How elite corporate lawyers are advising private equity giants with Weil | Commercial Awareness Compass #78

Over the past few decades, private equity has become one of the fastest growing areas of finance, with billions changing hands every year. Behind this, sits on the top legal minds of working to make sure the industry can move and deals can be done. So what makes the private equity more unique? And how do lawyers need to think about private equity clients differently to others? This is the commercial winus compass. You're weekly guide to thinking like a commercial lawyer. Each episode works for a key issue shaping the legal and business landscape, help you build the clarity and confidence to discuss it by breaking it down to three levels beginner, intermediate and advanced. I'm Sam, a law conversion student and future trainer listor. I'm joined today by Jamie from Wile who's here to help walk through all of this. Would you like to introduce yourself and to us a bit about what you do? Sure, I'm Jamie McDonough. I'm a counsellor while in the private equity group. I've been a while for just over 10 years now. And yeah, I specialize in all types of projects, you from very large cap to growth finance. Perfect. So I'm glad we got someone here with a lot of experience, help guide us through this, because I imagine it's quite a quite in-depth topic we can get quite deep into. And so just to begin, so to start with, what does the lifecycle of a private equity deal look like from acquisition all the way through to exit? Yeah, so I mean, even before acquisition, there's a period of origination where your clients try to find and identify this target. And they might do that in what's called a sort of proprietary approach where they dig it out of the market, do their own analysis and then approach them independently. Well, they might do it via an auction process where an investment bank pulls together a number of potential buyers and you bid on that target. And whether it's proprietary or an auction, it puts you into very different worlds and requires two very different skillsets, because one is all about game theory and how you put forward the most attractive bid while still getting the most defensible and economically advantageous package you can for your client. And the other is often more complex from a structuring perspective, because that hasn't been neatly packaged up by an investment bank for you, but you don't have to worry about four or five other well-advised buyers trying to acquire the same target. So that whole origination piece starts before you even get to acquisition. When you do decide that you're interested in the target seriously, this possible start spending money on it by doing diligence and that point, legal advisors, commercial advisors, accounting advisors, management consultants, in order to understand the business and the space a little bit more. And then they'll start doing some more in-depth structuring work, which essentially amounts to making sure that when you do buy this business, you're buying what you think you're buying and you're not buying it in such a way that you're going to incur a whole lot of tax that you don't need to incur. Then you negotiate the the transaction docs and that's probably the most fast and furious point of the whole deal where tensions are at the highs. And then typically you have a period between signing and closing where you have various conditions, regulatory approvals and so on that need to satisfy. And that can go from anything from four, six weeks to multiple years. And then once you close the asset, you have a holding period. How long a project you fund holds a asset is very variable and depends on the type of asset, the type of fund, but typically somewhere between three and six years and they'll try and improve it throughout that period and they might do that by buying other businesses and rolling them together. They might do it by financial engineering, driving to new geographies, all sorts. But all of it is done with an ITER exiting in that three to six year time period and you do that by selling to another project you fund to a strategic investor, buy an IPO, but that exit is kind of the point that we're all driving towards. And then of course you may exit and roll your stake over and be a minority investor in that business or you may be 50/50 with the buyer and so the lifecycle looks very varied and can go on for the decades. Yeah, and just to clarify a bit, so when you talk about the client and the sponsor, are they one and the same for you? Are you advising the sponsor? And then do you stick with that client for the whole lifecycle of the deal or are you just there for say the acquisition period? Yeah, it's a question said generally speaking, large law firms like to be appointed by the sponsors are great clients, responses. The thing that is very economically productive for a law firm is doing transactions and sponsors business is doing transactions. If you get instructed by the company normally only gets bought and sold maybe two or three times. So when particularly in the wild proactive practice, we're talking about private equity firms, those rock lines and remember what your second question was. And so then do you stick with that client for the whole time or do you stay start with you or you with the client just for the acquisition and just for the exit or just are you a bit in between? It varies on the client and it varies on what the client wants to do with the business. I think the base case is that you stay with the client throughout the whole of the whole period because as I say everything you're doing is with an eye to that exit process and you will be involved in the exit process and you what you don't want is for someone to guide the company in the wrong direction legally speaking for three to six years and then you have to kind of unravel a lot of mistakes that we made in that process. So it tends to be the deal cancel stay very involved and that obviously