Hi {{first_name}},

In 1976, three bankers left Bear Stearns to start their own firm. Kohlberg Kravis Roberts put $31.4 million to work in its first fund. According to KKR's SEC filings, that money came back as $537 million.

Back then, almost nobody else was buying companies this way. A seller had few buyers to choose from, and few buyers meant good prices.

Private equity has grown up a lot since then. Today, a well-run company draws a crowd of bidders, and crowds push prices up.

Except at the small end of the market.

In June, UNC's Institute for Private Capital published the first large study of independent sponsors, the dealmakers who find a company first and raise the money for it afterward. It covers 846 deals, and the returns land in the same range as KKR's early years. 

When I see returns like that, I want to know two things. Who’s sitting across the table? And what are they paying?

I’ve been asking those questions for a long time.

For 20 years, through every company I’ve bought. For 32 months, alongside a community that has invested $65 million in private markets. For more than a year, with the team I’ve been putting together.

Now it’s our turn at the table.

This Wednesday, we’re launching our first private equity fund, the Build Capital IS Fund. I don’t think you’ve seen anything quite like it. I certainly haven’t.

This issue covers the segment the fund invests in. I'm a founder of Build Capital, so I'm invested in the outcome, so keep that in mind as you dig in. Apply your questions and critiques to our fund too.

This week I'm sharing:

— Walker Deibel
WSJ & USA Today Bestselling Author of Buy Then Build
Founder, Build Wealth

P.S. Our new fund is finally here.

On Wednesday, October 28, at 7 p.m. ET, I’m going live to introduce Build Capital and our first fund, the Build Capital IS Fund. Join us for Deal Drop XIV. 

Register here

An independent sponsor is a dealmaker without a fund. They find a company, agree on a price, and only then raise the money for that one deal. The money comes from banks, SBICs (SBA-licensed private lenders), family offices, and funds that back sponsors.

For investors, that order is the appeal. You see the company, the sponsor, and the terms before you commit a dollar.

Why small companies sell for less

Private companies are priced as a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), a rough measure of the cash a business produces. A company with $5 million of EBITDA that sells for $32.5 million sells at 6.5 times EBITDA. Dealmakers call that “6.5 turns.”

The multiple climbs with size. GF Data, which tracks private equity deal prices, sorts deals by what the company sold for. In 2024, companies that sold for $25 million to $50 million went for 6.8 times EBITDA on average. Those that sold for $50 million to $100 million went for 8.3 times.

Independent sponsors work the low end of that range. In the UNC study, 73% of deals involved companies with $2 million to $10 million of EBITDA.

Why the gap? Sit in a big fund’s seat for a minute. You have $800 million to put to work, so you need big checks. A company with $5 million of EBITDA takes nearly as much work to buy as one with $50 million, and it returns a fraction of the dollars. So you pass.

That leaves the retiring founder with a short list of buyers. Short lists set lower prices.

Independent sponsors are on that list.

The Crossing, in one deal

Take an Ohio packaging manufacturer, a composite built from typical deals in this segment.

That’s $63.5 million more than the purchase price. Growing earnings delivered $45.5 million of it: the added $7 million of EBITDA, priced at the original 6.5 times. The higher multiple delivered the other $18 million.

We call that move into a higher pricing tier the Crossing. The sponsor gets paid twice. Once for growing the business, and again because buyers pay more for every dollar a bigger company earns.

The composite is conservative on purpose. It assumes 1.5 turns of expansion. The average company in the UNC study gained 3.5.

What the first big study found

For years, the case for independent sponsors ran on war stories. In June, it got data.

The UNC study covers 846 deals reported by 73 sponsors and the investors who back them. The median deal earned a 23.8% IRR (internal rate of return, the annualized return while your money is invested). Buyouts of similar size from the same years earned 18.5%. Both figures come after the sponsor’s fees and carry, and before any fees an investor pays to a fund.

How that compares to KKR’s early years

KKR’s funds from 1976 through 1998 invested $16.5 billion, according to its SEC filings. After fees, its investors earned 19.9% a year. Back then, few firms were competing for deals. The sponsor segment today looks a lot like those early days.

The comparison has one big catch. KKR is the firm that made it. Steven Kaplan and Antoinette Schoar studied private equity funds from 1980 to 2001 and found that average returns after fees roughly matched the S&P 500. Early private equity paid its best returns to the few firms that were good at it. Expect the same here.

What the sponsor takes

Sponsors get paid well for this work, usually three ways. A closing fee when the deal closes, a yearly management fee paid by the company, and a share of the profit, called carry. The law firm McGuireWoods surveyed more than 300 sponsor deals closed from 2021 to 2023. Here’s what typical terms look like on the Ohio composite.

