USA Law and Practice Contributed by: Vijay Sekhon, Brien Wassner, John Godfrey and Justin Macke, Sidley Austin LLP
ally subordinated debt and/or equity, manage govern - ance, allocate various classes of equity, and/or facili - tate rollover participation and issuance of incentive equity to management. The fund itself (typically a limited partnership or LLC) usually does not sign the purchase agreement. Instead, it generally provides (i) an equity commitment letter to fund BidCo at closing, enforceable by the seller if certain conditions are met and/or (ii) a limited guarantee, often covering reverse termination fees or other limited performance obligations up to a negoti - ated cap. This set-up is standard in US private equity deals and widely accepted by sellers. It ring-fences risk, ensures execution certainty through enforceable funding com - mitments, and allows the private equity fund to main - tain separation between individual deals and overall fund capital. Sellers typically insist on clear funding mechanics and specific performance rights to ensure BidCo is adequately capitalised when closing condi - tions are met, including pushing larger sponsors to agree to a full equity backstop commitment letter and/ or guarantee to eliminate debt financing risk. 5.3 Funding Structure of Private Equity Transactions Most US private equity deals are financed as lever - aged buyouts, using a mix of sponsor equity and third-party debt. Equity contributions typically range from 30% to 60%, depending on deal size and market conditions. Traditional bank lending has pulled back given recent economic conditions, with private credit funds stepping in to fill the gap through unitranche and direct loan structures. Equity Commitment Letters (ECLs) Sponsors typically provide an ECL at signing, com - mitting to fund the acquisition vehicle with equity at closing. The ECL gives sellers enforceable rights in certain circumstances, ensuring specific performance if closing conditions are met. This structure deliv - ers certainty of funds without exposing the private equity fund or its LPs to broader liability. In competi - tive auctions, some sponsors are willing to provide a full-equity backstop with the intention of refinancing
later, mitigating deal risk and capitalising on future rate improvements. Debt Financing Practices While fully “certain funds” debt commitments are typi - cal in large or auctioned deals, mid-market buyers may proceed with highly confident letters or lender term sheets in less competitive circumstances. Private credit has become the dominant source of committed debt in a cautious rate environment. No Financing Conditions US private equity deals almost never include a financ - ing-out. Sellers demand certainty, and if debt fails the buyer generally pays a reverse termination fee (or in certain circumstances is forced to close under a fully equity backstop commitment letter if/when negotiated by the seller to eliminate debt financing risk). Acquisi - tion agreements typically include buyer representa - tions affirming financing sufficiency (including through debt and/or equity commitment letters) and covenants to pursue funding in good faith. 5.4 Multiple Investors Consortium deals and co-investments are common features of the US private equity landscape, particu - larly for large or sector-specific transactions. Co- investors usually participate through parallel vehicles or invest directly in the acquisition entity. They sign onto equity holder agreements with customary tag- along rights, but limited control. Anti-dilution protec - tion is rare outside pre-emptive rights. Consortium Deals Multi-sponsor consortia remain rare but have re- emerged for mega-cap transactions where no single fund can absorb the equity check alone. These are often structured with shared governance rights and co-ordinated due diligence but require careful man - agement of antitrust and confidentiality concerns. LP Co-Investment LP co-investment is typical and widespread for US private equity deals. Large institutional LPs (pensions, endowments, sovereign wealth funds) frequently co- invest alongside their GP at reduced or no fees. These stakes are typically passive, with limited or no gov -
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