CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
While more often seen in the large-cap space, the pro - visions are also seen in middle-market transactions. The financing of an acquisition itself varies from one fund to the next, in terms of debt/equity combinations (or cash on hand, in the case of add-on acquisitions within a platform). Financing for these deals usually involves a minimal equity commitment by the private equity fund, with the remainder of the funds being pro - vided by traditional bank debt and other mezzanine lenders. Despite lenders remaining selective, credit in Canada continues to be available in the market, with a range in financing from 3.0 to 5.0+ times EBITDA for secured financing, depending on the type of industry and assets available for security. However, with high interest rates, financial covenant breaches continue to be more prevalent in leveraged buyout financings recently implemented. As such, in several circum - stances, lenders are asked to waive or tolerate finan - cial ratio breaches, leading to flexing the terms and conditions of such financings. The flexed terms often include an increase in their pricing and the tighten - ing of certain negative covenants such as incurrence of debt, permitted acquisitions and investments, and sometimes introducing a capital expenditures cap. As for leveraged buyout financings, 2025 continues to see lenders requiring a higher percentage of equity in the acquisition capital structure (which in turn propels an uptick in rollovers and the use of contingent pay - ment structures). However, in the past 12 months, the Bank of Canada has cut its key interest rate 225bps to 2.75%, which has rebalanced leverage in negotiations between lenders, on the one hand, and sponsors and Deals involving a consortium of private equity spon - sors are common in Canada, particularly in light of the role played in private equity by public sector pension plans and other quasi-governmental vehicles. “Club deals” with multiple private parties and no clear major - ity controlling fund involved are less frequent, perhaps due to the relative size of Canadian deals, which tend to be smaller and thus tend not to have the same capital requirements as those in other markets. borrowers, on the other. 5.4 Multiple Investors
It is not uncommon for a lead private equity investor to have provided for co-investment rights to its limited partners, or to partner with other private equity funds. In such cases, detailed shareholder rights are negotiat - ed concurrently with the acquisition in a shareholders’ agreement for the platform company(ies). Introducing additional investors following the initial investment is also considered, although such circumstances require a careful review and often lengthy renegotiation of the shareholders’ agreement already in place. In some instances, the limited partners wishing to participate in a co-investment opportunity may be required to invest through a special purpose invest - ment fund set up and controlled by the sponsors. This allows the sponsors to effect such co-investment opportunity more expeditiously and avoid lengthy discussions, as such co-investors’ entitlements are limited to a participation in a limited partnership con - trolled by the sponsors. 6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism Consideration structures in Canadian private equity transactions continue to be predominantly based on closing date financial statements (ie, an estimated purchase price is paid at closing), subject to a working capital adjustment (and other possible adjustments depending on the business) upon completion of finan - cial statements as of the effective time that is typically secured with an escrow. In the case of privatisation transactions, fixed-price agreements dominate. Parties continue to rely on earn-outs or other con - tingent consideration, with recent studies reporting that 31% of deals contain earn-outs. Certain of these earn-outs were quite substantial relative to the overall purchase price, and the terms of these earn-outs are becoming more creative. Notwithstanding the foregoing, the vast majority of private equity sellers are still relatively resistant to contingent consideration and will tend to limit any recourse post-closing to the purchase price consid - eration by using representations and warranties insur - ance or very time-limited indemnities and escrows.
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