US private equity houses and US law firms: a family affair?
3 March 2003
11 November 2013
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24 July 2013
How many law firms does it take to advise a US private equity house? It doesn't matter - as long as they do it the American way.
You'd be forgiven for thinking that this is how stateside private equity funds quantify their choice of legal advisers. It is rare indeed to see a European buyout by a US house pass by without at least some involvement from a US firm.
Is it that US equity investors are keen to indoctrinate European law firms into their way of thinking?
Or, for reputedly canny users of legal services, private equity houses appear to be remarkably fast and loose when it comes to fees?
US houses are obviously happy to spend an extra buck on having two firms providing both US and European legal advice.
New York's Clayton Dubilier & Rice (CD&R) probably didn't bat an eyelid when Macfarlanes was brought in alongside longtime adviser Debevoise & Plimpton to act on last year's £434m acquisition of food services group Brake Brothers.
After all, what's a few extra thousand pounds when, like CD&R, you had to freeze German expansion last month because of "recruitment issues"? Or you have to write off $300m (£190.1m) because German aircraft maker Fairchild-Dornier, which CD&R invested in during 1999, slid into bankruptcy in April last year?
Look, for example, at Simpson Thacher & Bartlett, one of a handful of law firms currently riding the crest of a wave as its prized private equity client KKR levels its acquisitive gaze at the likes of Safeway and now Six Continents.
Bear in mind that Simpson Thacher's European coverage currently spans to just a London office, which was opened in 1978. Then look at KKR's history of European deals valued over $100m (£63.4m).
Since 1999, when KKR officially opened an office in London, the private equity giant has completed seven major deals: five of these are German-based companies, with one in France and just one centred in the UK.
It is no surprise to see that Simpson Thacher acted on the majority of these deals despite having no coverage in Germany or France.
This is not to denigrate Simpson Thacher's role on these deals. On Legrand, for example, where KKR hooked up with Wendel Investissement to buy the business from Schneider Electric, Simpson Thacher was involved in a number of ways. These include due diligence, advising on the partnership with Wendel, syndicating the equity and structuring the senior and mezzanine facilities. But Linklaters' Paris office was also advising KKR, as well as Wendel.
Doesn't this seem somewhat convoluted? One US investor speaks in horror at the sheer logistics of having to navigate his way around the legions of lawyers present on large deals.
"If you use two or more law firms on a deal, it complicates matters no end. You have to sit in these interminable meetings late at night where everyone has a part to play," he sighs.
The wisdom of doubling up for US private equity houses often rests on the fact that their domestic firms have usually been responsible for structuring whatever fund is being invested at that time.
Therefore, there is the function of making sure that the deal structure fits the fund structure, thereby navigating through any tax issues that may affect US pension funds' original investments.
Although European private equity houses may use one law firm to structure a fund, it doesn't necessarily follow that those lawyers will automatically pick up the next significant deal.
But the relationships between US private equity houses and their lawyers seem very different to their European counterparts. In fact, they seem to border on the familial.
Thomas Roberts, chairman of the corporate department at Weil Gotshal & Manges, and John Muse, chief operating officer at Hicks Muse Tate & Furst, can trace their association back years.
Such is the closeness of Kirkland & Ellis corporate partner William Kirsch to client Madison Dearborn Partners, that one lawyer mistakenly thought Kirsch was the in-house general counsel at the private equity house.
The result of this is that the US law firms are often in the driving seat on European deals, leaving some European lawyers claiming that they feel like they are being babysat by their transatlantic counterparts.
The US firms also hold incredible power with their private equity clients. For example, a quick phonecall from Simpson Thacher to KKR ensured that Herbert Smith captured a role on the (now aborted) bid for Safeway, before the UK firm accepted another instruction.
At Weil Gotshal's London office, it was not unusual to see US lawyers fly in to oversee its then new UK lawyers complete their first deals for Hicks Muse.
It seems, though, as if this situation is beginning to change, as US firms in London begin to staff up with UK lawyers in private equity.
Are US law firms over here becoming more aware that they are losing out on fees because their smaller, largely US-centric teams, do not have the capacity to handle the larger deals on their own?
Clifford Chance, for example, has steadily built a relationship with KKR, as is Allen & Overy (A&O). CC has worked on at least three large deals for KKR. Since both these firms also have US offices, perhaps they are becoming a threat to the likes of Simpson Thacher.
Recently, Simpson Thacher famously took on Euan Gorrie from A&O in banking and is known to be scoping out potential UK corporate partners.
Kirkland & Ellis's 10-strong private equity team was enriched last year when Nigel Dunmore moved over from DLA.
Debevoise, which had just one UK private equity partner, added Christopher Mullen from Freshfields Bruckhaus Deringer and, significantly, Marwan al-Turki, formerly of Baker & McKenzie, who specialises in fund formation.
While firms such as Latham & Watkins have gone into overdrive building up London, not least by hiring Charles Fuller from Simmons & Simmons.
It is unlikely that US firms would ever admit that this flurry of activity is down to shoring up against Euro-pean competitors. Indeed, the impetus could be grabbing more work as pure corporate continues to suffer.
And although US law firms seem to be like family to their private equity clients, they would do well to remember that blood may be thicker than water, but for a pile of greenbacks, some might be tempted to sell their granny.