Non-Sponsor Lending: Solving for the Ownership DifferenceBy Andryk Guerrero, Principal, WhiteHorse Capital

October 21, 2026 – A large volume of privately held businesses will change hands over the next decade. McKinsey estimates that more than 1mm U.S. small and medium-sized businesses are viable candidates for sale as their owners retire, representing up to $5tn of enterprise value.¹ Corporate divestiture activity has picked up alongside it, with global divestiture value rising 30% in 2025 to $1.6tn and half of the 700 dealmakers surveyed by KPMG expecting carve-out volume to keep growing.² A meaningful share of both will go to management teams, families, and independent sponsors rather than to funded private equity platforms, and each of those transactions will need a lender. At WhiteHorse Capital we see that shift in our pipeline, where non-sponsored situations have become a growing share of the transactions we review.

Private credit has scaled dramatically over the past decade, but the capital has not distributed evenly across this opportunity set. It has concentrated primarily around private equity flow rather than around credit quality.

A November 2025 working paper by Jang, Kim and Sufi, circulated through the National Bureau of Economic Research, put numbers behind that. Comparing direct lenders with banks and finance companies across the full population of U.S. private middle market companies, it found that what most sets direct lenders’ borrowers apart is private equity ownership, and that in industries and cities where private equity had little presence, direct lending barely grew at all. What it did not find was a credit quality gap. On its measure of borrower credit quality, the portfolios of direct lenders and of traditional lenders looked largely alike.³

For a business without a sponsor, that leaves the banking market, and while banks on balance rate their commercial and industrial lending standards easier than their post-2005 midpoint per the Federal Reserve’s July survey,⁴ they do so from a defined box that assumes standard inputs already exist (e.g. consolidated trended financials, a quality of earnings, cleanly organized KPI reporting to name a few). In a sponsored transaction those inputs are a byproduct of an organized sell-side advisor or of the buyside primary diligence and are produced along the way to closing. A non-sponsored business that has never run a process of this kind often does not have this level of packaged data off the shelf, and most traditional lenders are not staffed to build it themselves.

Each channel covers part of the market. Banks lend to non-sponsored businesses routinely, and sponsored transactions are financed readily by both banks and direct lenders when a buyer supplies the diligence and an equity backstop behind them. What sits thinly covered is the overlap: sound businesses without a sponsor, in situations that do not arrive pre-packaged. Put the same transaction in front of the same lenders with a sponsor attached and it gets financed. Without one, often it does not. A logical question for any owner or intermediary carrying a non-sponsored deal: if the business performs, why is the financing so difficult to source?

In our experience the answer has little to do with the business. A lender looking at one of these situations finds the standard inputs absent and reads that absence as complexity, then prices this perceived complexity as credit risk.

Perceived complexity and credit risk are distinct variables, but telling them apart takes work. The absence of a sponsor changes who does the work; it does not change what the business earns.  An information gap is a solvable problem – do the primary diligence a sponsor would have done, close the information gap the ownership difference created, and the perceived complexity gives way to the business underneath. In many cases what emerges is a fundamentally sound business that services its debt as reliably as a sponsored borrower. Reaching that view depends on three things: (i) the capacity to generate diligence rather than review someone else’s, (ii) the ability to rely on structure rather than a sponsor’s equity, and (iii) a willingness to underwrite the transaction in front of you rather than defaulting to an inflexible underwriting template.

Underwriting Without a Sponsor’s Diligence

WhiteHorse has lent to businesses without financial sponsors since the firm’s founding: succession deals, family and partner buyouts, management buyouts, corporate carve-outs, dividend recapitalizations, independent sponsor platforms, etc. What makes a good credit in this segment is what makes a good credit anywhere. The business converts earnings into cash, it holds a defensible position in its market, and the people running it have a record of doing what they said they would. We apply the same fundamental credit quality tests we would to a sponsored credit.

