It’s the hottest trend in investment – but what does private equity mean for lawyers? We asked the team at Sidley Austin for their take on what can be a tricky topic to understand.
How would you define private equity?
Fatema Orjela, partner: Broadly ‘private equity’ relates to the making of an investment in private businesses for profit or upside returns (as opposed to debt-like repayment returns).
Yeawon Kim, associate: There is not one definition of private equity that can tie the industry in a neat ribbon. At minimum, private equity involves investing in (or acquiring) a private company, managing the company, and selling it after a few years at a profit.
Isabel Berger, associate: Private equity firms raise money from investors by granting an economic interest in a fund in return. The fund in return invests such money in private companies or buyouts (and taking private) of public companies with the intention of increasing the value of such companies so that their shares can be sold for a profit in the medium to long term (i.e. 3 to 7 years), following which the fund will return the initial investment, with a share of any profit, to investors.
Zoe Hansen, trainee: Private equity is an investment class consisting of capital that is not listed on a public exchange. Private equity lawyers will assist funds and investors to invest directly in private companies. A large part of the practice is also to set up and administer Management Incentive Schemes where the managers of such companies will obtain shares as incentivisation.
How does private equity differ from other areas of corporate law?
FO: The client base is the key difference which underpins the other differences. Big corporates are typically focused in a specific sector. When they look to acquire, they want the target businesses, but they likely already understand how those businesses work and how to run them day-to-day (and there may thus be synergies driving the acquisitions). Private equity firms are in the business of buying and selling and providing strategic advice to their portfolio businesses. They need to incentivise management teams to carry out the day to day running of the businesses they acquire and to act on the private equity firms’ strategic advice.
YK: I think the distinction that most impacts my day-to-day work is that private equity clients are very sophisticated, more so than corporate clients. This means a lot more is expected from me to pull my weight—for every transaction, we are constantly expected to be responsive, go beyond and be on our toes. Moreover it motivates me to attend every training session that Sidley offers to keep up to date with commercial and/or legal issues that may affect private equity funds, so that I may be able to deal with unforeseen novel issues that may arise during a transaction.
IB: As a private equity lawyer, in addition to advising on the acquisition of a target business, you advise on the equity arrangements which govern the relationship of the various stakeholders (e.g. the private equity sponsor, co-investors (if applicable) and management), which adds another level of complexity to your work. Whilst the acquisition documents terminate shortly after closing, the equity documents will remain in place for the duration of the investment and will set out, amongst other matters, the economics and control allocated to each stakeholder. As a result, negotiations often focus on the equity documents.
ZH: The clients are often funds that frequently invest in private companies – as such you get to work with the same client over and over again and will really understand the fund's structure and business. There's a lot less handholding and PE deals tend to be much faster paced.
IB: On private equity transactions, the deal turn-around times are typically shorter than in other corporate deals. Also as your clients’ business is to buy and sell companies, your role as a lawyer can be different from advising, for example, a trade buyer on a non-private equity transaction.
“For every transaction, we are constantly expected to be responsive, go beyond and be on our toes.”
How would you describe your role as a partner within such a fast-paced practice area?
FO: My role as partner is to act as captain of the ship. To use my experience to guide the team to avoid the usual known icebergs and use my judgement to help navigate around the icebergs that turn up out of the blue. Smooth execution is what our clients want and need – if we do our job well, they are better able to do their job.
What about senior solicitors and associates?
YK: Depending on seniority, an associate is expected to: conduct and manage due diligence processes by liaising with specialists (for example, colleagues in employment and data protection teams) and local counsel; be the communication channel between the opposing party and our clients; negotiate and draft transactional/legal documents; and research and draft memos on complex legal issues.
IB: At Sidley you are given responsibility from an early stage in your career, which means that as a five-year PQE you are well-positioned to run your own deals. In addition to billable work, you would typically also give training sessions to clients, prepare and participate in pitches and help organise client events. Mentoring is a big part of the firm's culture and senior associates also give regular training sessions to junior associates and trainees.
What do trainees tend to do on private equity deals?