there are some more straightforward processes that don't require a client to pay the level of fees that someone like wild charges and those will be moved out to different firms or dealt with in house as necessary but we would expect to be involved in the material stuff. Yeah. Yes you almost keep like an oversight of the whole like business until you get the exit point but not necessarily doing all the nitty gritty bits. Yeah 100% I think you get calling when there's a problem by and large. Yeah and so when this one's a successful deal if you go back to the start what could like the key commercial factors that influence whether a deal proceeds. Yeah so commercial factors and obviously the laws are not best placed to talk about commercial factors necessarily but I mean really what is top of mind for these skies is the sort of quality and then the defensibility of the business model so they're looking at stuff like the caring revenue customer loyalty market position and they're also looking at the management team because those are the people who are going to be driving the value for the whole period so the quality of the management team is central to that investment thesis as is how you plan to incentivise that management team for the the 3 to 6 year period and that's a big part of what we do is how clients put together a share incentive scheme that will be attractive for management and drive the kind of outcomes that they want to produce. They'll also be looking at leverage capacity as I say there is a financial engineering element to all of this so they'll need to know that there's predictable cash flows that there's good asset quality and then they'll always as I say have a mind to exit so they'll be already thinking as they buy the business who we selling this to in 3 to 5 years time are we selling 100% are we selling down in small stakes if you're dealing with infrastructure assets for example which are enormous it can often be the case that no one privately fund is going to have enough money to buy that asset in however many years time so you're you're selling up all the governance arrangements so that yes you get what you want vis-a-vis maybe your co-shareholder at the time you buy the the business but you also send here absolutely you can sell little pieces along the way and each of those little packages are attractive whilst not compromising your control so it becomes like an interesting game of of chess almost. Yeah so I guess the next natural question then is if the lawyers aren't so much involved in those commercial aspects what are the legal advises helping out what sort of risk of they trying to identify at that acquisition point. Yeah I mean I wouldn't I wouldn't exclude us completely from the commercial stuff I mean if you think about some of the things that I've just been mentioning all of those attributes will be written down and need to be like verified and we will need to give an opinion on on whether the theses that our client have come up with you know if for example you say we love this business because they haven't extremely diversified in sticky customer base you take that piece of knowledge and you apply it to the commercial contracts and you say well actually we think probably this is problematic because that's not what the contracts say that maybe it will has happened historically but who knows whether these people are intending to go on this journey with you for the next 30 to 60 years. So we do have a role on the commercial side of things but legal diligence I think splits into one like just understanding the business that you're buying and understanding how you might want to like tidy it up once you once you get your hands on the controls and so whenever we Deliverability and report will always deliver a plan for improvement for that business as well and clients seem to appreciate that. But you're also looking for things that will affect the price that you're willing to pay for the business. So if you're buying a business that has bought lots of different companies than the past five or ten years and it still owes a lot of money under the share purchase agreements to third parties and respect to those acquisitions. You need to factor the fact that a lot of money is going to be leaving the group into how much you're willing to pay for that group. Similarly, if there is a great big piece of litigation and the business is about to get cut and half and valued, that needs to be factored into price. So I think the other element of diligence is to inform your transaction docs negotiation. You service the issue and then to the maximum extent possible, you regulate that in the deal docs and you try and bridge two views of that issue in an intelligent way to get the deal done. Yeah. So when you're talking about the valuation of the deal and things like that, are you working specifically with the client or are you working maybe with the finance side of another business, maybe an investment bank or someone else when you talk about valuation or it's such a strictly you talk to the client and then they sort out what they want to do with those things when you tell them that information. No, we'll be working with everybody. I've just done something, for example, where there was a large environmental issue and we worked extremely closely with the environmental specialists on that to craft an appropriate story to present the issue in the right light. Make sure that everyone had the information that they needed when they had that issue arise. Obviously the client is the ultimate arbiter of, you know, it's the client's money. So the client decides how an issue should be dealt with or presented or put into the documents for the other side to have a look out. But I would say particularly with if you get a good set of lawyers working for you, I think they will see once you get into that execution period of the deal cycle, they're always to call to back that. And so they are responsible. We will always review every diligence