Weil Gotshal's Marco Compagnoni charts what it takes to close deals in a much-changed environment and finds a market that refuses to conform to expectations

We often hear that a particular position is or is not 'market'. Said with enough conviction it can sound true; but what is or is not market is usually only the result of a particular set of factors coming into play in any given transaction. The single factor that before, during and after the credit crunch has always determined where the balance of negotiating power sits between buyer and seller is how many parties want to buy a particular asset and how well the competitive position is played out.

When the credit crunch first hit in the summer of 2007, there was much talk of distressed sales being the new reality – in fact, there were some distressed deals, but only a tiny faction of the level predicted. Instead, we saw good assets being kept back from sale by their owners, waiting for buyers to return – so supply and demand continued to play into the hands of sellers. When banks started to lend again at the end of 2009 and early 2010, we saw a gradual return of sellers to the market and just the same levels of competition for those good assets as had existed at the height of the credit boom.

The widely predicted return of buyer-friendly terms like material adverse change (MAC) conditions, full warranty and indemnity packages, full purchase price liability caps and net asset price adjustments did not materialise. This was simply because there was always more cash chasing good assets than good assets to buy. Bank lending, when it returned, could have driven a change in share purchase agreement (SPA) terms in favour of buyers – instead, banks did not concern themselves with SPAs, focusing their energy on pricing for banking terms and fighting to swing the Loan Market Association banking documentation in their favour.

The key criteria for sellers (other than price) – and buyers and their advisers have to keep this very much in mind – are: certainty of getting a transaction closed and walking away from a closed transaction without exposure to claims (and, for private equity sellers, therefore being able to return all the deal proceeds to their fund investors to maximise the fund's internal rate of return).

Looking first at closing certainty, it is now only a very confident buyer who asks for a financing condition or a MAC clause. Sellers will usually only allow conditions precedent in relation to regulatory matters where it is actually illegal to close a deal without them: 'nice to have' conditions are rarely seen. The concept of certain funds has migrated across from public takeovers into most private deals now, requiring lenders (and equity providers) to demonstrate enforceable financing for the transaction on and from signing.

The most recent trend affecting SPA conditionality is the use of high-yield bonds. The traditional approach has been to close a transaction using a bridge loan, which is then repaid from the bond proceeds, with the bridge finance being on a certain funds basis on signing – and so no financing condition in the SPA. Increasingly, we are seeing buyers looking to close and fund the purchase price directly from their high-yield bond proceeds, thereby avoiding the cost of bridge finance.

This means that the buyer now has to introduce a condition precedent in the SPA linked to the successful launch and take up of the bond. This is not ideal from the seller's perspective as it leaves a period, albeit a short one, where the seller is exposed with an announced transaction that is dependent on the bond's successful placing. A market approach to such conditions is already appearing, with a limited number of features of the bond offering being used as criteria to determine whether or not an SPA bond financing condition has been satisfied. The strength of the bond market to date has meant that this has not given rise to particular problems – but potential wobbles over recent events in Japan and Libya (and who knows what else is around the corner) mean that this is an area where market terms are still evolving.

In terms of minimising sellers' post-closing liabilities, seller-friendliness in transaction terms and buyers being comfortable working with seller-friendly terms are still key. It is not unusual now to have no general tax indemnities, locked boxes rather than completion accounts, general disclosure of data rooms and the general acceptance of a range of contractual limitations on sellers' liability. Seasoned private equity buyers are accustomed to buying with these concepts, but they cause concern to less frequent buyers of businesses, especially those from outside Europe.

Buyers and their advisers have honed transaction techniques to cope with this trend. For example, diligence is relied on to a far greater extent by buyers and sellers to identify and quantify risk, allowing it to be priced more effectively. A smarter diligence product is therefore now required from advisers. Specialist locked box teams within accountants have emerged. Private equity lawyers have to devise more creative, tailored solutions to deal with problems which fit into the overall dynamic operating between the buyer and the seller.

Of course, not all transactions are played out in competitive processes. Finding the elusive proprietary transaction is every private equity buyer's ideal. Some are better able to find and execute on these situations than others. Increasingly, that will be where ultimate transaction success lies – but even in a proprietary scenario, sellers' advisers are going to keep importing seller-friendly 'market' terms into those transactions.

Marco Compagnoni is a partner in Weil Gotshal & Manges' private equity group.