ZH: As a transactional seat, private equity is very process heavy. This allows trainees to run their own work streams, often involving reaching out to specialist teams within the firm. Private equity also offers direct exposure to the client.
Describe an interesting matter you’ve worked on.
FO: My team and I recently completed Apollo Global Management, LLC’s acquisition of a majority stake in run-off insurance specialist, Catalina Holdings (Bermuda). This was the biggest private equity/insurance deal of the year. There was a lot of development for me personally, especially, in relation to insurance, (pivoting on Sidley’s cross-practice skillset ) and it was a key mandate for the firm and which has led to other, ongoing private equity/insurance opportunities in Europe.
YK: All transactions are bespoke and not one transaction involved targeting business in the same specialisation sector—from insurance companies to medical device developers, each transaction involved different issues, and this made every transaction as interesting as the next.
IB: There have been many! For example, advising a private equity firm on the acquisition of a Dutch learning business, which included complex co-investor arrangements; a private equity firm on its investment in a lending platform focused on real estate which required bespoke agreements and structuring; and on the sell-side, advising on an auction process which started with over 50 bidders.
“My interactions need to result in getting this diverse group of people on the same page to achieve the end goal.”
What are the highs and lows of working in this practice area?
FO: Private equity lawyers need a sharp technical and personal skillset to get deals done. Having a solid grounding in law is only the starting point. The clients that we serve are dynamic and there is a broad range of stakeholders that our clients (need our help to) agree deals with. We have to understand the commercial context and provide practical solutions at pace. The highlight is the range of people I interact with across generation, jurisdiction and background. The challenge is one and the same, as my interactions need to result in getting this diverse group of people on the same page to achieve the end goal.
YK: The highs are the clients being appreciative of your hard work after the signing and closing. The lows are the pressure, long hours and commitment that come with the job.
IB: Private equity firms invest across different sectors and asset classes with transactions often involving multiple jurisdictions. Every deal is different and comes with its own challenges, which means you can learn something new on each deal.
You occasionally have to work long hours in the run-up to signing, completion or other key deadlines. Our team operates a “no-face-time” policy which ensures that you can retain autonomy and some work-life balance despite the episodic pressures of the job.
ZH: The hours can definitely be tough. Trainees and associates are often staffed on multiple deals that can kick-off at the same time. Highs are usually closings and the satisfaction when everything comes together and falls into place.
What are the current trends affecting private equity?
FO: Private equity is at a really interesting stage. There are fewer target businesses for sale, competition is high, it is tough to be certain with valuations, macro-political and economic events add increasing uncertainty, there is increased regulation, and there is investor pressure to consider societal factors (such as the environment and diversity). Fortunately private equity is adept at change to make the most of opportunities created by uncertainty.
YK: Uncertainty surrounding Brexit and low interest on bank loans are two of the big trends.
IB: Private equity has experienced rising capital inflows in the last couple of years (due in part to low interest rates); at the same time, private equity firms have been struggling to invest such capital due to valuations of target companies being at an all-time high. In such a competitive market, private equity firms have adopted different strategies to address such challenges.
Some private equity firms increasingly focus on alternative asset classes such as infrastructure, private credit or debt (including distressed debt) or growth investments in order to distinguish themselves. Contrastingly, a growing number of investors co-invest in transactions alongside private equity firms, allowing especially the smaller to medium sized private equity firms to write bigger equity cheques. The last couple of years have also seen an emergence of funds dedicated to alternative investment strategies (e.g. impact investing and other socially responsible investing strategies).
ZH: It appears that the number of PE deals is anticipated to reach a record high this year (2019), largely due to the low interest-rate environment. However, it would be interesting to observe how this plays out with Brexit occurring simultaneously, which has resulted in cheaper UK target companies, but also increasing deal and business uncertainty.
“At 5 years’ PQE, I was handling calls with clients and leading negotiations.”
Where can new associates expect to be in five years?
FO: Leading deals! At 5 years’ PQE, I was handling calls with clients, leading negotiations, delegating to juniors and managing the junior team. Pipeline is key: we are focused on our junior pipeline because they are the leaders of tomorrow.
ZH: 5-year qualified associates are given a huge amount responsibility and are usually the ones leading the deals.
