Independent private equity sponsors earn money in three layers: closing fees, ongoing management fees, and promote (carry). The exact numbers vary, but the structure is standardized across the lower middle market.
Closing fee
When a deal closes, the sponsor typically receives a transaction fee of two to four percent of the equity raised. This compensates for the unpaid months of sourcing, negotiating, and arranging financing.
Management fee
Once the company is acquired, the sponsor charges an annual management fee, usually one to three percent of EBITDA or a fixed dollar amount, paid by the portfolio company. This funds board oversight, strategic support, and add-on sourcing.
Promote
The sponsor's biggest payday comes at exit. After investors receive their original capital and a preferred return (commonly eight percent), the sponsor receives twenty to thirty percent of remaining profits. Tiered promotes that step up after higher return hurdles are common.
Total sponsor economics on a successful deal can be substantial, but they are fully aligned with investor outcomes. If the company underperforms, the promote disappears.
If you are evaluating a transaction in this space and want a candid second look, Solender Capital is happy to compare notes. Reach out through our contact page and share what you are working on.