Private Equity 2023

• Published date: 03 October 2023
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Shareholders
• Law Firm: Aabo-Evensen
• Author: Ole Kristian Aab'-Evensen

1. Overview

1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions?

Although the Norwegian private equity ("PE") market ranges from seed and growth investments by angel and venture capital funds, to leveraged buyouts ("LBO") and secondary transactions by PE funds (herewith public-to-private acquisitions and initial public offering ("IPO") exits), in 2022, LBO transactions of private targets dominated the transaction volume, representing 46.2% of the total PE transactional volume for that year.

Throughout 2022, private equity firms started to experience increased headwinds with respect to leveraged financing, resulting in declining private equity deal activity despite significant dry powder. In 2022, the total Norwegian M&A market continued to increase in volume and was compared with 2021. Large deals were slightly up in respect of the percentage of the total M&A value but down in numbers compared with 2022, due to a significant drop in large deals in the second half of the year. The Norwegian PE market could, however, report a 10.1% increase in reported volume compared with 2021, but with a significant drop in average deal sizes, as well as a drop in number of exits. For deals involving PE Sponsors in 2022, (either on the buy- or sell-side) the average reported deal sizes dropped significantly from '334 in 2021, to '153 in 2022. The market continued to be driven by new investments and add-ons but, in 2022, we also witnessed a significant drop in the number of secondary investments.

As mentioned above, the Norwegian PE market spans the width of all transaction types found in any mature market, but the typical club deals have, save for a few exceptions, for all practical purposes been outside the realm of the Norwegian PE market. The main reason for this is that most Norwegian transactions are of a size that normally does not require a major international PE fund to spread its equity risk in order to avoid exceeding investment concentration limits in its fund. The foregoing notwithstanding, sell-downs or syndication of minority equity portions subsequent to buyouts also occur in the Norwegian market.

By the number of PE transactions, TMT, the industrial/manufacturing and the services sectors dominated the Norwegian market in 2022, each with 30%, 14.3% and 13.8% of the buyout investment volume, respectively. They were followed by the construction sector with 11.1% of the total deal count, the consumer sector with 8.5%, and the energy sector with 5.8%.

1.2 What are the most significant factors currently encouraging or inhibiting private equity transactions in your jurisdiction?

The most significant features encouraging PE actors to transact in Norway are access to relatively inexpensive capital as well as a highly educated workforce, innovative technology, natural resources and a well-established legal framework for M&A transactions. In respect of the latter (see further in section 3), those familiar with M&A transactions and methodology in most other parts of Europe will find the Norwegian landscape quite familiar, both in respect of private and public acquisitions. Most EU regulations pertaining to M&A transactions have also been implemented in Norwegian law through membership in the European Free Trade Association ("EFTA") and the European Economic Area ("EEA").

Historically, an important factor, viewed by many investors as sheltering Norway against international financial turmoil, has been a high oil price. For the moment, the oil- and energy prices are once again on the rise, which is generally viewed as beneficial for the Norwegian economy. This time, however, increasing energy prices have come at a high cost due to supply chain disruptions, and pent-up demand following the COVID-19 pandemic as well as the war in Ukraine, which have collectively intensified the inflationary pressure. Increased inflation is currently also contributing to increasing interest rates, which again may lead to a recession in many European countries. Increasing inflation and interest rates, in combination with a somewhat aggressive approach by Norwegian tax authorities against LBOs (herewith principles of PE funds domiciled in Norway) could, in the long term, potentially frustrate international PE funds' appetites in general, as well as for Norwegian targets.

1.3 Are you seeing any types of investors other than traditional private equity firms executing private equity-style transactions in your jurisdiction? If so, please explain which investors, and briefly identify any significant points of difference between the deal terms offered, or approach taken, by this type of investor and that of traditional private equity firms.

During the last decade, we have seen a number of family offices, but also smaller investment-firms, and individual investors executing PE style transactions in the Norwegian market. The main difference between the deal terms offered in such transactions is that some of these investors tend to be slightly more flexible with regard to their sweet spot for investing, the approach they take with regard to lock-up until exit, vesting structures, accepting investments in minority stakes, and the amount of leverage applied in the deal. Some of these investors tend to seek out investment opportunities in areas that have not typically been a focus for traditional PE funds, but where consolidation opportunities still exist. Examples of such investors are, inter alia, Ferd, Credo Partners, Icon and Hawk.

2. Structuring Matters

2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction?

Virtually all national and international PE funds are today organised as some type of limited partnership, wherein the Institutional Investors participate as direct or (normally) indirect limited partners, and wherein the fund manager (in the following, the "Manager" or the "Sponsor") acts as the general partner, normally owned through a private limited liability company ("LLC") specifically organised for this purpose. The domicile, tax status and internal structure of the Manager sponsoring the fund will very often drive the choice of the general partner.

PE funds typically create a special purpose shell acquisition vehicle ("SPV") to effect an investment or acquisition, and commit to fund a specified amount of equity to the SPV at closing. The final acquisition structure adopted by these PE funds in the Norwegian market will normally depend on whether the respective fund is organised under Norwegian law or under foreign jurisdictions. Funds organised under Norwegian law will, when investing into Norwegian target companies, normally adopt a one-tier structure by investing through a set of Norwegian holding companies.

Funds organised under a foreign jurisdiction investing into Norwegian target companies will usually structure the acquisition by adopting a two-tier structure, irrespective of whether the Manager is foreign or domestic. Firstly, the PE fund establishes an offshore holding structure of one or more private LLCs incorporated and tax resident outside of Norway - typically in Luxembourg, the Netherlands or (occasionally) Cyprus. Secondly, the acquisition of the shares in the Norwegian target company will be made by the foreign holding structure through a Norwegian-incorporated and tax-resident SPV (or "BidCo") that eventually acquires the target company. Additional Norwegian holding companies could be added into the structure between the foreign holding structure and the Norwegian BidCo to allow for flexibility in obtaining subordinated debt financing and other commercial reasons.

Occasionally over the last six years, we have also seen examples of Sponsors carrying out minority investments in listed companies, but these funds' limited partners have often criticised such strategies. An increasing number of funds also seem to have obtained mandates to carry out minority investments in private companies subject to certain defined control criteria with respect to a possible exit.

2.2 What are the main drivers for these acquisition structures?

Various deal-specific considerations dictate the type and organisation of the SPV, including, among others, tax structuring issues, desired governance structure, number of equity holders, equity holders' (and the Sponsors') exposure to liability by use of the applicable vehicles, general ease of administration and required regulatory requirements, including the financing bank's demand for structural subordination (see below).

Typically, the entry route used by PE funds for their investments depends upon which structure provides the greatest flexibility for efficiently repatriating funds back to the fund's investor base in connection with either an exit or a partial exit, with as little tax leakage as possible (i.e. minimising the effective tax rate for all relevant stakeholders upon exit). The choice of entry-jurisdiction into Europe, therefore, normally depends on the identity and geography of the fund's investors, the tax treaty between the proposed European entry-jurisdiction and the home jurisdiction for the majority of the fund's investor base and the tax treaties between the various other jurisdictions involved, including Norway. It is not uncommon that Sponsors structure the investment through various forms of sub-partnerships (or feeder funds) set up in different jurisdictions to achieve the most optimal structure for their respective investors, all depending upon such investors' geographical location.

Another main driver when choosing relevant acquisition structures (and particularly the number of holding companies involved), is the structuring of the financing (i.e. the bank's demand for control of cash flow and debt subordination); see sections 8 and 9. Particularly in large transactions, it can be necessary to use various layers of...