The private equity market: how to win friends and influence people
4 June 2007
21 February 2014
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5 November 2013
18 July 2014
"Precedent junkie." "Big girl's blouse." "Aggressive." "Pompous." "A bunch of muppets."
Private equity and leveraged finance lawyers do not pull any punches when describing their peers. In this most opinionated of markets peer approval, not just client approval, is becoming an important element of how law firm banking departments get deals.
Not only do private equity houses have their own, often trenchant, views, but sponsor lawyers have become powerful in choosing and occasionally vetoing the lawyers for the banks.
"The sponsors mandate the banks and will tell them that they have to use one firm," says Charlie Geffen, a partner at Ashurst. "Then that firm has to tree the deal - it's absolutely a trend. One of the issues for leveraged practices in that case is how to get close to the sponsors."
This has certain implications, because it is not just about getting on the bank panels anymore and hoping the work just flows your way. As a prominent private equity lawyer says: "If your sponsor client says what you're going to do, who the f**k cares about bank panels?"However, choosing the right debt lawyer is an art. "You don't want weak lawyers who are just going to cave in to your client. You might be able to run rings around them intellectually, but they would also be s**t at executing a deal," says one sponsor lawyer.
"It's chemistry, competence, market knowledge and whether they can get the deal closed," agrees Kirkland & Ellis partner Stephen Gillespie. "If we have a chance to influence the choice, it would disingenuous to say we wouldn't do so."
Linklaters partner Gideon Moore, who is something of a favourite among sponsors, says that traditional bank lawyers who hold up the deal are making themselves unpopular with sponsors. "Everybody expects you to know the legal points," he says, "but it won't win you any friends if you're still harping on about them three days into a five-day timeline."
And there are some referral patterns emerging.
CVC Capital Partners uses Clifford Chance partner James Baird and Freshfields Bruckhaus Deringer partners Ed Braham and Chris Bown, along with partner Graham White, late of Linklaters and now at Kirkland. For example, Braham advised CVC on the flotation of Debenhams in 2006, while Ashurst advised underwriters Citigroup and Merrill Lynch.
However, CVC has its own preferred lawyers on the debt side that it likes its lending banks to use. These tend to be Maurice Allen, co-head of banking and capital markets at White & Case, who is close to CVC executives Mark Boughton and Hugh Briggs, and Nigel Ward, head of international finance at Ashurst. However, history also plays a part: Allen was at Oxford with Clifford Chance's Baird, who describes him as a "good chap".
Permira is wedded to Matthew Layton, a partner at Clifford Chance, on the equity side, but has favoured Linklaters partners Nick Syson and Adam Freeman for the banks. Linklaters scooped a big win on Unilever's sale of frozen food manufacturer Birds Eye in November last year, acting for the underwriters. Clifford Chance's Layton advised Permira on the acquisition. Cinven uses David Higgins, a partner at Freshfields, for corporate matters and usually likes to see Ashurst partner Mark Vickers acting for the banks.
Terra Firma has used Ashurst, Clifford Chance and now Weil Gotshal & Manges on the corporate side. Its lack of a visible track record in the past 18 months - brought to a spectacular end by its bids for Alliance Boots and then EMI - means that it is trickier to track its favourite debt lawyers. It is thought to favour Michael Bates, a partner at Clifford Chance, although the lawyer acting for the debt providers on Terra Firma's groundbreaking bid for EMI is in fact Cleary Gottlieb Steen & Hamilton partner Andrew Shutter for Citibank.
Kohlberg Kravis Roberts is wedded to Simpson Thacher & Bartlett partner Tony Keal on borrower financing. He has been opposite Linklaters for the banks recently, although it is unclear whether any firm has become formally preferred for the senior lenders. Indeed, Linklaters appears to have become the referral firm of choice, in particular partners Moore and Syson.
"Gideon's good," says a prominent private equity partner. "He's sensible, he knows what's what and he gets on with life."
Amusingly, however, relations between Clifford Chance and Linklaters have become just a little frosty. Clifford Chance used to recommend Linklaters to Permira for the senior lenders, but more than one Clifford Chance partner says the referrals have tailed off now that Linklaters has become serious competition in the acquisition finance market.
Clifford Chance itself is criticised by two sponsor lawyers for its fees, but partners such as James Johnson, Alan Inglis and Malcolm Sweeting get good reviews: in particular Johnson, although there is widespread fear among sponsors that he is spread too thin.
Lovells, in the shape of partners Matthew Cottis and Gary Hamp, gets strong reviews for chunky domestic work. One lawyer calls them "civilised and practical; good people".
US firms have been canny at selling in the bank-bond combination to sponsors. Shearman & Sterling scores highly here, with partner Anthony Ward garnering praise from private equity lawyers. However, two lawyers warn that Shearman's execution is not as it should be: if Ward is not there, says one, then "nobody is prepared to stand up and take ownership of the deal".
There is one enormous omission among the recommendations, and that is Allen & Overy (A&O). Sponsor lawyers are really not keen on A&O, to put it mildly. Five firms with powerful private equity practices claim never to refer work to A&O if they can help it.
"They're routinely vetoed," claims a sponsor lawyer in a typical comment. "I'd very rarely recommend them. They're too expensive and there's always a fight on fees." While another says: "They've trained whole generations to take up a lot of oxygen. They just annoy our associates to death."
However, A&O banking partner Stephen Kensell argues that his team has never been busier. "Sponsors will always have their preferences," he says, "but we're busy on both banking and sponsor-led deals, and that speaks for itself."
There are two A&O partners who do not attract invective: Stephen Kensell and George Link. But neither actually hails from A&O's traditional leveraged group. Rather, they are seen as generalist can-do banking lawyers in the David Morley mould (both were in his group).
So it seems that A&O's reputation of Rolls-Royce lawyering has come at a price, and that price is the mass reluctance of its peers to refer it work. In general terms, the market is moving away from an overly technical view of documentation.
"The view of the banks is not so much 'is this a seven-year credit?', but 'will this sell in the market?'. So that changes the negotiating dynamics quite a lot," says Ashurst's Vickers.
So in this buccaneering environment, aspirant leveraged finance firms may find themselves marketing their execution abilities as much to the sponsor law firms as well as the private equity houses. On current evidence, they're a hard crowd to please.