Equity Commitment Letters: 7 Things To Pay Attention To

If the signing and closing of a transaction does not take place on the same day, the seller runs a debtor risk on the buyer. This risk is even greater if the buyer is a newly established acquisition vehicle, that has not yet been provided with financial resources. An Equity Commitment Letter (ECL) offers a solution. But what should you pay attention to when setting it up?

Newco: initially an empty shell without financial resources

In private equity practice, it is common for a private equity investor to use an acquisition vehicle (often known as "SPV," "Bidco," or "Newco"). It acts as the buyer in the purchase agreement and is often incorporated shortly before the purchase agreement is being signed. The capital that is paid up on the shares upon incorporation of Newco is usually only one euro. The further financing of Newco – often a combination of equity and debt, together just enough to pay the purchase price and transaction costs – only takes place shortly