report on the deal to make sure that nobody's saying something that is going to result in an issue for our client or, you know, if you're on the cell side and an accounting advisor happens to present an issue in a non-fortunate way, the results and the big purchase adjustment. And we consider that to be on us to fix and make sure that that doesn't happen before it makes contact with the enemy. Yeah, and I think that kind of nicely moves us into the intermediate part of this. And so we've kind of discussed what the red flags are and the things that you're looking out for when you're helping to assess the acquisitions. But how do you then mitigate risk? So you've said that you helped you work with environmental agencies. Are there any other ways that you've worked to maybe mitigate risk if you do find there's outstanding litigation or if there's something on the books that could have a company's valuation? Yeah, I mean, so there's kind of, I think there's probably two principle things that you need to do like firstly, you try and regulate it through the through the documents. So you say, here is an issue. We think this issue is worth 100 million. And obviously, if your buyer is going to say, well, but we consider the issue to be worth 200 million. So we're going to have a 200 million deduction. And so you try and breach that 100 million gap sensibly in the documents you might have. And now you might have some sort of clever mechanic that allocates the risk of that issue in such a way that that 100 million differential doesn't hold up the deal. But the better thing to do before you even get to that point is to uncover the issue and fix the problem before it arises. So a lot of what we do when we're acting on the cell side. So when the product you found the selling stuff is to get in early surface the issues and then have sort of a long process of either fixing them or figuring out how we present them in a sensible way to the benefit of our clients. So it's not the case that you were just bought in a couple of weeks before the deal. You won't cover the litigation and you say this is what it is. Like you're going to get less money as a result of this. You really try to get your arms around the issue in order to create the right outcome. If there was say outstanding litigation would that be something that you then deal with within while like would you pass it off to a litigation team to handle or is there another way you go about that? Yeah, I mean, generally speaking if the litigation is on-going, it will probably not be while that's counsel as part of that litigation, but we will get our litigation specialist to look at it and then to, I mean, you may, for example, get them to write a memo informed by all the data that they've gathered and all the conversations that have with management and the counsel who's working on that deal. You get them to produce a memo that supports the thesis that your plan would like to put forward. Or you may, what you're really trying to do on something like litigation is put a number on it for that number to be accurate and kind of uncontestable because if everybody agrees that it's worth 100 million, then the issue kind of goes away to some extent because it's just what it is. What you really don't want to do is to have this big scary thing sitting on the balance sheet that everybody disagrees about whether it's going to happen or not because that kind of uncertainty in that difference in world view is what kills deals a lot of the time. I'm not sure if this is too far, but would you say it's almost like being a salesperson that way where you have the issue and whilst you do have your very professional legal lens that you tackle it with, are you almost trying to package it in a way that then makes it more palatable to a client and able to sell forwards in a way? 100%. First, second, third, fourth, fifth concern is like being, is disclosing things properly telling the truth complying with all of your like regulatory obligations, but undoubtedly like your client, it's in the interest of your client to present something in a particular way. And so we are paid to have the judgment of to balance those two things, which are often not oppositional, like often simply by surfacing the true facts and asking, knowing that the footnote to the answer and the footnote to the footnote to the footnote, you get to uncover the fact that it's not actually very material, but it's all a job to do that digging. And as I say, when we're presenting something in a particular light, we're not doing it in a way that is duplicitous because by and large the kind of deals that we do, the person on the other side is extremely well advised. Everybody in private equity tends to be a repeat player. Everybody knows everybody. So in some respects, it's self-pleasing in that regard because it's not the case that you try and lag your opposing council over and then run off into the hills. You know you're going to see them in a few months time. And reputation is the most important thing. So yes, there is a sales element, but it's subsidiary to the truth without a doubt. Yeah, it's really interesting to speak about seeing someone again in a few months time because I think you often hear about private equity deals being really fast pace. So why is it so important that they are fast pace and done quickly? So what is the sort of benefit of that for the clients? Well time is the is the enemy of all deals. I think for a variety of reasons, and actually this is something that my wife asked me, ultimately when you're doing it, for all the careful financial analysis that goes into this stuff, these deals are done by human beings forming a judgment often on another human being and then having high conviction in that judgment. Events change, you know, new facts come to light, which alter people's judgments. And also people just are people, they wake up on the wrong side of the bed one day and decide they don't want to sell to bid a bid a bid a bid a