From a cross to bear to a leap of faith – private equity’s second coming

Putting houses in order is becoming the mainstay of law firms’ private equity work, says Kian Ganz.

From a cross to bear to a leap of faith – private equity’s second comingIt feels like a world away, but it’s not so long since private equity was a major driver of many firms’ corporate revenues. With the dearth of credit and the global downturn, private equity practices have largely turned into fee-­earning deadweight.

Despite this, private equity’s year in the wilderness seems to have come to an end, with a ­number of houses now facing the fact that the masses of debt they took out to fund their spending sprees is proving more than a little difficult to service.

Apollo Management has been grappling with Countrywide (see story below), the debt that ­Candover used to buy Italian ­boatbuilder Ferretti has been restructured (The Lawyer, 16 ­February), Bridgepoint has ­injected cash into clothing retailer Fat Face, and Terra Firma has done the same for EMI while 3i has radically restructured the debt of its 3i ­Quoted Private Equity (QPE) fund.

Many others are on the watch-list, with a raft of deals, such as BC Partners’ acquisition of estate agency Foxtons, closed at the top of the market.
According to one private equity partner at a top 10 firm, “there’s a lot of trouble to come”.

“I think everyone feels that there are a lot of highly leveraged private equity deals that must be really struggling to pay the financing cost at the moment,” he adds.

This is not surprising given that leverage ballooned towards the tail-end of the private equity boom, with debt-to-earnings ­multiples regularly hitting the double digits.

And as the private equity ­houses scramble to either pump cash into their portfolio companies or restructure the acquisition finance, private equity lawyers are getting used to a different kind of ­workload.

At Travers Smith partner David Innes has been helping ­longstanding client Bridgepoint on the Fat Face deal. Innes’ ­colleague Phil Sanderson, who heads the firm’s private equity team, says: “Generally there’s an awful lot of work on that type of dynamic. It’s not necessarily covenant breaches, but the best private ;equity ;houses ;are ­preparing their portfolios for what they see as likely or possible over the next year or 18 months. That involves looking at headroom on covenants and the like.”

Slaughter and May partner ­Martin Hattrell has been helping 3i on the complicated restructuring that will see 3i QPE enter voluntary solvent liquidation. Firms such as Clifford Chance, Macfarlanes and Travers also stand to benefit from the restructuring, having set up several relevant funds for 3i in the past.

“The work is lawyer-intensive because you’re renegotiating all the banking arrangements and injections of new equity,” explains one private equity partner. “There’ll be a lot of law firms trying to get that work.”

But what of the firms that stand to benefit from the wave of debt restructurings? Generally, the instructions for the meaty ­restructurings seem to have been bagged by the firms that advised the private equity houses on the original buyouts.

As one City partner says: “The advantage of getting the firm that did the buyout deal is that they ought to have some familiarity with ;the ;documents. ;The ­disadvantage is that, if part of the problem with the original deal was part of the way it was documented, that isn’t going to come out quite so readily if it’s the same firm advising on the restructuring.

“If I was doing the refinancing I’d want someone different doing it.”

Of course, it is not just private equity houses that are facing up to a deluge of debt refinancing. As Freshfields Bruckhaus Deringer restructuring partner Ken Baird points out, FTSE350 companies are looking at refinancing more than £210.3bn of loan debt over the next five years, with £29.2bn set to mature this year alone and £52bn due to mature next year.

The problems associated with the burden of debt are clearly deep seated, then, and with the private equity model predicated on debt, the sector’s future can be seen as less than certain.

Despite this, few private equity lawyers are in any doubt that the sector will have a major role to play in the economic recovery, whenever it comes.
“The private equity world will be one of the leaders of the ­recovery,” claims Sanderson at ­Travers. “There’s £1trn of cash available – when there’s a recovery a very obvious source of those deals will be private equity.”

Taylor Wessing private equity partner Martin Winter agrees, ­saying: “Private equity will be part of getting the wheels of capitalism moving again. Traditionally it’s always said that private equity has done its best deals in bad markets.”

kian.ganz@thelawyer.com