How do financial sponsors generally raise their investment capital?

Financial sponsors, such as private equity firms or venture capital firms, typically raise their investment capital through third-party investors. This involves sourcing capital from institutional investors, high-net-worth individuals, pension funds, endowments, and family offices, among others. These sponsors often create funds that pool together capital from multiple investors with the goal of investing in various companies or projects.

The structure allows financial sponsors to leverage the capital from these third-party investors to conduct significant investments, buyouts, or expansions in target companies. This capital-raising method is essential for financial sponsors as it enables them to manage larger funds and pursue more substantial investment opportunities, while also allowing investors to diversify their portfolios through the combined investments of the fund.

In contrast, public market offerings are more aligned with companies looking to raise equity directly from the market, while issuing corporate bonds involves raising debt capital, neither of which aligns with the standard practices of financial sponsors. Retained earnings pertain to profits kept within a company for reinvestment rather than distributed to shareholders; this approach is not applicable to how financial sponsors typically gather investment capital.