Pre-Signing Commitments In Co-Investments: What To Know Before Committing

Many passive co-investments involve a syndication by the sponsor's primary fund of its interest of a target company in the period either after signing the M&A agreement or after closing the M&A transaction.

However, as the average size of private equity-led buyouts increases (due in part to the rise of mega-deals), sponsors are looking for commitments earlier in the transaction process in order to pay larger purchase prices. Sponsors are therefore increasingly approaching co-investors before the transaction is signed, asking them to commit to funding the transaction through an equity commitment letter (ECL) in favour of either the sponsor or the buyer, which is then enforceable by the seller¹.