EM Pro Tips: Alternatives to Fund Structures

In today’s private markets landscape, raising a traditional commingled fund has become increasingly difficult. Institutional LPs remain cautious, fundraising timelines are extended and first-time fund managers are facing a higher bar than ever to secure commitments.

Yet, current market dislocations are creating compelling opportunities for those who can move fast and creatively. In this environment, many emerging managers and entrepreneurial investors are turning to alternative fund structures that provide flexibility, reduce upfront costs and allow capital to be deployed quickly.

Importantly, generative AI and other automation tools are making these alternative models more viable than ever before. Legal workflows, diligence and fund formation tasks that previously required substantial time and expense can now be streamlined. With a standardized playbook and the right tech stack, managers can replicate each of these strategies at scale, creating a repeatable platform to build a portfolio of assets, even without the benefits of a traditional commingled fund.

Below are three structures gaining momentum in this environment: the independent sponsor model, managed accounts and search funds.

Independent Sponsor Model

Also known as the “fundless sponsor” model, the independent sponsor approach involves sourcing and closing transactions one deal at a time, without raising a blind pool of capital. Typically, the manager forms a special purpose vehicle (SPV) for each investment and syndicates capital from a small group of LPs.

Historical Roots: This model has deep roots. Early private equity pioneers like KKR and Blackstone used a deal-by-deal approach in their formative years (circa late 1970s to early 1980s), before transitioning to the Silicon Valley-style commingled fund model in the mid-1980s. Shifting to pooled capital structures helped reduce legal friction - eliminating the need for new documentation with each transaction - and enabled them to move more quickly on deals.

Modern Benefits: Today, the model is resurging, especially among emerging managers, thanks in part to generative AI tools that automate the creation of legal docs, data rooms and diligence processes. Managers who develop a repeatable playbook can scale this approach efficiently, transforming one-off transactions into a long-term, portfolio-building strategy.

Managed Accounts

A managed account structure involves a single investor, often a family office, endowment, or institutional LP, hiring a manager to deploy capital on their behalf. The investor generally retains full ownership of the assets - whether through a standalone management agreement or a fund-of-one structure where the investor is the sole LP of the vehicle, while the manager executes the agreed strategy, often with discretionary authority.

Broader Applications:
While common in the private credit and hedge fund space, managed accounts are also widely used in real estate, infrastructure and other asset classes where investors seek control, transparency or tailored solutions. In real estate, for example, institutional investors may engage a manager to execute a specific investment thesis across a region or property type, without commingling their capital with others investors.

Compliance Considerations: One challenge for managers is regulatory because there are limited exemptions from SEC or state investment adviser registration when managing capital in this way. Managers should assess these obligations early because registering as a fully-registered investment adviser can be quite costly and these structures often come with lower management fees and incentive fees than a commingled fund.

Opportunity: Despite the regulatory layer, managed accounts offer a valuable path for emerging managers to demonstrate performance, build credibility and create long-term partnerships with key LPs through multiple accounts, often before raising a commingled fund.

Search Funds and Entrepreneurial Acquisition

A search fund is an investment vehicle formed by an entrepreneur seeking to acquire and operate a private business. Investors provide initial capital to cover the search phase, typically 12–24 months of diligence, sourcing and travel. Once a target is identified, the original investors are typically offered a right of first offer (ROFO) to participate in the acquisition financing.

Flexible Variants: Some searchers choose to self-fund the search phase and raise capital on a deal-by-deal basis via a syndicate. This can be more flexible but requires an active investor network to close a deal when the time comes.

Typical Targets: Search funds often pursue small, profitable, “boring” businesses, such as HVAC services, local manufacturing or logistics providers. These companies are large enough to support a full-time CEO, but small enough to avoid private equity competition. The entrepreneur steps in as an owner-operator, and if successful, may pursue roll-up strategies, effectively building a portfolio of investments over time.

Not Traditional Fund Managers: Searchers differ from fund managers in that they are typically full-time operators, not allocators. However, a successful search can lay the foundation for an investment platform, and some searchers evolve into sponsors or build multi-asset holding companies.

Conclusion

The path to launching a traditional commingled fund is more difficult than ever, but it’s far from the only option. Alternative models like the independent sponsor approach, managed accounts and search funds offer emerging managers a way to deploy capital, build a track record and scale thoughtfully, without needing to raise a blind pool on day one.

With the aid of generative AI, each model can now be implemented more efficiently and repeated at scale. For entrepreneurial investors and managers willing to think creatively, these strategies offer a clear way to capitalize on current market dislocations and position themselves for long-term success.