bid. And so you want to minimize the like any possible extrinsic factors, sort of market risk, that might affect a deal once you have a handshake. So once you get people to the point of looking each other in the eye and saying we want to do this thing, you want to kind of exclude all the noise and just get it done. An example of that would be COVID where there were handshake deals all over the city that we're about to go through and then this enormous event strikes and everybody re-appraises whether we want to be putting capital to work anymore in this new world where we don't know how long we're going to be locked down and so on and so forth. So I'm sure there are a number of deal teams in the city. On the day that locked down was announced that we're wishing that they'd push a little bit quicker and not expose themselves to that market risk. It's really interesting you keep coming back to that almost human element of the deal cycle because I think something maybe as a student from our side, it seems quite far into us. It feels like almost things should be done a certain way and it feels as if that isn't. that human element to it. So how important to you is that reputation the human element interacting with people as the lawyer? I mean I think it's what I think it's probably the most important thing because I think once you kind of I think it's a given that people who get to a certain stage in their careers and are doing a representing you know large-productive clients or any productive clients are going to be capable lawyers, they're going to know the technical staff, they're going to be highly driven, but I think what distinguishes a great lawyer from a less good lawyer, certainly in my experience, has been the ability to unlock her to sort of solve the ruby excuse, not with brute intellectual force, but by just having a very human relationship with opposing council, often with the client on the other side and to create an atmosphere of collaboration in the room, get way more deals done than this antagonistic style. And what I love about the job is that you can bring your own style to it. I mean if I walk down the corridor of clients at while each one of them does the job in a completely different style and I think they're all very laudable, but certainly as a trainee going into a law firm I would encourage anyone just to look around and observe the many different styles because in due course you're going to have to adopt your own style and it's better if that's informed by thinking well I love the way X deals with this point or I love the style that you know why has of always calling opposing council before he sends the documents just to contextualize their things and put names to faces so on and so forth. You pick up these tips and tricks and you and my experiences they really really boost the world. Yeah it's really interesting because it almost seems antithetical to what you see in my when you watch TV and see people in high-powered deals where it's more you know sweary and adversarial that really that when it comes down to it being human being able to interact with people well is the key skill. Yeah I mean I mean there is the sweary thing that exists and I think if you had a different person on the podcast then they may say you know all the the nicey nicey stuff doesn't actually get deals over the line and and there is a degree to which is horses for courses and I've seen extremely gregarious partners get very tough with people when the time comes but I would my net takeaway from you know my brothers would be sure career so far is that you catch more flies with honey and so that's that's kind of the approach that I've adopted. Thank you I think nicely we can now move into the advanced section so now look at the advanced section when dealing with spanning multiple jurisdictions what challenges are you other than maybe different when you're involving regulators investors or assets are from different jurisdictions or regions. Yeah I mean a lot and almost everything we do is multi jurisdictional so I mean you've got internal challenges because unless I mean it's some of the firms that your peers will be going to have offices all around the globe and they're super joined up and that's an amazing offering a firm like Wildhop does not have that I mean we have I don't know 10 offices in the key jurisdictions but it's pretty unusual for us to do a deal where you don't have to instruct someone from somewhere that isn't in Europe or where we don't have an office and I think one there is there is like a cultural bridge that needs to be made because the way people lawyer in Italy or the US or you know where I mean you can go China there's the style is so different and in order to get the best out of people takes a way takes a while to dial into that and it also just adds a lot of time and we talked about how much time is the enemy of all deals but it takes a lot of time whether it's because you're dealing with time zones whether it's because you're having to be people into the deal a lot of jurisdictions people are with don't really have the the sort of private equity mentality of doing things super quickly so a lot of what you're doing is trying to extract complicated work product from people who on a timeline that they're not really comfortable working on and and then so that's kind of the more pros and internal stuff and then inevitably there's governance there's local law there's all sorts of fun games around execution there's convention I mean it is staggering the way in certain jurisdictions some risks are an athema and in others they're just completely normal and so a lot of what we do is is as someone who sits in the corporate team is take all those inputs synthesize them for the client try and push on the right risk factors to get a great understanding of the position and then present the client with these are the problems here are the proposed solutions and this is what we think it's okay or not but all of that is quite a heavy