Private Equity / Family Office

Guaranties, Equity Commitment Letters, and Keepwell Agreements: Recommendations for Private Equity Funds and Beyond

Brent Vegliacich
June 2, 2021

Private equity funds use many different financial instruments to enhance credit or provide support to subsidiaries or portfolio companies. The type of instrument that a private fund chooses typically depends on the terms of the transaction, the portfolio company’s available credit, and prior financial obligations or restrictions of the fund.

Article summary

In this article, we examine key differences between guaranty agreements, equity commitment letters (ECL), and keepwell agreements that private equity funds and their attorneys should consider in future private equity transactions. We also provide some recommendations for when each instrument might be the best method for raising capital for hedge funds, venture funds, or private equity funds.

Guaranty Agreements

A guaranty agreement is an agreement between a third party (“guarantor”) to back the debt of a second party (“creditor”) for its payments to the debtholder (“investor”). Under these agreements, the guarantor assumes liability for the investor and promises to fulfill the investor’s obligations to the creditor should the investor default on its obligations.

Guaranty agreements are the most common financing structures employed in the fund finance market because an extensive history of common law has developed over time to bolster their enforceability. Private equity law firms tend to favor guarantee agreements because aside from enforceability, the breadth of common law provides more guidance and less uncertainty for all of the parties involved. 

Guaranty agreements are also favored because they are best understood by market participants, whether they are parent companies, subsidiaries, or private equity firms.

Who Are the Typical Guarantors?

Guarantors are often sponsors, funds, feeder funds, or portfolio companies. In some circumstances, the guarantor may be a related sibling entity as opposed to a parent entity. Generally speaking, limited partner sponsors may prefer to use feeder funds or portfolio companies to limit their direct exposure to liabilities.

Feeder Funds

Feeder funds are often used when a limited partner sponsor does not want to commit capital to an entity that incurs debt for borrowed money. This is usually for tax and/or regulatory reasons. So, instead of making the capital commitment themselves, the sponsor makes capital commitments to a feeder fund that guarantees the obligations of a fund subsidiary and grants the security to the creditor.

Portfolio Companies

A portfolio company may also be used to receive loans and cut borrowing expenses. In this scenario, the portfolio company takes out loans under a credit facility as a qualified borrower, while the creditor receives a guaranty in its favor that is supported by the security of the limited partners’ capital commitments.

Bad-Boy Clauses

A sponsor can also limit their guarantee to specific aspects of a transaction through a “bad-boy” clause. While less common in practice, a sponsor may provide a “bad-boy” guaranty for any losses the creditor acquires as a result of the investor’s bad acts or material misrepresentation.

Types of Guaranty Agreements

Various types of guaranty agreements are available depending on the scope of obligations and liability a guarantor is comfortable assuming. There are two main types of guaranty agreements:

  • Guaranties of Payment: A guaranty of payment is the preferred method for a creditor because it is an unconditional guaranty, allowing the creditor to seek direct payment from the guarantor.
  • Guaranties of Collection: A guaranty of collection requires the creditor to first exhaust all remedies against the investor, such as foreclosing on collateral, before seeking direct payment from their guarantor.

Private investment funds and law firms should note that under New York law, a guaranty will be treated as a guaranty of payment unless the parties have expressly declared the guaranty to be a guaranty of collection.

Ensuring Guaranty Agreement Enforceability

To avoid challenges to the enforceability of the guaranty, funds should conduct the proper due diligence on the transaction. Funds must review their founding documents, such as the partnership agreement, to confirm that there are no restrictions on providing guaranties, both directly and indirectly through an entity related to the fund.

Funds should also confirm that the transaction includes adequate consideration. Challenges to proper consideration most often arise when a sibling entity is providing the guaranty to the investor, rather than the parent entity. If the guaranty agreement does not explicitly state that valuable, sufficient consideration has been provided, then the guaranty may not be enforceable, which would allow creditors to raise fraudulent transfer defenses.

Lastly, the guaranty should waive all legal and equitable defenses and explicitly state that the guaranty is absolute and unconditional.

Equity Commitment Letters (ECL)

An equity commitment letter (ECL) is an agreement that requires an entity (“ECL provider”), often the parent entity, to contribute capital or other financial support to another entity (“ECL beneficiary”). ECL beneficiaries are usually subsidiaries.

