The Apax panel review: putting the worry into work

Panel reviews are, quite frankly, a pain in the proverbial for lawyers. Jumping through hoops, stressing over dwindling fees, poncing about with PowerPoint pictures – it’s irritating but a necessary evil.

Take a panel review for a private equity firm, though, and suddenly it’s not just general lawyer grumpiness we’re talking about, but full-blown paranoia.

Think I’m exaggerating?

Look at the near hysteria surrounding Apax Partners’ intention of setting up a panel of law firms. I don’t think I’ve ever seen emotions run so high over a beauty parade, ranging from thinly disguised panic to crushing disappointment to stark bewilderment. A confused-looking lawyer is not a pretty sight.

But with Apax, all this is kind of understandable.
As one of the leading private equity houses in Europe, Apax has been involved in some of the most high-profile deals over the past two or three years.

These include a (failed) bid for National Car Parks, the buyout of satellite operator Inmarsat, the purchase of a stake in DIY group Focus Wickes and, of course, the much delayed IPO, with Hicks Muse Tate & Furst, of directories business Yell.

These are the spoils that the chosen law firms could expect to share on the panel, since they would be advising Apax’s leveraged transaction group for deals valued at over e100m (£54.4m).

Unfortunately, there are only two places available, for a primary and secondary adviser, with a space for a firm on high-yield finance.

What’s puzzling is why Apax is doing this and how it came up with its shortlist of firms, which will be tendering later this month.

As revealed by The Lawyer (29 March), the finalists include Allen & Overy (A&O), Ashurst, Clifford Chance, Freshfields Bruckhaus Deringer and Travers Smith Braithwaite.

Taking the question of why Apax is doing this, it cannot simply be down to fees. Can it?

Stephen Green, head of the financial services industry group and a director in the leveraged transaction group, who is running the process, gave the impression it might when he told The Lawyer
last May: “We’ve been very widespread with our favours.”

Or maybe that was a secret code for something else.
The issue of fees when acting for a private equity client is difficult to manage, since more often than not law firms can be mandated on a deal that fails to come to fruition, throwing billings up in the air.

There are, of course, abort fees – potentially one area that lawyers will touch on in the Apax beauty parade – or discounts, where, for example, a law firm might offer to charge 90 per cent of time recorded on £1m of fees, ie giving a 10 per cent discount.

By centralising law firms (admittedly, Apax has used a plethora in the past) it could control cost, benefit from freebies such as training, and manage risk, ie make sure the firms know how the private equity group and its convoluted fund structure works.

This last point is very important; one private equity insider said they nearly “fell down a black hole” on a deal when a stand-in UK firm screwed up because of issues buried deep down in the fund structure.
Apax could be setting up a panel to manage conflicts.

But I just don’t get this. The very nature of an auction means it is not impossible that your chosen firm has already been retained by a rival, although lawyers argue that this is where Chinese walls – sorry, ‘information barriers’ – come into play.

Perhaps the fact that Apax has taken nearly a year from first mooting a panel of law firms (as first revealed by The Lawyer in May 2003) to actually getting round to sending out invites to tender, shows that it knows it was going to be a difficult process.

Couple this with the fact that the panel, according to sources, will be reviewed after 18 months (like Apax’s chosen line-up of accountancy firms) and it may mean that relationships are very important.

What about the list of invitees? Clifford Chance and Travers Smith are easy to understand, since both firms are long-time advisers to Apax, while Ashurst’s private equity team is one of the best in the City. Freshfields and A&O, though, are slightly more puzzling.

Admittedly, Freshfields undertakes a lot of high-profile work for Apax in Germany. Its co-head of the global private equity group Peter Nussbaum has a particularly strong relationship with Martin Halusa, who was appointed chief executive officer (CEO) of Apax in January this year, taking over from Ronald Cohen, who became executive chairman.

Also, Freshfields banking partner David Ereira is, say sources, close to Stephen Grabiner, founding CEO of OnDigital, which became ITV Digital, the collapsed pay TV channel, who is now a director at Apax.

Freshfields’ London ambitions were boosted after taking on Chris Bown from Baker & McKenzie, which also has a great relationship with Apax in Germany. This is through Frankfurt partner Matthias Jaletzke’s connection to Apax’s German-based leveraged transactions expert Michael Phillips.

However, Freshfields UK has been slow to build this practice in London, with Bown previously admitting it has taken the firm until 2002 to achieve the right internal critical mass. But now, with so many important contacts, could it be a case of planets colliding just at the right time for Freshfields and Apax?

A&O, on the other hand, is better known for having a leading banking practice and not so much in private equity. True, it has been involved in past deals for Apax, but overall, private equity at the firm has been fairly muted.

The firm has worked for the now defunct Morgan Grenfell Private Equity and Investcorp, but it has
not been high profile. But corporate partners such as the highly-rated Alan Paul, former head of corporate in London Susan Howard, Jeremy Hunt and Christopher Thorne are more associated with public M&A.

Private equity is something that A&O has periodically considered building up, although the worry of clashes with its successful banking practice has often won out.
What is ironic is that acting for a borrower is often more lucrative, especially in follow-up work for the company, than advising the banks on a buyout.

Whatever the result, it is going to be worth watching this. Let’s hope Apax handles the whole process carefully. After all, it is a very touchy subject.