Having in-house legal counsel today may be necessary, but not sufficient, to address the mountains of work required of a private equity investment platform. Many firms with a global presence have at least two full-time, in-house lawyers, and an army of external legal counsel both at home and around the world.
General counsel at private equity firms are typically tasked with handling fund formation, transaction, litigation, employment and contracts work. But a crucial role is coordinating the activities of external legal counsel, says Chris Lanning, co-general counsel at Greenwich, Connecticut-based General Atlantic. Lanning leaves the drafting of documentation and legal due diligence to external counsel; because he is closer to the business, he guides external counsel as to where to focus their efforts to ?efficiently and cost effectively manage the transactions.?
AIG Investments, the alternative investment group of AIG, alone has 13 lawyers in the US dedicated to private equity and hedge funds. Combined with general corporate lawyers in Hong Kong, London and Tokyo, AIG investments has closer to 20 legal eagles doing legal and regulatory work for the alternatives team. Even so, the firm can't do without external counsel.
?Where we tend to see most efficiency in bringing the expertise of an outside firm is where it's specialized, whether it's regulatory, ERISA, tax or local law,? says John Hornbostel, deputy general counsel at AIG Investments in New York. ?We also rely on external counsel where they can bring market expertise to bear, for example, advising us on a state pension plan that hasn't invested in us before or on securitizations.?
Hornbostel also uses external counsel for what he calls ?heavy lifting? and for work that is on short notice and has quick turnaround times.
AIG Investments in-houses most of its legal work in the earlier stages of a transaction, when the firm's in-house lawyers are working closely with the investment professionals in structuring a deal or a project. Beyond that, ?there can be a logical hand off [to external counsel] from the letter of intent or the term sheet to the definitive agreements in a deal,? says Hornbostel.
The use of external counsel is also an opportunity for the inhouse team to broaden its base of knowledge and skills, says Jordan Urstadt, general counsel at Swiss-based private equity advisor Capital Dynamics. ?As in-house counsel, the best value my team and I can add is to know every aspect of Capital Dynamics and its business,? says Urstadt. ?In the many jurisdictions in which we work, we use the best specialized external legal knowledge whenever we need it. Once we've received their counsel though, we make sure to internalize that knowledge so that it is also an investment in our company.?
How many parties of lawyers should there be working on a single deal? If AIG Investments is taking a lead on an investment, external counsel will generally be brought in to advise on the deal. If the firm is a co-investor, the in-house legal team reviews the documentation, unless, of course, there is a shortage of resources, as has become the case at the fund of funds group.
As most general counsel sit in the firm's headquarters, many rely heavily on external counsel for international legal work. There are a few avenues for finding local external counsel ? recommendations from other external counsel or investment professionals, or opposing counsel in other transactions. When General Atlantic started doing deals in India, Lanning personally interviewed five firms and selected counsel based on what he perceived to be the firms' understanding of General Atlantic's business. Lanning hired two external counsel, which is typical of each jurisdiction the firm operates in.
Although General Atlantic has a long-standing relationship with law firm Paul, Weiss, Rifkind, Wharton & Garrison, and relies on them in the markets in which Paul Weiss operates, Lanning doesn't believe in using one global law firm to meet all of his needs. ?It varies jurisdiction by jurisdiction. I think the expertise really is local and the quality of the attorneys across offices of global law firms is not always consistent,? Lanning says.
Monitoring the external legal relationships tends to be done on an informal basis, but AIG Investments has a systematic method of evaluation. On a formal level, the firm's lawyers evaluate external law firms' legal knowledge and judgment, responsiveness and communication, and cost and overall rating once a year. The information is stored in AIG's internal database, which serves as a resource for the entire organization in every jurisdiction in which it operates. ?We're systematically reevaluating all of our relationships with the firms we use so we can better partner with them in all our businesses,? Hornbostel notes.
AIG Investments has also developed a series of seminars over the past few years where law firms are invited to present, together with AIG Investments' in-house lawyers, on issues that are geared towards the investment professionals. This allows AIG Investments to build better relationships with the external counsels it wants to work with, and to help it identify important legal and regulatory trends in markets all over the world.
As for legal fees, project-based billing seems to be the most popular option for external counsel, although institutional accounts can help lower costs when the service is bought in bulk.