Non-recourse

Acquisition debt in a buyout is raised by the vehicle formed for the transaction and secured on the group being acquired. The fund subscribes for the equity of that vehicle and gives no guarantee, so the lenders' claim runs against the company and its assets rather than against the sponsor. If the business cannot pay, the lenders take the company.

The consequence is an asymmetry that explains most of how a buyout is underwritten. The sponsor's loss is capped at the equity it has contributed, while its upside is uncapped, so its position behaves like a call option over the enterprise. That is exactly why the lender does its own work on the downside rather than relying on the sponsor's reputation, and why diligence is aimed at how bad a bad year can be rather than at how good the plan is.

It also explains something at fund level. Because losses do not travel between holdings, a fund can take concentrated equity risk on ten companies and survive a total loss on one. A corporate that borrows to buy something has put its whole balance sheet behind the debt permanently, which is why comparing sponsor leverage with corporate leverage as though they were the same act misses the point.

The limits are worth knowing so the claim is not overstated. Sponsors sometimes provide equity commitment letters that a seller can enforce, and occasionally limited guarantees or equity cure rights that are negotiated rather than assumed. Reputation also operates as a soft form of recourse, since a sponsor that walks away from a struggling holding will find the same lenders across the table on its next transaction.