A growing number of private equity executives without capital of their own to invest are finding deals and shopping them to other private equity firms.
And private equity firms are buying.
Private equity is a difficult business these days because debt is plentiful and competition for deals is causing prices to skyrocket. So, some private equity firms are getting deals they wouldn't otherwise have found from freelancers, many of whom are former private equity executives who are specialists in a region or industry, giving them access to deals the private equity firms might not otherwise find.
The number of so-called “fundless sponsors” has doubled from five years ago, estimated Michael B. Shaw, partner in the Chicago office of law firm Much Shelist PC, who helps put private equity transactions together.
“There are a lot of former private equity people who have left funds and elected to go alone, but they can't raise capital because they lack a track record,” Mr. Shaw said.
At the same time, there are private equity firms that can't raise another fund and so their executives are leaving. They are striking out on their own searching for deals first and then for capital from other private equity firms.
Mr. Shaw said the number of fundless sponsors will increase.
“The availability of capital from traditional sources is not growing. There is less money allocated to a smaller number of private equity groups,” he said.
That means there will be more former private equity executives available who will be searching for companies to buy and offering them up to the private equity firms that have capital to invest, Mr. Shaw said.