Every cost in that table is already inside the UNC returns. A fund that holds sponsor deals adds its own layer on top.

Where the data stops short

The study is a big step forward, and it has limits.

The authors compare the pattern to venture capital, where picking decides the outcome. With a spread this wide, how many positions you own matters as much as which ones you pick. 

The tax angle, if the company qualifies

There’s one more reason investors look at small companies, and it’s in the tax code. Section 1202 was written in 1993 to get more money flowing into small businesses. If you buy newly issued shares in a qualifying small company and hold them long enough, you can sell them without paying federal tax on the gain, up to $15 million per investor per company. Tax advisors call these shares QSBS, short for qualified small business stock.

Last year’s tax bill made Section 1202 a much better fit for deals this size. A company can now qualify with up to $75 million in gross assets, up from $50 million, and the tax-free amount rose from $10 million to $15 million. A $32.5 million purchase like the Ohio composite fits comfortably.

If you read our Tax Elimination Engine issue in March, think of this as a new part for that engine. Oil and gas write-offs cut the taxes on your income. Section 1202 works at the other end, on the gain when a company sells.

Everything in this section draws on Financing the Crossing, the whitepaper our Build Capital team wrote on independent sponsors. There was more than could fit in this newsletter. The full deal walkthrough, the simulation behind the math, and the tax analysis are all in there.

Read Financing the Crossing here.

A Sponsor Portfolio From the Inside: Ten Companies, with One Exit So Far

Between September 2024 and March 2026, an independent sponsor team bought thirteen companies through Fruition Capital’s second fund. Fruition’s entire investment team has since joined Build Capital, and the new fund is the first the combined team is raising together. I’m a founding partner in Build Capital. I did not work on these investments, but I’m proud to share what my partners built.

Jason Ehrlich led the investments, with Mario Montag and Michael Bonanni. Ehrlich is an alternative asset investor and fund sponsor with more than 20 lower middle market acquisitions. Montag founded an early machine-learning infrastructure company with a Fortune 50 exit in 2018 and serves as a Certified EOS coach to portfolio sponsors. Bonanni began in investment banking, executing transactions valued at more than $1 billion, and later acquired, grew, and exited a business as an independent sponsor.

The thirteen companies carry $266.9 million of trailing twelve-month revenue, and each grew that figure from the prior quarter, by 1.2% to 17.7%.

The first exit

The first company to complete a full cycle is a floor coating manufacturer. The team bought it in September 2024 for $22 million and sold it in October 2026 for $33 million, 25 months later. Enterprise value rose $11 million, or 50%. Net of all fund fees and before taxes, the fund’s investors received 2.01 times their money and a 40.04% IRR, so each $1 million invested returned $2.01 million. It is one deal among thirteen, and I treat it as one data point–but a great one!

Where else the work is paying off

An industrial rental company, bought in September 2025, has reached all-time highs in revenue and EBITDA, and its EBITDA already sits at the level budgeted for mid-2027. A rooftop solar racking company, bought in March 2026, has won major contracts and is running ahead of its base case.

The operating work in progress

The Ohio composite had its sponsor fix customer concentration, install a CFO, and add an acquisition. The portfolio shows the same categories of work under way. A wire harness manufacturer is addressing a top customer that accounts for 24% of revenue. A commercial landscaping company changed accounting firms and systems. An auto dealer services company is professionalizing its organization and finance function and has its first add-on under contract.

All thirteen are up and to the right as of revenue last year. But 13 companies are too few to say anything about the segment. In the UNC study, 23.5% of 846 deals lost money and 25% returned more than 4.0x, and the Playbook starts with how many positions it takes to hold a spread that wide.

The Next Chapter

Build Capital’s next IS fund launches tomorrow and picks up with a team double the size, a fund over 200% larger, and eight figures in EBITDA already in place. 

Sometimes momentum, individual track record, and edge have everything to do with making the calculated decisions.

Say a sponsor deal lands in your inbox. Or a fund holding a dozen of them does. Either way, run it through these five questions before you wire a dollar.

Build Capital invests in this segment, so run the new IS Fund through these questions too.

1. How many positions, and do they move together?

Start with how many deals you own.

The Build Capital team built a simulation to put numbers on it. It holds equal-sized sponsor deals for five years, using the outcomes from the UNC study. If every deal were independent, here are the odds of losing money on the whole portfolio:

In practice, portfolios are messier. Deals bought in the same year or the same industry tend to rise and fall together. The study doesn’t measure how much, so the simulation tests two more cases. With some shared risk (a correlation of 0.2), ten deals lose money 2.9% of the time. With heavy shared risk (0.4), it’s 8.0%.

