Frazer Money, trainee solicitor, Weil Gotshal & Manges
29 April 2010
The term private equity is used to refer to a type of investment fund where investors’ money is used by fund managers to buy-out businesses. The difference between this and traditional share investment activity where investors buy a small portion of the shares of a listed company, is that in private equity deals, the private equity investor will tend to buy a controlling stake in the business.
With this controlling stake, the private equity investor can use its business expertise to improve the profitability and value of the company. For corporate lawyers, private equity leads to merger & acquisition (‘M&A’) work when businesses are bought by the fund and then later sold.
A private equity house manages one or more investment funds. Investors in the funds commit capital and give the partners and employees of the private equity house the authority to source and invest in transactions on behalf of the funds. The funding for these transactions will typically come from a combination of the investors’ money and bank debt (known as a leveraged buyout or LBO). Once acquired, the companies that a private equity fund holds are known as “portfolio companies”.
A private equity house will typically look to realise the gains on an investment on behalf of the fund within three to seven years of the original investment. This realisation or “exit” is typically structured as a sale of the portfolio company to a trade purchaser or another private equity fund or by way of an initial public offering (“IPO”) of the portfolio company’s shares on a stock exchange. As mentioned above, private equity lawyers will be involved in this exit as well.
How is private equity different to ‘mainstream’ corporate work?
Private equity draws on all the skills of a normal M&A lawyer and then some more. Although many aspects of a deal will be the same as with a trade M&A transaction, private equity clients have lots of M&A experience and have subtly different needs and motivations for doing a deal; These differences have a big impact on the way we, as lawyers, work on the acquisition.
A big difference is that in private equity deals the investor will usually back the management of the target business to continue to take the business forward after the acquisition (unlike trade M&A where the buyer normally puts their own management team in place shortly after completion). As a result the management will often be asked to invest their own money alongside the private equity investor and so they will be heavily involved in the negotiations for the deal.
For tax and funding reasons, private equity deals are usually structured in a more complex fashion, which makes our work challenging and interesting.
What’s the working culture like in a private equity department?
The work can be intense and fast paced, making it an exciting practice area to be part of. Our clients are smart and driven people who have a good understanding of the legal issues arising on deals, which really keeps you on your toes.
The partners are very hands on in their approach, but are very keen to involve people at every level of the team in the deal and directly with clients, which is great.
What’s the typical makeup of a private equity lawyer’s client base?
The typical makeup of a private equity lawyer’s client base is likely to include a range of private equity houses (whose funds invest in deals of differing values in a number of sectors) as well as teams of managers who have invested capital alongside the private equity fund and require advice in relation to those investments.
Which other practice areas do you work most closely with?
Finance and tax (in relation to funding and structuring respectively), although most specialist departments, such as real estate and competition, will become involved throughout the course of a deal, particularly in relation to due diligence.
What skills make a good private equity lawyer?
Energy, drive, teamwork and problem solving. Commercial awareness is also vital to give you the all important context when working on a deal, as this makes your advice more focussed. Technical expertise is obviously a prerequisite.
What impact has the recession had on your practice area?
Leveraged buyouts (i.e. acquisition of companies with bank finance being used to fund part of the purchase price) have become less commonplace as the banks have reduced lending, although they are starting to come back again. Our work has become more diverse, with private equity houses taking a less conventional approach to deals, and in particular to funding. So, for example, private equity funds have been considering acquiring significant minority interests in both public and private companies, rather than limiting their deal activity to the acquisition of the whole or the significant majority of a company. Private equity houses have also spent more time evaluating their options in respect of their existing portfolio companies and this is reflected in the legal advice we give.
What recent key private equity deals has your firm been involved in?
We acted for Lion Capital and The Blackstone Group International on the sale of Orangina to Suntory Holdings, a Japanese drinks manufacturer. We also advised CCMP Capital Advisors and Bancroft Private Equity on the sale of food wholesalers, Farutex and Nowaco, which was a significant transaction in Central and Eastern Europe in 2009. In addition, Weil Gotshal represented Teachers’ Private Capital on its debut acquisition in Europe of Acorn Care and Education Limited from Phoenix Equity Partners.
What do you think will be the future shape of the private equity department?
There will continue to be a stable flow of conventional private equity work for our core clients. However, some of the focus of our work will shift away from leveraged buyouts to more innovative deal structures. As the financial markets and the economy pick up, private equity funds will begin to exit more of their investments, since the prevailing conditions will be more favourable to this. This will lead to a lot of seller-side work for private equity lawyers and also work for our capital markets teams who deal with IPOs.
In the light of the financial crisis, governments and the EU are looking to impose greater regulation on the private equity industry. This will obviously impact on our clients and will shape the advice we give.
What phrase is a private equity lawyer most likely to use and what does it mean?
“Exit” which means the realisation of the private equity fund’s investment in a business. This is one of the most important considerations and a great deal of time and energy is expended ensuring the transaction is structured so as to maximise the private equity investor’s ability to realise its investment over the medium term.