Make the Deal

CHAPTER 11 Equity and Debt Commitment Letters

Private Equity Deal Structures

Private equity deals require two sources of financing: equity financing from the private equity fund, often referred to as the sponsor, and debt financing from third-party lenders. Each source of financing is supported by a commitment letter that is signed at the same time the acquisition agreement is entered into.

A private equity fund is a pool of money. A range of third-party investors will deposit money into the fund and/or commit to deposit money into the fund as needed. This fund entity is the holder of value and those funding commitments.

The fund has no operations or employees; it just holds investments. The investment activity of the fund is usually managed by a management company (or general partner of the fund). The management company acts for the fund under an investment management agreement. The deal team that the target interacts with in negotiating the transaction is usually made up of employees or partners of the management company.

None of these entities—neither the fund nor the management company (nor any general partner of the fund, if there is one)—sign up as parties to the acquisition agreement. Instead, on the buyer side two special purpose vehicles (SPVs) with no assets of their own enter into the purchase agreement.

This structure alone would present a significant problem for the target. If the target needed to sue, it would have no one to sue with any assets. Two documents ...