How the firm survives between closings.

The transaction fee at close pays for the firm to find the next deal. The carry at exit pays for the firm to have been right about this one.

Both are negotiated in week one of the deal, before either of them is earned. That is the strange thing about running an independent sponsor practice. The decisions that compound for ten years get made in the first thirty days.

The transaction fee is the misunderstood number. New independent sponsors think it is a one-time cash event at close, paid out of the deal, that sits separately from the long-term carry. Veteran independent sponsors think of it as the operating budget of the firm.

Here is the math. Sponsor closes a $50M platform deal. Transaction fee at 2.5 percent is $1.25M. After closing costs and reserved working capital, the sponsor has roughly $800K to fund the firm for the next twelve months. That pays the partner's draw, an analyst, an associate, deal-sourcing software, conference travel, legal retainers for unsigned LOIs, and the slush fund for the next deal that does not close. By month nine, that $800K is gone. Then either the next deal closes and the cycle restarts, or the firm contracts.

The transaction fee is how the firm survives between platform closings.

The carry is different. Carry is paid at exit, usually four to seven years after the deal closes. If the deal hits a 2.5x MOIC and the carry is 22 percent above an eight preferred with a 50/50 catch-up, the sponsor's carry on a $25M LP equity check is roughly $7M to $9M, depending on the waterfall calculation. That is real money. It is also money that arrives years after the firm needed it.

Most independent sponsors who fail do not fail at exit. They fail in year two or three, when the second deal is not closing fast enough and the firm runs out of operating capital. The transaction fee is what keeps the firm alive long enough to earn the carry.

Defend both numbers. They are how the firm gets to year five.