AIFMD & definition of an AIF
Is your investment company an AIF? New regulations in 2025 could make non-compliance a criminal offense. Understand the key rules, exceptions, and what you need to do—before it’s too late!
Setting up a private equity fund in Sweden. Key considerations.
Establishing a private equity fund in Sweden offers exciting opportunities and the alternative assets industry has a stellar record in the region. A successful establishment involves navigating a complex landscape of commercial, regulatory, and operational challenges where several different teams will advise on separate aspects. At Oak One we have extensive experience of this process and are here to guide you every step of the way. Below we have gathered some of the most common questions we are asked during the initial stages of establishing a new fund.
Regulatory framework
What are the key regulatory requirements we need to be aware of when setting up a fund in Sweden?
One of the first steps in setting up a private equity fund in Sweden is understanding the regulatory framework. The Alternative Investment Fund Managers Directive (AIFMD) plays a crucial role as well as corporate-, tax- and contract law. Generally the first step is to determine if the structure is an alternative investment fund and if so how it’s governed under the AIFMD as incorporated in Sweden. The intended fundraising & target investors become important to identify early to streamline the process and ensure compliance with the regulatory environment both from the perspective of the AIFMD but also with regards to the Swedish Companies Act which may limit how shares are marketed. We usually sort this out during the first or second meeting and the team can then start implementing their fundraising strategy right away.
Fund Structure
What are the advantages and disadvantages of different legal structures for our fund, such as limited partnerships versus limited liability companies?
In Sweden it is very common to utilize one or more limited liability companies (see Key Terms, Legal Structure) (Sw. aktiebolag) and the corporate form has seen extensive use in Sweden for both domestic as well as international fundraises.
Do we need to establish a company right now?
Marketing interest in legal entities requires compliance with applicable laws, including the AIFMD. We typically advise the management team not to rush off and establish or acquire the fund company right away to avoid marketing interests in contravention with applicable laws in Sweden. It is, however, often necessary to designate a company which from the start will be designated as the client during the initial phases of the establishment.
TIP: Don’t market your fund until you speak to counsel.
How should we structure the fund to optimize for tax efficiency and investor appeal?
Again, a limited liability company (Sw. aktiebolag) provides a well known tried and tested model which has worked very well for many years. It also provides for efficient tax structures for both the fund, manager and the investors. Tax advisors are also familiar with the structure which often times reduces costs attributable to establishment. Investors from certain tax-jurisdictions may require special terms or feeder vehicles to alleviate tax concerns but this is very rarely a problem and funds in Sweden close with Commitments from institutional investors and endowment funds from around the world.
TIP: Foreseeability is key and seasoned investors rarely appreciate creative tax structures.
Investor Relations
We have seen countless examples of fundraises which are closed in short order because of the trust investors show in the team and the relationship with your investors is paramount to the teams endeavours. For successful teams the relationship with investors and will span many years, or decades, which warrants the utmost care and diligence in all aspects of the relationship. Similarly the relationship with portfolio companies and industry partners can make or break a team’s future. As Warren Buffet famously said in a hearing before the US congress “Lose money for the firm and I will be understanding. Loose a shred of reputation for the firm and I will be ruthless.”
TIP: Be sure everyone who works for your fund, including administrators, counsel and colleagues, understands and respects the long term commitment and trust investors & partners have shown your team by providing outstanding professional service and commitment.
Fund terms
What are the typical terms and conditions that investors expect, and how can we structure these to be competitive?
For first time or early vintage teams we generally advise on “plain vanilla” terms to maximize the potential for a successful fundraise. This has also become prevalent in more established groups seeking capital from state pension funds or similar. More seasoned teams with exceptional track records may seek to shift terms in their favour and counsel’s role is to advise and strike a balance between the management team and the investors. The terms generally include a cap on Establishment Costs of 0,5%-1%, Management Fees of around 1,75%-2,5% with lifetime caps on Management Fees over the life of the fund, and Carried Interest of 20%. This is called the “2:20” model based on 2% management fee and 20% carried interest. Depending on the structure, team seniority and how attractive the team’s perceived pipeline is, management fees may vary and so called supercarry (a higher carried interest in the event of outperformance) may also be incorporated in the terms.
TIP: Fundraising is hard work and often times the leads to investors go cold if they perceive your terms to be “off market”. Consult with counsel before approaching key investors with specific terms to maximize your chances.
Fundraising Strategy
What strategies are effective for attracting investors, particularly in the Swedish and broader European markets and how can we differentiate our fund to stand out to potential investors?
This is the magic sauce of setting up a fund and there is no solution which fits all. Generally we advise teams are careful to ensure their track record supports their purported investment policy and intended investor base, In the end the personal relationship you have with your investors, professionalism, track record and honesty go a long way. We are also often asked if we can help in fundraising by contacting or recommending investors but that would be a conflict of interest for us.
TIP: Work with counsel to ensure terms are balanced and packaged in a way to allow the investors to see why your fund is the best option for their capital deployment.
Legal Documentation
What are the essential legal documents we need to prepare, and what are the key provisions we should include?
This is where most of the legal cost for establishment is accumulated. We generally advise on first setting a clear term sheet to describe the structure and key terms of the fund. This is a document which often can be benchmarked by investors against other fund terms and for new teams it is often advisable to abstain from too may eccentricities to ensure the terms are in line with best practice and market standard.
TIP: Keep the terms simple in early funds & spend time to whittle down the terms to the core principles. A longer term sheet is rarely better.
How can we ensure that our documentation complies with Swedish law and meets international standards?
This lands squarely on your legal counsel.
Costs
What does it cost for legal counsel and what financial risks do the team take?
Legal costs for establishing a new fund are not trivial, often 0,25%-0,5% of Commitments (but up to 1% is not uncommon), and it is important to work closely with your legal counsel to ensure the financial risks for the team are limited during the establishment process. If, for example, counsel is engaged in a way that draws large costs at an early stage the fund-team takes the risk of carrying the costs in the event of a failed or delayed fundraise. Generally we deploy a method of structuring the fundraise to limit cost exposure during the initial phase which allows the team confirm the financing before the costs are accrued. As the commitments are solidified and the Hard Cap is approached risks of carrying costs are greatly reduced for the team. As the fund reaches closing the establishment costs, which include legal, tax and marketing, will be borne by the investors as part of their commitments provided they have a priority right of return for such expenditures before there is any Carried Interest accrued.
More knowledge
Key Terms and definitions in Private Equity Funds
Understand the key terms that drive successful private equity. Dive into our breakdown of fund structures and what they mean for investors.