Meet today’s private equity lawyer

PEM recently spoke with Manatt, Phelps & Phillips duo Masood Sohaili and Eric Newsom to ask what today’s private equity lawyer will need to meet today’s new regulatory challenges. Both Sohaili and Newsom, co-chairs of Manatt’s private equity practice, argue that lawyers ahead of the curve are helping GPs identify quality deal flow and specialising in regulations covering specific sectors and industries.

Can you describe what types of personal and professional qualities a regulatory lawyer needs today? 

Sohaili: It is a rare combination. Too many regulatory lawyers practising in the private equity world for instance have not transcended their practice by understanding the practicalities and pressures of a transactional practice. I believe that regulatory and industry lawyers must possess the same qualities that make an outstanding tax lawyer: outstanding technical skills and knowledge combined with the personal skills and big picture thinking of excellent deal lawyers.

Masood Sohaili

Newsom: Agreed. A regulatory lawyer or industry specialist must have the capacity to think “inside the deal”. That is, he or she must think beyond the regulatory analysis, and spend the time necessary to understand the client’s particular concerns and sensitivities. Only then can regulatory or industry counsel appreciate issues that may prove deal-breakers, versus those presenting an acceptable level of risk. These are the rare regulatory lawyers who can distinguish between the science of solving a regulatory issue and the art of helping close a deal. As we deal lawyers are trained to appreciate, it’s not just about presenting clients with downside scenarios, but knowing whether and when to get out of the way.

Are regulations (both in private equity and virtually all other industries) influencing what sectors GPs target? And if so, does this influence fund managers’ ideal legal advisor? 

Sohaili:  In my experience, regulations are having that impact. As the competition builds to source deals, private equity players are increasingly looking at opportunities in regulated industries and other sectors that have not historically been the target of disciplined private equity investment activity. In many cases, these opportunities are cropping up in mature industries with a substantial regulatory overlay, such as banking and financial institutions and healthcare.

So as part of their due diligence efforts when investing in a new space, private equity firms have increasingly looked to counsel and other advisors known to industry players to have the specific industry and regulatory expertise necessary to “know the space” and to spot issues that might trip up generalists – including those who may have transactional expertise but who may lack industry expertise.

Newsom: This is leading to a shift from the historical paradigm, wherein most private equity firms, both first-tier and middle-market, retained law firms solely based on the size of their corporate departments, the number of ten-figure tombstones and the perceived depth of expertise in all types  of transactions. As general partners target heavily-regulated industries, we are seeing a trend toward private equity firms looking for professional service firms (including law firms) that can deliver an integrated work product – one that combines top-tier corporate deal expertise with more specific industry and regulatory experience.

That being said, do (or should) private equity lawyers today help influence GPs’ ability to identify quality deals in these industries? 

Sohaili:  I would argue they should, and many do have that impact. First, counsel active in a particular industry will know not only the potential acquisition targets to which they can introduce their private equity fund clients, but also the other potential bidders for those targets. Second, an attorney who lives and breathes a particular industry will, in all likelihood, know the serious ancillary players (buyers, bankers, auditors and fellow counsel) whom industry insiders take seriously. And, of course, once the transaction is underway, solid counsel can help a client see opportunities and pitfalls that other counsel, who may lack the specialised practice, fail to perceive.

Eric Newsom

Newsom:  With these strengths, counsel can assist the client in pulling together a deal team that demonstrates the client’s commitment to a particular industry. That commitment can in turn help increase the fund’s visibility and deal flow in that particular space. For example, we at Manatt recently assisted one of our private equity fund clients, who was interested in a particular food and beverage industry target, putting the fund in contact with the top investment banker in that insular space, helping the client formulate an industry specific due diligence strategy and generally providing the fund with a clear, educated backgrounder in an industry that was completely new to the fund. It is these types of attributes that will define how GPs select lawyers going forward.

Manatt, Phelps & Phillips is by one definition a mid-market law firm; how then do you secure the right talent to meet GPs new demands compared to larger law firms with more resources? 

Sohaili: Very large firms can add value by staffing very large deals, or by completing several very large deals at once using a great number of partners and associates. The economics for such large firms are driven more by deal volume than by specialised work that, in and of itself, often cannot support a separate practice group.

To provide the skilled specialists necessary to close deals in heavily regulated or specialised industries, these large firms often bring in regulatory or industry co-counsel to assist with industry-specific issues implicated by the transaction. On some of these transactions, cost efficiencies are frankly less important than delivering a large population of transactional counsel, even if this requires retaining different firms to undertake different tasks and increasing the cost of the transaction.

Newsom:  But greater transaction costs are not the only inefficiencies created when using multi-firm deal teams. In the healthcare industry, to cite just one example, regulatory and other issues (from federal regulatory requirements to canon law) are not just ancillary issues or diligence hurdles – they commonly drive the terms and timeline of a transaction. Unless transactional counsel and healthcare regulatory counsel are fully integrated, conflicts and inefficiencies can arise within a diverse deal team.  Having a single firm with top-tier transactional lawyers and the relevant regulatory or industry specialists can help avoid these inefficiencies, especially in mid-market and all but the very largest private equity transactions.