Equity Contribution
Private Credit glossary · Market, Sourcing & Sponsor Dynamics
Definition
Sponsor equity invested in an LBO, typically 30%–50% of total enterprise value at closing — the loss-absorbing cushion that protects all debt tranches. The lender's effective LTV on the senior secured tranche is Senior Debt/EV; first-lien attachment typically runs 0%–50% LTV and unitranche 0%–70% LTV. Larger sponsor equity is a credit positive because the sponsor has more to lose before the lender does.
Equity Contribution in plain English
When investors buy a whole company using mostly borrowed money (a "leveraged buyout"), the buyer still has to put in some of its own cash — that's the equity contribution, usually 30–50% of the price. Think of buying a $500,000 house: if you put $150,000 down and borrow the rest, your down payment is the first money to disappear if the house loses value, which is exactly why the bank feels safe. In a buyout the sponsor's equity is that down payment — it absorbs the first losses, so the lenders only get hurt after all of it is wiped out. That's why a bigger equity contribution is good news for lenders: the buyer has more of its own skin at risk before the loan is ever touched.
Related Private Credit terms
Private Credit practice questions · Private Credit flashcards · Private Credit study guide