Ed. note: Law Shucks focuses on life in, and after, BigLaw, including by tracking layoffs, bonuses, and laterals. Above the Law is pleased to bring you this weekly column, which analyzes news at the world’s top law firms.
One other note: Law Shucks is changing server hosts this weekend. Please forgive any intermittent downtime.
Private equity is one of the largest benefactors of BigLaw.
PE firms are massive consumers of all sorts of legal work, from fund formation, to investment transactions, to exits. Investment banks – and perhaps government (see, e.g., Davis Polk, Cleary Gottlieb, and Simpson Thacher slurping from the TARP firehose), thanks to recent events that have pumped that above traditional norms – are probably the only providers of more billable hours.
Even corporate clients that do a quarter-trillion dollars worth of deals with one lawyer can’t compete with the soup-to-nuts appetite of private equity.
In honor of all the billable hours they and their portfolio companies have generated, this week is All Private Equity….
Last month, private equity won the fight of its life, narrowly averting a change in tax laws that would have seen the rate at which it was taxed skyrocket. Regulation is still on the horizon, but in true lemons-from-lemonade spirit, clients’ misfortune is being spun as lawyers’ fortune in the form of yet another (Sarbanes-Oxley being the previous blessing) Full Employment for Lawyers Act. Although that’s mostly aimed at investment banks and hedge funds, some provisions will affect PE.
Not only were there some particularly exciting PE developments over the past two weeks, but Allen & Co.’s annual Sun Valley Conference is also going on. That annual event brings together the biggest moguls in media, entertainment and finance.
It’s also where Mark Zuckerberg is getting served papers in an as-yet-unidentified case (we assume BigLaw would be classy enough to serve him at the office instead of crashing his lunch), and where Jeffrey Katzenberg is trying to sell a stake in Creative Artists Agency (the agency that represents three basketball players you may have heard of – one of whom broke our hearts by not going to the Knicks) to TPG or KKR.
Quality legal support is critical to the complex structures and investments private equity does, and that means they need full-time access to the best legal minds. Blackstone was so happy with Robert Friedman, its incumbent general counsel from Simpson Thacher, that they turned to one of his former partners to succeed him. M&A partner John Finley will be taking over the top legal job at one of the world’s largest funds.
Being general counsel of a private-equity shop is pretty lucrative work – and Simpson Thacher lawyers have a tight grip on it. KKR’s general counsel David Sorkin is also from the firm, and his 2009 comp was just revealed in an amendment to the fund’s registration statement for its looming IPO. Even though his base is slightly less than a Simpson Thacher fifth year, he ends up OK in the end.
If you’re interested in making that inhouse move, Jumping In(House) has all the insider information.
That KKR IPO also revealed some interesting speculation about IPO fees in general. Back in 2007, Simpson Thacher’s legal fees on the Blackstone IPO were $15 million according to the registration statement (and in line with the $14.5 million Skadden raked in on the Fortress IPO that same year), but it’s down to just $1 million in fees to Simpson Thacher on the KKR IPO. This hasn’t become commodity work by any stretch of the imagination, but it does go to show how much flexibility there is in what the registrant decides to disclose as legal fees.
The general counsels of most of the top private-equity funds are BigLaw veterans, usually from their primary outside counsel, but sometimes not – as was the case when TPG surprisingly hired a Cravath lawyer, instead of someone from Cleary Gottlieb not too long ago.
Not to pick on Cleary, but they also got left out of one of the biggest PE deals of the year. A consortium of Hellman & Friedman, TPG, and JMI Equity had a $2.1 billion exit from Integraph, after having already taken out some dividends. Simpson Thacher and K&L Gates were the primary advisors on that deal, notwithstanding, again, that Cleary is TPG’s usual go-to firm. Cleary did get the nod on TPG’s buyout of TPG’s and JMI’s interests in Vertafore for $1.4 billion earlier this year, though.
The usual private-equity exit is an IPO or a sale to a strategic investor, but the biggest deal of the week (and second-biggest secondary buyout of the year) kept the money and assets in the family. Carlyle Group and Welsh Carson flipped health-care business MultiPlan to PE rivals BC Partners and Silver Lake for $3.1 billion. Simpson Thacher represented the buyers, Latham & Watkins the sellers.
Secondary buyouts, flips, or whatever you want to call them, aren’t necessarily too popular with investors, though. Consider the pension fund that has spread its alternative-investment dollars across a host of investments in various funds. If the company is an LP on both sides of the deal, it just got a capital call to pay a premium (plus transaction costs) for an asset it already held – and has to wait for the cash distribution to boot.
Don’t feel too bad for the LPs, though. Carlyle is reportedly making a 3x return on the MultiPlan deal, so the investors are playing with house money already.
And that’s why these deals are probably back on the rise. There’s a lot of unrealized gains stuck in some portfolio companies. Citigroup is looking to realize some of those gains (and pay down debt) by selling $1 billion in PE assets to Lexington Partners and Lloyd’s is foisting off $500 million in investments on Coller Capital.
Interesting as flips are, M&A is the bread and butter of private-equity exits – and corresponding legal bills. While not all M&A is private-equity driven, those deals are a substantial piece, which is part of the reason why US firms dominated the M&A league tables for Europe.
Sullivan & Cromwell and Cravath were 1-2, and they are traditionally powerhouses in strategic M&A. But hot on their heels were Simpson Thacher and Cleary Gottlieb at 3-4, fueled in no small part by their dominance in private equity.
That’s why there’s such a hot market for laterals right now – a number of recent moves involved players who have the ability to move huge blocks of business (and why you should be keeping an eye on the Law Shucks Lateral Tracker to spot the trends). Of course, not many lawyers are getting the 7-figure guarantees that investment bankers are starting to see again.
There you have it – a one-week snapshot of the goose that lays golden eggs… for a handful of top BigLaw firms.
We’ll be back next week with the usual roundup of BigLaw news (hopefully on a brand new server).