On these results, ten positions is a sensible minimum. Past ten, each extra deal helps less. With some shared risk, the odds of a loss fall from 9.6% at three deals to 2.9% at ten, and only to 2.1% at sixteen. What’s left after ten is the risk the deals share, and more deals can’t remove it.

So ask for the portfolio broken out by year and industry. Ten deals from one industry or one year count as fewer than ten.

Good picking helps too. In the simulation, cutting the worst 30% of outcomes lifts the median return to about 30% a year. That assumes a manager who can spot losers in advance, and the UNC study offers no evidence that any manager can. So ask how many deals the manager reviews for every one it funds. These results are illustrative and are not a projection.

2. Is there a Crossing to make?

The Crossing only pays if the company has room to cross. A company with $5 million of EBITDA, bought near 6.5 times, has a path to bigger buyers if the sponsor can grow it past $10 million.

Ask the sponsor to name that path: the earnings target, the likely buyer, and the changes that get the company there.

If the company already earns close to $10 million and was priced like it, the seller has already been paid for the Crossing.

3. What’s left if the multiple doesn’t move?

Multiple expansion is the bonus. A good deal should still work without it.

Rerun the deal with the sale at the purchase multiple. In the Ohio composite, the added $7 million of EBITDA at 6.5 times still earns $45.5 million of the $63.5 million gain. That’s 72% of the return, with no help from the market.

Then try the bad case. Earnings stay flat and the multiple drops a turn. $5 million at 5.5 times is $27.5 million, against a $32.5 million purchase price. That’s a $5 million hole before any debt is paid down.

Now ask what protects your money when a deal falls behind. Two protections are common.

4. What do the layers cost?

Every UNC figure is already net of the sponsor’s fees and carry. A fund that holds sponsor deals adds a second layer. Ask for its terms in full.

Here’s that second layer in round numbers, using the classic 2% annual fee and 20% carry, with no hurdle and no catch-up.

The fund’s fees and carry took $300,000 of the $1.1 million profit, about 27%. Ask any fund to show you its own version of that math.

In exchange, the fund assembles the ten or more positions you’d otherwise build one deal at a time. Whether that’s worth it is your call, and now you can put a number on it.

5. Does the tax treatment fit the timeline?

Whether Section 1202 applies gets decided when the deal is set up, years before the sale. Check three things.

Timing can catch you. The floor coating company in the Case Study was bought in September 2024, under the old rule, and sold 25 months later. That falls short of five years under the old rule and three under the new one, so the sale qualified for no exclusion.

The $15 million cap applies per investor for each qualifying company, so every qualifying position carries its own.

If the planned hold is under three years, or the sponsor can’t tell you which companies qualify, assume the tax benefit isn’t there. This isn’t tax advice, so bring your advisor in before you count on it.

Five questions. Plenty of deals will stumble on at least one. The ones that clear all five are worth your time.

“The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.” — Benjamin Graham, The Intelligent Investor

Everyone watches the speedometer. Graham watched the fuel gauge. He wrote that about stocks, and it works just as well at 6.5 times EBITDA.

Build Capital’s IS Fund launches live this Wednesday at 7 p.m. ET. Bring the Playbook’s five questions.

Returns cited in this issue are historical. They belong to other managers, to the segment as a whole, and to a prior fund managed by Fruition Capital, and they are not a projection of the results of Build Capital IS Fund. Walker Deibel is a founder of Build Capital. 

A reminder that this is not tax advice. The UNC figures in this issue are historical, investor-reported, and self-selected. They describe a segment of the market and are not a forecast of what any investment, including any vehicle available to Build Wealth members, will return.

Fruition Capital managed these investments in its second fund. Fruition Capital’s first fund, which followed a different investment thesis, is excluded. The 2.01x and 40.04% are net of all fund fees and before taxes, and describe one investment. The ten-company snapshot is unaudited, and neither is a forecast for any other investment, including any Build Capital fund. Revenue figures are trailing twelve months and were sourced from Fruition Capital’s second fund investor update, Q2 2026, and the partners.

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This is not financial advice. Illustrative output of a reasoned thought experiment. Not a backtest, guarantee, or prospectus. Actual results vary based on market conditions, fund selection, timing, fees, taxes, and factors not modeled. Private credit, CRE, and leveraged strategies involve significant risk including loss of principal. Consult a qualified financial advisor.