Fund managers put a significant degree of trust in their lawyers for deal structuring, fund formation, exits, tax planning, compliance and a whole host of other issues that arise in the everyday running of the firm.
Indeed since the industry’s dawning, the relationship between GPs and their legal advisors has been incredibly close, because “law is so central to what private equity houses do,” says Charles Martin, senior partner at Macfarlanes.
But how are these relationships, which often hinge on personal bonds, tested when a star private equity partner leaves the firm? The market for private equity lawyers is fluid, meaning this is no rare occasion. Examples of big name private equity partners to be poached by a rival practice include Raymond McKeeve, the global private equity head of Berwin Leighton Paisner, who left for US-based rival firm Jones Day in August; and David Walker, who stepped down as head of Clifford Chance’s private equity practice to join Latham & Watkins earlier this year.
When this happens GPs face a conundrum: follow the star lawyer by reassigning specific work to his or her new firm, or stay loyal to the firm originally selected to be their advisor? With either option, it can be tough to avoid some disruption to the relationship between parties.
A TOUGH DECISION
There’s no correct answer to the aforementioned conundrum. Countless considerations must be weighed, and weighted differently, depending on a GP’s own wants and needs.
For starters, a private equity professionals might consider how far back the relationship goes. Private equity lawyers that have stood by GPs through multiple stages of growth develop a closer tie to the firm, and develop an intuitive understanding of its internal organization and structure, according to sources. Especially during a firm’s more formative years, when a smaller circle of staff are responsible for growing the shop, a GP can become reliant on one lawyer’s guidance, and wish to continue that close relationship even if the lawyer practices under a new firm name.
Some lawyers that help guide a GP through growth can even begin to offer more strategic advice to the firm, which can further solidify the bond between the two. “My sense is that private equity houses most value those lawyers who know them well, have worked with them through multiple financial cycles and are trusted business advisors as well as legal advisors,” says Jason Glover, funds partner at Simpson Thacher & Bartlett.
“When a lawyer leave a firm, they take all knowledge of their GP clients with them,” adds Jordan Urstadt, head of legal and compliance at fund of funds and advisory group Capital Dynamics. “It is worth real dollars when you get a lawyer schooled on your internal processes and procedures, how the products work, how we like things to be structured and so on.”
[GPs] most value those lawyers who know them well, have worked with them through multiple financial cycles and are trusted business advisors as well as legal advisors
To preserve their client relationships, law firms are finding ways to mitigate the impact of a departing lawyer who holds intimate understanding of a GP. One way law firms are doing this is by sharing more expertise and relationships with other team members across practices.
“Law firms try to capitalize on their familiarity with GPs by taking a more integrated approach in their offerings, and so a departing lawyer can no longer be as confident he or she will take existing relationships with them,” says Geoff Burgess, a corporate partner at Debevoise & Plimpton.
Burgess says that as private equity houses evolve into larger entities with multiple business lines and products, their relationships with law firms naturally becomes more holistic. “We are at a point where no one firm, let alone one individual, can be everything to one of these sophisticated private equity firms.”
Indeed GPs say they are more likely to follow favored lawyers – particularly fund formation and M&A lawyers, which have more pull on GPs – to a different law firm if that new firm can offer them a one-stop shop of legal services. “The reality is they are buying a whole array of specialist areas: debt finance, tax, litigation and all the other components,” says Martin.
“We would need to consider where the lawyer is moving. Is the tax support as good? Is the ERISA [US pension rules] support as good?” adds Urstadt.
Complicating the matter further still is how the departure of a key partner can disrupt a firm’s practice. Even if a GP’s current legal advisor already offers an array of services, a fund formation practice significantly weakened by the loss of its chair for instance, can be worrying. By the same token, GPs should consider how deep the fund formation bench is at the star lawyer’s new firm before making the switch.
Timing can also be an issue as GPs value consistency during a fundraising or takeover deal. A lead partner leaving during the middle of a deal for instance can damage the relationship between the GP and lawyer (because of this, lawyers tend to stick around with their current partnership until a deal is completed, or the fundraising has hit a close).
Often a law firm interested in hiring me will ask my GP clients if they’re open to switching legal advisors
But it’s uncommon for a lawyer to surprise their client GP by suddenly switching to a new firm. One UK-based deals lawyer says that many of his GP clients actually act as references for him. “And often a law firm interested in hiring me will ask my GP clients if they’re open to switching legal advisors,” he adds.
At a time when more senior private equity lawyers are making the switch to new firms – a trend exacerbated by US law firms luring private equity specialists away from European rivals as they look to establish a greater foothold in the region – more GPs will face the question of if they should follow their trusted legal advisor in kind. Unfortunately, much like the lawyer’s own decision to redirect his or her career path, the choice is far from simple.