The difference is that nobody has established any of that for us. There is no sponsor’s diligence to review and no banker’s model to check. We do that work ourselves, to a private equity standard, and that work is what allows us to separate a business that only looks complex at face value from one that is truly carrying credit risk we cannot underwrite. At the outset the two may look similar, and a lender without the capacity to tell them apart has to assume the worst and price accordingly, or decline. Most often the work resolves the question in the borrower’s favor: the difficulty lies in assembling the picture, not in what the picture actually shows after we have fully compiled the pieces.

The situations below (although not an exhaustive list) are ones that often stop other lenders. In each, the gap is in information or presentation rather than performance, and it closes with work:

• Limited Financial Reporting: Often there is no audit and no quality of earnings report. What is missing is the information, not necessarily the performance, though most lenders treat the two as the same. We commission the diligence ourselves and form our own view of what the business earns, which usually results in identifying and adjusting for non-operating and non-recurring expenses in a similar fashion to a sponsored transaction.
• Data Spread Across Multiple Systems: Sometimes the information exists but not in usable form, sitting across several systems that do not reconcile or in raw extracts nobody has assembled. We take the underlying data and build the analysis ourselves.
• Carve-Outs and Corporate Separations: When a division is sold out of a larger company and has never operated on its own, the financials provided are the parent’s estimate of what it cost to run. We aim to validate that cost base ourselves and establish which services the business will still need from the seller and for how long.
• Integrations: Acquisitions that combine businesses with different revenue models, or where the thesis depends on synergies being realized. We do the work to understand which of those synergies are genuinely achievable and on what timeline rather than taking an aggregate figure on faith, and we size the facility so the borrower has runway if the plan is only partly delivered.

Two situations illustrate the pattern. In a founder-owned car wash operator with neither an audit nor a quality of earnings, our diligence validated both the adjusted earnings and the location ramp timelines management had described, which let us underwrite the gap between reported and adjusted performance and model how leverage would evolve after close, much as a sponsor would have. In a marketing services business, KPI data sat across several systems that reported weekly and, in some cases, daily, so while there was no shortage of information, there was no consolidated trended view of performance anywhere; we assembled several hundred of those files and built one. The company used it going forward.

Structuring in the Absence of a Sponsor

In these non-sponsor situations, diligence resolves what the market mistakes for complexity, but it cannot produce a sponsor. If the business underperforms there is no fund standing behind it to put more money in, and that is a real difference from a sponsored deal.

What replaces it is common sense structuring: bespoke covenants, conservative leverage, and cash sweeps that pay us down while the business is performing. That makes the credit more resilient if performance slips, and it gives us early warning when it does, so we can work through the problem alongside the borrower while there is still room to act rather than arriving once the business has badly deteriorated.

Tighter covenants are sometimes read as a lender looking for a reason to intervene. We would put it the other way around. Covenants that surface a problem early are what make a constructive conversation possible, and the deals that go badly are usually the ones where nobody had cause to talk until the options had narrowed.

WhiteHorse Capital’s Approach

These transactions take more work than a sponsored credit, and it is the work rather than the credit that usually puts lenders off. There is no finished diligence package waiting and no institutional equity holder to call when performance slips. A lender either does the work or declines given the perceived complexity, and most decline.

We believe that is precisely where a direct lender earns its position. WhiteHorse does not treat non-sponsor lending as a cyclical opportunity or a place to go when sponsored volume thins. We have been active in the segment since the firm’s founding, through periods when bank capacity was abundant and periods when it was not, and our approach does not depend on either. It rests on the capacity to generate our own diligence, to structure appropriately, and to commit and close on a timeline that owners and intermediaries can actually plan against.

The supply of these situations is growing. The number of lenders equipped to underwrite them is not. In our experience these are not a lesser class of credit; they clear the same bar as their sponsored counterparts once the information exists to show it. For owners, independent sponsors, and advisors carrying a transaction that does not fit a standard template, we are prepared to do the work.