terms and structure of the deal.

Speed of  Execution and Timeline Expectations

Cost Structure and Economic Considerations

Direct originators keep their deal pricing simple, focusing on interest rates and origination fees that are directly connected to the specific transaction. In contrast, sponsor-backed firms have "layered economics" due to their fund structure, which includes extra costs like management fees and carried interest. For borrowers, this means that any difference in pricing between the two models is usually because of these underlying structural costs, and not because one firm is better at evaluating the quality of the deal.

Deal Size and Market Fit

Large PE firms focus on larger transactions, as their fund scale, institutional mandates, and economic structures generally require a minimum deal size to be efficient. This means smaller deals typically fall outside their scope.

In contrast, direct originators have greater deal size flexibility and cover a broader range. They often focus on the middle-market or niche opportunities, which allows them to effectively serve segments of the market that large PE firms overlook.

The Red Tower Capital Approach

For investors seeking flexibility, deal-by-deal analysis, and access to unique middle-market opportunities, the direct originator model often presents a compelling alternative.

At Red Tower Capital, we operate as a direct originator, allowing us to deploy capital with the speed and flexibility that is often absent in fund-driven, committee-approved structures. We leverage our deep internal underwriting capabilities, focusing on the specific merits of each transaction and the quality of the underlying collateral, rather than being constrained by the rigid mandates of a large institutional fund. This approach allows us to offer investors alternative options for their investment portfolio, focusing on quality deals that large PE firms frequently overlook.

We invite you to contact us today to discuss your goals and learn more about how our deal-driven approach can be a strategic fit for your capital needs.