Private equity firms never used to be obvious job destinations for private practice lawyers.
But by the time Jeremy Dennison joined mid-market private equity firm Livingbridge as its first ever general counsel from Travers Smith in 2018, the market had grown accustomed to such moves.
Ten years earlier, such a jump would have been surprising as only larger buyout firms tended to have general counsel roles. But nowadays most European private equity firms of any substantial size have at least one in-house lawyer on their payroll.
Even Livingbridge, which is currently investing from two funds with a combined £1.5 billion of firepower, now has three lawyers.
“I expect there are people like me in other firms on a similar journey because private equity firms are becoming bigger, more sophisticated and more institutionalised,” explained Dennison.
“Big firms have had in-house legal capability for quite a long time and the mid market is going through a really interesting point in its evolution. Firms that are positioning themselves for long term sustainable growth now have internal legal capability.”
Once a cottage industry run by a few charismatic founders, private equity is now more professional, process driven and subject to ever-increasing regulation. Competition for deals is fiercer than ever and the industry is now managing trillions of dollars.
All of that has led to ever-growing in-house legal teams and the style and type of advice that private equity firms want from their external lawyers is evolving accordingly—with market knowledge and a more constructive negotiating style in demand.
Arrival of the GC
Within the buyout industry, the top legal role varies from firm-to-firm but general counsel usually deal with day-to-day legal issues for the private equity house, tackling employment or regulatory matters, as well as supervising the legal aspects of investments and fundraising.
Dennison said: “There will be some PE firms who just want a lawyer sat alongside the deal team doing deals. But in my case, I’m on a steady progression to a more strategic role. I’ve set myself up as someone who sits slightly above the detail and I’ll do more of a quality control role.”
Bigger firms have more specialists; CVC Capital, one of Europe’s largest buyout firms, has had in-house lawyers since at least 2005 and now has 11 English qualified solicitors with lawyers specifically focused on private debt, Jersey-based fund structures and compliance. But even smaller firms are now recruiting lawyers to focus on different areas, with Astorg, Bridgepoint Group and Hg Capital all recruiting lawyers to focus on M&A deals in the past two years.
How private equity firms approach each aspect of their legal spend is largely determined by who ends up paying for it. Buyout houses typically push law firms to provide competitive fee rates on legal matters that are paid for out of the firm’s overheads, such as fees for when a deal does not complete (known as broken deal costs) or employment advice. But they appear to be less worried about the cost of legal fees on M&A deals or when they create a new fund, as these costs are typically paid for by the portfolio company or the investors in the fund respectively.
“We are cost sensitive across all of those areas, but the budgets are very different,” said Dennison.
Alastair Richardson, head of legal for 3i Group’s private equity team, agreed and added that he expects firms to understand this dynamic and be flexible on how they approach fees.
“We typically find that by having firms that know us, we can balance things between some broken deal costs, successful deal costs and get a certain amount relatively free or sensibly reduced up front,” he said.
The big prize for law firms though is winning M&A work. Deal partners still typically pick the lawyers they instruct from a list of ‘preferred firms’ provided by the in-house team but often need permission to go ‘off list’.
Some general counsel have taken this further introducing formal legal panels. Dennison introduced three-year legal panels for mid-market and lower mid-market M&A when he first joined Livingbridge.
Narrowing number of leaders
There is now a relatively small group of law firms servicing the bulk of Europe’s private equity M&A mandates. Analysis by Law.com International last year found that just eight firms acted on 19 of the 20 largest private equity acquisitions in 2021, worth a total value of nearly $200 billion. While it may not be quite as extreme in the mid-market, there is still a relatively small pool of firms that act on most deals.
This is compounded by the fact that private equity is a repeat business: law firms that advise on the buyout of a company usually advise on the exit five years later, as well as significant bolt-on deals or refinancings along the way.
The is a simple explanation to this, according to David Higgins, a partner at Kirkland & Ellis. “The number of law firms who are doing the high-end private equity work is narrowing because it’s an increasingly demanding market to service,” he said. His sales pitch is that bigger deals, take-privates, new types of fund structures and club deals all need specialist skills that only a few global law firms have. To add to this, ESG requirements, antitrust issues and investment rules are making deals ever more complex.
“It’s a competitive environment,” added Higgins.
Changing deal style
The way private equity lawyers negotiate on deals is also changing.
‘Pass the parcel’ deals, where one private equity firm sells a company to another private equity buyer, have become much more common and have changed dealmaking dynamics. Such deals were valued at $228 billion last year – nearly a quarter of the value of all private equity exits globally, according to research by Bain & Company.
In these instances it pays to have lawyers who have worked both sides of the table, for exampling knowing that one buyer prioritises ESG, while another wants to expand portfolio companies in the US.
3i’s Richardson commented: “Most of these law firms are flipping between acting for buyer and seller. We work with some of the [law firm] partners because they have a broad range of experience selling, buying and acting for [our] competitors.”
M&A lawyers may be known as the Rottweilers of the legal world, but today’s deal market mean that financial sponsors want their lawyers to act in a more consultative and less aggressive way because the next week they could be on the other side of the negotiating table.
“I think the law firms that are doing well in this space are the ones who really understand that private equity deals are not combative,” added Richardson “They should be about finding alignment. Some of the law firms that are steeped in corporate M&A where it is a bit more combative will get flipped out of processes because they’re just too difficult to deal with.”
Knowledge of the different players in the industry is also seen as absolutely key to winning private equity work.
Paul Dolman, a partner at Latham & Watkins, explained: “Clients want me to be able to say ‘look in this auction, there’s X and Y private equity firm and I know exactly the approach they’re going to take on all these terms’ because we have seen them in action on the other side of the table.”
This is particularly important as the speed of deals is getting faster, with pre-emptive deals and express auctions that take place over just a week now much more common. Dolman says in these instances, lawyers need to be able to quickly prioritise the most pressing legal issues.
“I think the most important thing private equity firms want from their lawyers is judgement and being able to make the big calls,” he said.
“You can’t get bogged down in detail and you need a lawyer who says right at the start ‘these are the things we need to focus on and don’t care about the rest’ because otherwise you’ll never get to the finish line. That level of trust only comes from repeat instructions and many years of being in the trenches together.”