YK: New associates are expected to be mid-level associates within five years. I have also seen some associates leave to work for client firms as their in-house counsel, or leave the legal industry all together.
What is unique about Sidley Austin’s practice in this area?
FO: Our team are diverse (from a gender, race, sexuality, and country of origin perspective). We are creative and solve problems as a team; invest a lot of time in training; and support our associates to build their own client relationships from day 1 (through budget, time credits, discussions on business plan etc.). We give our team autonomy and agility to work in the manner that they choose, and support our associates for life whether in private practice or elsewhere.
YK: We have a very strong regulatory and sector expertise, ranging from life sciences to insurance. Moreover, we have great support from the US offices—meaning that on any UK-US cross-border matters, we are able to work seamlessly as one firm, so a client need not outsource to another firm.
IB: Sidley has dedicated specialist teams in the life sciences, insurance, financial services and other regulated sectors which are industries that private equity firms are increasingly interested in. Our team also brings together lawyers admitted in different jurisdictions and from a variety of countries and backgrounds, which mirrors the international and diverse client base we have.
ZH: As a relatively new practice are at Sidley, the PE team is definitely growing. It's great to get an insight into how the team is developing the practice. Unlike a number of pure private equity law firms, Sidley, as a full-service firm, can offer specialised advice required on PE deals without having to engage outside counsel.
What personal qualities are beneficial to have as a private equity lawyer?
FO: Focused, driven, pro-active, articulate, curious, pragmatic, a problem solver, and empathetic.
YK: As a junior private equity lawyer, I think it is important to be a team player; always be ready to pull your weight and be responsible; remain calm, yet enthusiastic during stressful and pressurised times; be organised and keep on top of multiple work streams; have a keen eye for detail; and importantly, enjoy being around the people you work with, whether it be your co-workers or clients.
IB: As a private equity lawyer in the corporate team, you are usually project managing the transaction from a legal perspective, which can involve the coordination of different specialists across the firm as well as acting as the first point of contact for the client, which means that strong interpersonal and organisational skills are important qualities. A genuine interest in understanding how businesses operate and being comfortable with numbers is also key.
ZH: Organisation skills and attention to detail are key and a good understanding of basic Excel is useful for understanding the financial mechanics of a transaction.
“As a junior private equity lawyer, I think it is important to be a team player.”
What is your advice to students interested in this area?
FO: Learn as much as you can as early as you can – about the law, the context of why certain arrangements are structured or deals are struck as they are. Ask lots of questions to do this. There is often no one right answer – it depends on the factual scenario. So, the more ‘options’ you understand, the bigger your own toolbox with be, and the more quickly your judgment will be able to become a value add.
YK: Brushing up on commercial awareness and knowing the trends that may potentially impact private equity firms; if possible, seek work experience in the relevant fields (i.e. working at a fund etc.) to gain as much exposure to the industry before committing.
IB: Work experience in the private equity team of a law firm is the best way to find out whether you enjoy the day-to-day work of a private equity lawyer. At Sidley we offer vacation schemes to students which is a great way to get some exposure to legal work in that field.
ZH: Apply for vacation schemes at law firms with a strong PE focus – even if you don't end up in the PE team on the vacation scheme, you'll get an insight into PE work across departments.
How can our student readers and junior associates keep up-to-date with the market and industry trends?
FO: Private equity is everywhere. Any topical story in a credible broadsheet newspaper likely touches on private equity somehow. It is worth keeping up to date. If you have access to others in the industry (whether through colleagues or work placements), be sure to ask. You will likely always learn something by hearing a viewpoint from a different lens.
YK: It sounds very clichéd, but read the Wall Street Journal, Bloomberg and related publications. This does not mean read from cover-to-cover, but try to skim through at least one publication every day and recognize the issues that grace the papers frequently.
IB: A good starting point to keep up-to-date is the FT (both company and sector specific articles) and other business and financial publications. The website of the British Venture Capital Association is useful for updates on legislative changes affecting the private equity and venture capital industry and also contains examples of equity documents. In addition, following private equity firms on social media is also a helpful way of staying up-to-date.