While large-scale buyout funds have dominated investor allocations for years, a compelling case is emerging for turning to smaller managers—so-called emerging managers—and independent (or ‘fundless’) sponsors, particularly in the mid, lower-mid-markets, and small-cap sectors.
At Connection Capital, we believe this manager segment offers private investors an attractive strategic lever to enhance return potential, diversify portfolios and access this overlooked dealflow. In this article I’ll examine the reasons that support our belief and why investors may want exposure to this area of private markets.
Why emerging managers and independent sponsors stand out
In private equity, the long-held assumption that established managers deliver greater safety and consistency no longer holds true. Recent research shows that performance persistence, once a defining feature of the asset class, has largely disappeared. Around eight in ten managers that ranked in the top quartile in one fund vintage fail to do so in their next1.
As the private equity industry has matured, competition has intensified and the gap in skill between managers has narrowed, it’s therefore become harder for managers to differentiate themselves. In this more efficient landscape, the real sources of stronger performance are increasingly found among smaller, less-institutionalised firms that operate in overlooked or less competitive areas of the market. At this point, it is worth me clarifying that while the managers’ firms may be new, the teams are experienced and have often worked closely together previously or have spun out of other private markets firms and have strong provenance in their chosen focus.
There are several structural and behavioural advantages that these emerging managers (and independent sponsors) bring compared with large buyout funds. These include:
Potential for higher alpha and portfolio diversification
Analysis by US manager Flexstone Partners based on 25-30 years of industry data shows that emerging managers can generate higher median returns than larger ones2.
Their smaller fund size allows for greater selectivity, deeper operational engagement, and access to niche or complex deals often with a geographic focus that larger managers often cannot pursue.
Moreover, beyond pure return potential, emerging managers provide diversification benefits. They offer exposure to different risk-return dynamics (smaller-cap companies, less intermediated deals, often more operationally focused) than many of the large buyout funds whose size often forces them into more commoditised strategies. This diversification can help in building a private-markets portfolio that is not simply a scaled-up version of the largest funds.
Alignment of interest and a ‘hungry’ mindset
Emerging managers frequently launch their funds (or operate on a deal-by-deal independent sponsor basis) with strong personal capital commitments, tighter teams and significant incentive alignment.
By having more ‘skin in the game’, and by running smaller funds which cannot rely on large fee-income streams, staff compensation is more correlated to the ultimate exit outcome and therefore more aligned with investors.
A mindset of being hungry to create value can translate into a sharper focus on operational performance, deal sourcing creativity and downside discipline.
Access to inefficiencies/less-crowded markets
Large buyout funds typically compete in competitive auctions, pay higher entry multiples, and confront significant competition for quality assets. By contrast, emerging managers are often able to target smaller companies or niche sectors, source proprietary deal flow, remain laser-focused on specific deal characteristics, and typically structure transactions with more flexibility.
This ability to operate in the blind spots of mainstream capital can create structural arbitrage of sorts: lower multiples, meaningful value-creation potential, operational upside and potentially more attractive return profiles.
Structural tailwinds
Market-structure tailwinds enhance the attractiveness of the emerging manager/independent sponsor segment:
- Consolidation among large private-equity firms is creating opportunity: as mega-platforms grow, spin-outs of experienced teams are forming emerging firms, thereby increasing the supply of new opportunities3.
- Growth in the independent sponsor model, particularly in the U.S., where industry trackers count over 1,500 active independent sponsors, which is nearly double the amount five years prior4.
The forces of scale, competition and market saturation in large buyouts are making the smaller, specialist space more interesting.
How emerging managers and independent sponsors compare with mainstream buyout funds
It is worth contrasting some of the key dynamics of large buyout funds with the emerging manager/independent sponsor space.
| Dimension | Large buyout funds | Emerging managers/independent sponsors |
| Deal-size and competition | Very large, often highly competitive auction processes, high multiples, limited structural arbitrage | Smaller mid-market or lower-mid market deals, more room to structure creatively, less bidding pressure |
| Operational upside potential | May be constrained by scale, maturity of target companies, incremental improvement rather than transformation | Greater opportunity for operational turnaround, value creation in less-efficient businesses |
| Fees and alignment | Fee levels increasingly under scrutiny (2/20 structure under pressure), large base of capital to deploy | Often more tailored terms, potentially better alignment of GP and LP interests |
| Diversification benefit for LPs | Many LPs already have exposure to large buyout platforms; returns may increasingly reflect market beta | Provides access to less-efficient segment of the market, lower correlation, higher dispersion of outcomes |
| Fundraising and availability | Established firms command large commitments, may become crowded; opportunities may tilt toward a relatively small set of mega-managers | There are more emerging funds, though also more fundraising competition. Higher dispersion but higher potential upside |
| Risk profile | Large firms have longer track records, more resources, but also may face challenges of deal sourcing, market saturation, competition for quality asset | Shorter track records, smaller teams—so higher manager risk; but also higher upside potential and more strategic optionality |
In this context, the key argument is not “large buyout funds are bad” — and they remain an important part of private markets portfolios — but rather that emerging managers/independent sponsors offer a complementary strategy, enabling a tilt toward higher alpha, differentiation and access to non-core segments of the market.
Conclusion
As the private-markets ecosystem evolves, backing emerging managers and independent sponsors presents a compelling strategic complement to mainstream large buy-out funds. The case rests on stronger alignment with investors, access to less-efficient segments of the market, focus on specific geographies, differentiated dealflow, and the potential for outsized returns.
It suggests that thoughtful exposure to emerging managers can improve the overall probability-weighted return of a private equity portfolio, especially in a market where legacy brands may no longer guarantee superior performance.
For investors seeking to enhance the return-potential and diversification of their private-markets portfolios, the emerging manager/independent sponsor segment warrants serious consideration.
Important note
The type of investments offered by Connection Capital for self-selection by its professional clients are high risk and speculative. Investing places investors’ capital at risk and they could lose all of their money. There is no guarantee of investment return or distributions, and past performance is not a reliable indicator of future results. The investments are medium to long term and illiquid, so they are not readily realisable or easily transferable until the exit point.
Sources
- CAIA Association, A Probabilistic View of Established vs. Emerging Managers in Private Markets (2021)
- PitchBook, Private Equity Fund Size and Performance (2020); Hamilton Lane, Market Overview (2022)
- IPEM, Further Consolidation Set to Accelerate New Manager Launches (2023)
- H.I.G. Capital, A Lender’s Lens on the Independent Sponsor Market (2024)