SWEDEN Law and Practice Contributed by: Niclas Rockborn, Pär Johansson, Daniel Sveen, Arijan Kan and Erik Schwartz, Gernandt & Danielsson Advokatbyrå
6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism Consideration Mechanisms As outlined in 1.1 Private Equity Transactions and M&A Deals in General , the difficulty of pricing targets in abnormal market conditions has led to purchase price mechanics again becoming more diversified. However, in Sweden the most commonly used forms of consideration structures are still locked-box and closing accounts mechanisms. The locked-box struc - ture is most common in Swedish private equity trans - actions and especially favoured by sponsor sellers. Closing accounts and other true-up mechanisms are often applied in complex transactions involving a spin- off or carve-out component, where the business does not have a standalone balance sheet and/or long-term historic financials or the working capital levels of the target are difficult to predict. Vendor Participation Other than for management reinvestment, as out - lined in 8.1 Equity Incentivisation and Ownership , vendor participation is not, or has at least not during the last couple of good years been, a common feature in Swedish private equity transactions. On occasion, vendor participation has been used to bridge valua - tion gaps where a buyer has difficulty raising sufficient external financing. Earn-Outs Earn-outs are more frequently used in times of mar - ket uncertainty and are common when private equity funds acquire a business that is founder-owned. With respect to acquisitions of recently founded growth companies, earn-out components are leveraged by private equity buyers to ensure that the consideration for the business is in line with the expected financial performance. Roll-over structures are common when the founders or management shall remain involved in the acquired company. Level of Protection Offered by Private Equity Sellers and Buyers The protection offered by a private equity seller in relation to consideration mechanisms is generally based on warranties and covenants during the period between signing (or, in a locked-box transaction, the
combined with spill-over effects of the downward pressure on real property bonds. The rapidly grow - ing direct lending market where, for example, credit funds are increasingly active is especially interesting for certain borrowers and certain sectors where there are funding gaps. If the private equity buyer’s acquisition structure includes a special purpose acquisition vehicle as the buying entity, the fund will (upon the seller’s request) typically issue an equity commitment letter addressed to the special purpose acquisition vehicle and the seller, committing to provide the buying entity with funds to pay amounts due under the transaction agreement. Lenders also frequently provide comfort over the debt-funded portion of the purchase price by committing certain debt funds, signing off on as many condition precedents as possible in advance. Private equity deals in Sweden are generally control investments. The investment mandates of the funds typically require the funds to hold majority stakes. However, there has been a recent increase in minority investments as set out under 5.4 Multiple Investors , and certain private equity funds, including venture capital funds, regularly make minority investments. 5.4 Multiple Investors In larger transactions, it sometimes happens that pri - vate equity buyers form consortiums. Albeit rare, such consortiums can include corporate investors. The size of the fundraising rounds, and the size of the invest - ments made, have been growing steadily, and minority investments are getting more common. There are also buyout funds that have started to raise capital specifi - cally intended for minority investments. The management team is regularly offered to own a small portion of ordinary equity, but represents only an insignificant portion of the equity funding. It is common for limited partners to make direct investments alongside the general partner. These investments are often passive. This kind of equity syn - dication is often done after the transaction has been signed but prior to the transaction being funded and closed.
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