lift and takes time so yeah it definitely adds complexity for sure it seems to once again come back down to that human element where you've got these people in different jurisdictions different customs different practices that you're having to juggle while still dealing with a client who maybe isn't as familiar with them yeah totally and you know you come into these people's lives like a bolt from the blue on a Friday evening saying I need this extremely complicated thing over the weekend and and yeah the what the how are you going to get that it's not it's not by being in human and pushy I think yeah and I think as we're coming towards the exit of this podcast I just want to say um don't want to take the discussion out towards the exit side of the deal so when getting towards the exit of the deal what our client's looking to do so another a few options like continuation fund selling on as you've mentioned are there any other options and can you just walk us through which what options those are yeah I mean so the principle thing the our clients tend to look for is like a sale to another private company or a or a private active fund it tends to be the case that you get the best value for your asset in those in those transactions and if you look at say infrastructure for example it's historically underpriced asset heavy um grew asset heavy targets so they love to IPO IPO is obviously another option it's fallen slightly out of favor um in parts because IPO Windows Windows run us to new volatile so those are your kind of principle to um approaches to the extent that you don't have a market for a private sale and you don't want to take an IPO you might consider um a secondary or a continuation fund where you continue to hold the asset you think it's great you think it's got another six years of growth in it so you might move it from your current fund which is reaching end of its life because one of these funds have a fixed term of around 10 years so you have to move it onto another fund um and then it gets a whole nother 10-year existence with you until you found the the right exit but at some point you have to to monetize your investment um and there is there is an argument that a lot of project use attractiveness versus buying a public listed stock is it's not marked marked with market so you don't never really know what the value of these companies are until the point of sale um until then it's all just paper yeah and when you say moving onto another fund what does that look like in practice does the initial fund simply pay back the original investors and then a whole new fund with the same company takes it over or is that something different it it it really really varies like it but sometimes it's the case that you will move it to another fund with different limited partners in it um and sometimes it's the case that you will already have a raised fund with your your normal suite of limited partners and you'll just move it into into that one um it there really is like a very varied approach taking all that and it's all it's it's a part of the market that has developed quite substantially including in respect of controls because there's lots of risks that come with that if you're an limited partner in terms of conflicts you know how do you determine if you're selling from the left hand to the right hand how do you determine the price at which you're going to do that because you're inherently disadvantaging one part of the fund network um and so processes around that and controls around that have become much more sophisticated in the last 10 or 15 years including in respect of the fees that are paid in terms of whether the money is if fund A sells the fund B whether the money is is pushed up to the LPs immediately that I mean this may be too much detail but it will depend on whether that fund A runs what's called like um deal by deal carry um so if that particularly deal has made a big profit the profit gets distributed whether it runs whole fund carry which is more common um which is you take all the investments that fund is made together and to the extent they result in an aggregate profit then you distribute um that's a little bit more common so yeah it's probably a little bit too much detail yeah I think it's fantastic there's so much detail you can go into there are so many different options it seems with every stage of the private equity sort of life cycle. And I'm just going to wrap up with a few questions where I'm going to ask you to look a bit into your crystal ball and look towards the future. And so looking ahead, what do you think will change P deal making the most in the next few years? And what might it look like in say 10 years time? I think the biggest thing that's going to change, it's doing the actual process of making of doing deals. The actual process, yeah. Yeah, I think A.O. is going to completely transform it. I think it's going to be quicker. I think it's going to be more granular. I think it's going to be more human because I think that all of the facts and all of the analysis will be surface package readily available. And then that top slice of the human element is going to become disproportionately important because if every, if you have five bitters for a company, they've all got the same analysis. And all of a sudden it's worth 100. How do you decide to sell it to one person and not the other? We've done all the basis of human relationships. So I think that element is going to become more and more important. Brilliant, thank you. And I think that nicely brings us to the end of this week's commercial awareness compass. I want to say a massive thank you to you, Jamie, again for joining us. And thank you to everyone for listening. So remember, being commercially aware isn't just about following the headlines. It's about understanding the questions they raise and how lawyers help to answer them. We'll see you next week to keep building your commercial awareness. Until then, prepare without the panic. Thank you.