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?
All of the standard transaction strategies to acquire portfolio companies are commonly used in Switzerland. We assume that regular leveraged buyouts have accounted for the majority of the transactions in recent years. In 2019, private equity funds were involved in around one-third of M&A transactions in Switzerland.
1.2 What are the most significant factors currently encouraging or inhibiting private equity transactions in your jurisdiction?
While low interest rates for transaction financing, as well as favourable borrowing conditions, still generate an incentive for high levels of private equity activity, the COVID-19 pandemic will have an impact on private equity transactions (see question 1.3).
1.3 What are going to be the long-term effects for private equity in your jurisdiction as a result of the COVID-19 pandemic?
The COVID-19 pandemic is expected to slow down private equity deal-making until summer 2020, at least. The further impact will largely depend on the development of the pandemic and we may see increased activity in distressed sales transactions towards the year end.
1.4 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.
A number of family offices are playing an active role in Swiss private equity-style transactions, both in co-investments with private equity funds and as sole investors. In particular, in the latter case, their approach can differ from traditional private equity firms, e.g. in terms of structuring in connection with tax considerations.
2 Structuring Matters
2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction?
Usually, private equity funds investing in Swiss portfolio companies set up a NewCo/AcquiCo in Switzerland as an acquisition vehicle. The NewCo is held either directly or via Luxembourg, the Netherlands or a similar structure. We have also seen AcquiCos incorporated outside of Switzerland.
Management usually invests directly in the AcquiCo rather than via a management participation company. Often, a single shareholders' agreement (SHA) is concluded between the financial investor(s) and management, which governs all aspects of the investment (governance, exit procedures, share transfers, good/bad leaver provisions, etc.). In other cases, a main SHA is concluded between the financial sponsors and a separate, smaller SHA with management.
2.2 What are the main drivers for these acquisition structures?
The acquisition structure is mainly tax-driven (tax-efficient repatriation of dividends/application of double taxation treaties, tax-exempt exit). Directly investing in the AcquiCo may allow Swiss-domiciled managers to realise a tax-free capital gain on their investment when the AcquiCo is sold on exit.
2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)?
A Swiss NewCo often has only one class (or a maximum of two classes) of shares. Preferential rights, exit waterfall, etc. are implemented on a contractual level in the SHA. NewCos incorporated abroad often have several classes of shares.
2.4 If a private equity investor is taking a minority position, are there different structuring considerations?
Structuring is, in principle, not fundamentally different from majority investments. Pre-existing structures are often maintained to a certain extent. However, on a contractual level increased protection is sought (veto rights, right to trigger an exit, etc.).
2.5 In relation to management equity, what is the typical range of equity allocated to the management, and what are the typical vesting and compulsory acquisition provisions?
Management equity amounts and terms depend very much on the individual deal. Typically the management stake ranges between 3–10%. In most cases, standard drag-along and tag-along provisions and good/bad leaver call options for the benefit of the financial sponsor will apply. Put options for the benefit of management are less prevalent.
2.6 For what reasons is a management equity holder usually treated as a good leaver or a bad leaver in your jurisdiction?
Good leaver cases typically encompass (i) termination of employment by the company absent cause set by the manager, (ii) termination of employment by the manager with cause set by the company, and (iii) death, incapability, reaching of retirement age or mutual termination.
Bad leaver cases on the other hand usually include (i) termination of employment by the company with cause set by the manager, (ii) termination of employment by the manager absent cause set by the company, and (iii) material breach by the manager of the SHA or criminal acts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.