Talk to most private equity lawyers and you would never guess the country is teetering on the edge of a recession.
Things are “ticking along nicely” and practices are “surprisingly busy”, they say. Privately, however, the sector’s key players must be worried.
Not only has the finance that fuelled the industry all but dried up, there are signs that investors are starting to lose faith.
In the US, it has been reported that some investors have been selling stakes in funds for as little as a third of their original value.
To add to the air of gloom, Terra Firma head Guy Hands has spoken out about the sector’s woes, predicting fewer deals, diminishing returns and job losses.
So are the UK’s private equity lawyers living in a state of collective delusion – or do they know something we don’t?
The truth is probably somewhere in between. The highly leveraged megadeals that have made private equity such an attractive proposition for the past few years have certainly fallen away, but this is not to say that there is nothing for lawyers to do.
Charles Barter, former head of private equity at Travers Smith, and now general counsel at Bridgepoint Capital, says: “Putting together financing for massive multimillion-pound deals is certainly going to be very difficult for the foreseeable future. Law firms are going to have to start doing different types of deals or look for different types of client.”
The sort of advice being offered now might not be as glamorous as a multibillion-pound management buyout, but it is keeping private equity practices in work. So far the sector has avoided the layoffs seen in real estate and other credit crunch-hit practice areas.
Weil Gotshal & Manges private equity partner Marco Compagnoni says his firm’s clients are looking at their portfolios, selling off underperforming assets and picking up bolt-ons, as well as renegotiating debt and tackling the fallout from deals that have gone bad.
“It’s a different sort of work,” he says. “You’re not going to be doing new deals every day of your life, but you will be doing other things.”
Adding to the sense of upheaval, there is a changing of the guard at the very top of the profession. Some of the most seasoned private equity lawyers in the City have either moved on or taken up management positions recently.
During the past few months alone Barter has left Travers for Bridgepoint, Charles Martin has become senior partner at Macfarlanes, Matthew Layton has been appointed global head of corporate at Clifford Chance, and
Charlie Geffen has been elected senior partner at Ashurst.
All big names at top-tier firms – perhaps an indication of how important private equity became during the boom years?
“There’s a generational move going on,” says Compagnoni.
The effect of all this on the market could be considerable. More than any other area of corporate law, private equity is hinged on relationships, so what are the consequences when a key partner joins the management of a firm?
Of course Martin, Geffen and the like would say they will continue working for clients. But how much time can they realistically devote to the practice?
Says Martin: “When the market is right I fully expect to be spending no less than half my time on client work. At the moment there isn’t sufficient deal flow to call on a vast amount of my time.”
He also denies that the practice has been affected by his move, pointing to the firm’s recent work for Goldman Sachs Asset Management, leading a consortium to purchase 20 private equity assets from ABN Amro in a deal thought to be worth over e500m (£423.59m).
Likewise, Geffen is adamant he will not be passing on his key relationships – which include Blackstone and Candover – just yet, saying: “It’s certainly my intention to continue to spend time with clients, and indeed work with them. The senior partner role is very much client-facing.”
Regardless of whether it is feasible to look after a client given all the responsibilities that come with management, smaller firms will see the situation as an opportunity to break up a established hegemony.
As Barter puts it: “People always have an eye open as to whether there is a chance to get in when things change.”
So which firms are best placed to profit from the changing world of private equity?
The answer depends on who you ask. The firms at the top of the food chain – Clifford Chance, Weil Gotshal, Ashurst, Freshfields Bruckhaus Deringer, Macfarlanes and Travers Smith – inevitably talk about a flight to quality.
Certainly, those holding relationships with the larger funds are more likely to be trusted with whatever work is available. And these firms are also likely to be able to offer the wider range of legal services now needed. Martin at Macfarlanes says that a restructuring instruction requires expertise in pensions, tax and employment, for example.
But partners at less established private equity firms see things differently. Andrew Carpenter, head of private equity at Addleshaw Goddard, prefers to focus on the value for money his firm offers.
“For the bulk of deals you’re talking about in the UK, where is the clear water between what [Weil Gotshal and Clifford Chance] are providing and the likes of ourselves, Ashurst, Travers Smith and Macfarlanes?” he asks. “The lawyers who offer the best value for money and who are most prepared to take constructive approaches to billing are going to be sitting out in front.”
In reality, despite the personnel changes at the top of the profession, it seems unlikely that the hierarchy of private equity lawyers will change significantly.
There is no shortage of talented partners to take over client relationships, even if the likes of Layton and Geffen are forced to give up their practices.
Which makes firms outside the top tier, or with highly specialised practices, more vulnerable.
Dickson Minto, for example, relies to a large extent on transactions from two big clients – BC Partners and Charterhouse. Tellingly, the firm has just cancelled its Christmas party.
And those who invested heavily in private equity lawyers during the good times may already be regretting the decision.
“People trying to break into the London market, I can see them having a pretty nasty time,” says Barter. “It’s going to come back to firms and their relationships with key people.”