Under the agreement, the ECL beneficiary can obligate their provider to issue capital in exchange for equity in the ECL beneficiary when the ECL beneficiary needs funds for its payment requirements. If the ECL provider breaches the contract, the ECL beneficiary, and possibly a third-party creditor, may enforce appropriate remedies, such as specific performance.

Differences Between ECL Agreements and Guaranty Agreements

There are a few key differences between ECLs and guaranty agreements. 

First, an ECL runs in favor of the ECL beneficiary, while a guaranty runs in favor of the creditor. Under an ECL, only the ECL beneficiary can directly enforce the terms of the agreement against the ECL provider. As mentioned above, this isn't the case in a guaranty agreement, where the creditor can directly seek payment from the guarantor. Because of this restriction, ECLs are often drafted to specifically provide that either the creditor is a third-party beneficiary or the creditor retains the same rights as the ECL beneficiary.

A second key difference between an ECL and a guaranty agreement is that ECL agreements have not been litigated as often as guaranty agreements. The limited common law focused on ECL enforceability has made ECLs less well-known in private equity practice and in the financial market in general. This leaves borrowers and lenders more comfortable with guaranty agreements.

When ECL Agreements Are Used

Despite the vague standards, funds employ ECLs in a number of ways. ECLs are commonly used when the ECL provider is unable or unwilling to issue capital commitments or enter into a guaranty agreement. Like guaranty agreements, ECLs may be employed through a feeder fund or to support a portfolio company.

If a creditor becomes involved in an ECL, they should make sure that certain provisions are included in the agreement:

  • Enforceability: The ECL should contain a waiver of setoff, counterclaim, and defense by the ECL provider to prevent the provider from challenging the ECL's enforceability.
  • Beneficiary Status: It is also best practice for the ECL to either list the creditor as a third-party beneficiary or provide that the creditor retains the same rights as the ECL beneficiary.
  • Amendments: As a non-party to the ECL, the creditor should confirm that any amendment to or termination of the ECL requires the creditor’s prior consent.

Conversely, ECL providers should include a covenant for the term of the ECL providing the right to reserve sufficient capital so that the provider may satisfy their future funding requirements.

Keepwell Agreements

Keepwell agreements are agreements between a parent entity and its subsidiary where the parent agrees to monitor and support the financial health of its subsidiary by assuming specific obligations for a designated period of time.

The specific obligations assumed, and the time period of those obligations will usually depend on the transaction, but in general, keepwell agreements are key for enhancing a subsidiary’s credit.

Keepwell Agreements Are Not Support Letters

Although keepwell agreements can be easily confused with comfort or support letters, they’re distinguishable: comfort or support letters only provide statements of intent to provide financial support for a subsidiary. With keepwell agreements, parent entities are bound by an enforceable contract.


Differences Between Keepwell Agreements and ECLs

Unlike ECLs, a keepwell agreement usually only provides a general statement of financial support that does not specify the method in which the parent will provide the support. A keepwell agreement also differs from an ECL because it typically will not make certain that the creditor will be repaid for their loan.

Despite these differences, a keepwell agreement should contain many of the same terms as an ECL. If the keepwell agreement is made in favor of the parent entity, then the creditor should be expressly included as a third-party beneficiary or retain the rights of the subsidiary. Without including these terms, the creditor may be unable to enforce the keepwell agreement against the parent.

Like an ECL, the keepwell agreement should only be terminable or amendable if the creditor has provided prior consent. The creditor should also require the parent to include a covenant against certain actions by the parent that would render the subsidiary unable to meet its requirements often due to insufficient funds.

When Keepwell Agreements are Used

Keepwell agreements are typically used in fund credit support transactions when the subsidiary lacks the necessary credit for a transaction, or the creditor would like more assurance on its investment.


Guaranties, ECLs, and keepwell agreements are all viable forms of raising financing. Which method is most appropriate will depend on the specific needs of the subsidiary, the creditor’s appetite for risk, and the parent’s prior financial restrictions.

Nonetheless, private investment funds should consult a private equity attorney who has experience and expertise to handle these forms of credit support to ensure that the fund’s relevant documentation allows the fund to meet the duties and obligations required under the financing agreement.