Last year, Private Equity International’s 40 under 40: Future Leaders of Private Equity list was unveiled just over a month after many countries began implementing national lockdowns. And what a year it has been for our class of 2020. The lawyers included on the Future 40 list, like their counterparts across the PE industry, have had to navigate remote working while advising clients on the complexities of fund formations and transactions during a global pandemic.
We asked three legal experts from the Future 40 cohort to share the challenges they have encountered over the past 12 months, the possible long-term impact of covid-19 on private markets, and the legal issues that should be on managers’ and investors’ agendas.
Amala Ejikeme, Partner, Kirkland & Ellis
Steven Klar, Partner, Simpson Thacher & Bartlett
James Wood, Partner, Hogan Lovells
What were the biggest challenges faced by yourself and your PE clients in the wake of the pandemic?
Amala Ejikeme: The market disruption precipitated by the outbreak, together with the challenges to traditional ways of working brought by lockdowns and related restrictions, were among the most significant faced by legal advisors and their clients. That we have been able to support so many of our clients as they continue to successfully raise capital – in a number of cases for new strategies and from new investors – is testament to their tenacity and the resilience of the industry as a whole.
Steven Klar: In addition to everyone transitioning to a fully remote working environment, we have seen the acceleration of existing trends, including the consolidation of commitments towards funds of established sponsors. This has been further intensified by the pandemic because it has made it more challenging for investors to develop new relationships with sponsors and conduct in-person due diligence. Investors have needed to rely on virtual diligence and therefore placed a premium on existing relationships with established sponsors to guide their investment decision-making.
James Wood: Nascent managers were slow to embrace virtual fundraising (a first-time investor relations meeting on Zoom isn’t quite the same). Sponsors were pre-occupied with managing their existing portfolios, particularly those with covid-19 vulnerable businesses. Traditional financiers were loath to further finance funds in their harvest phase with covid-19 vulnerable businesses, which resulted in GPs implementing creative solutions, such as the launch of companion funds and strategic co-investments at short order.
From a legal perspective, do you think covid-19 and the shift to remote working will have a lasting impact on the industry and, if so, in what way?
AE: While a number of firms have maintained high levels of productivity, my sense is that the remote working model of the last 12 months will not come to represent the ‘new normal’ for lawyers after the crisis. This is largely because of the apprenticeship culture at the heart of training and mentoring within the profession, as well as the relationship-driven nature of the business. However, covid-19 has probably served to accelerate pre-existing trends towards more flexible working, which I think is generally a positive thing.
SK: From a legal perspective, the shift to working remotely hasn’t affected the nature of the advice we give to sponsors or our ability to provide that advice. In some ways, working remotely and the related proliferation of video meetings has given us the opportunity to see clients ‘face-to-face’ more frequently. The industry will likely maintain certain efficiencies of remote working, including cutting back on certain travel for early-stage diligence meetings and, from a documentation perspective, the use of electronic signatures.
JW: Yes, I believe video conferencing is a new norm, and while there is a place for face-to-face meetings, the industry will seek to rationalise travel and its economic and environmental impact. Covid-19 demonstrated that the industry is dynamic, and people are happy to work flexibly. Any reduction in travel time is a bonus.
What legal issues should be on GPs’ and LPs’ radars in 2021?
AE: With budget deficits burgeoning worldwide, as well as a new administration in the US, private equity managers will be cognisant of the potential for changes in tax laws as governments seek to balance their books. Any such changes could impact economics at all levels of structures and so would be significant. Separately, ESG is emerging as a key area of focus for the industry, as LPs and GPs continue to adjust their operations to reflect regulatory developments across jurisdictions (including the Sustainable Finance Disclosure Regulation in Europe).
SK: Post-pandemic, we may see more and more investors who desire liquidity continue to look at ways to rebalance their portfolios. This will likely lead to sponsors offering investors additional liquidity solutions as well as the continued rise of structured secondary transactions, including fund restructurings, tender offers and GP-led secondaries/continuation funds, and likely new forms we haven’t seen to date. This all bodes well for a strong secondary fund market in 2021 and beyond.
JW: There will be a confluence of geopolitical and taxation factors at play in the Asia-Pacific region in 2021. Singapore, Hong Kong and Australia each have rolled out attractive fund programmes designed to attract private capital and query whether such measures are sufficient to influence private capital stakeholders’ behaviour and investment decisions away from familiar structures. Government approaches to foreign investment during covid-19 have varied significantly, and GPs/LPs need to keep a watchful eye on how government policy may impact their activities.
AE: I expect the trend towards consolidation to continue, with the most successful firms raising ever-larger pools of capital and investors actively managing their number of GP relationships. I would also look out for continued growth in the secondary market, as GP-leds and other liquidity solution transactions become fully mainstream. Finally, consistent with the growing conversation around ESG, I would expect private equity firms to increasingly place focus on ‘double bottom line’ performance – money multiples and IRRs will increasingly only paint part
of the picture.
SK: As has been the case for the past several years, I think we’re going to see a continued consolidation of capital being invested with larger, well-established sponsors. In addition, obtaining longer terms and permanent capital is a focus for sponsors and various new strategies and structures are likely to emerge in that area. We may also see the industry move towards an enhanced reliance on technology as it evolves and offers ways to increase efficiency and streamline the fundraising and closing process.
JW: Funds’ ESG activities will only continue to have greater importance, and I see some ‘social impact’ element of the investment strategy to be a prerequisite to attracting institutional capital for the most part. We’ll see more sponsors becoming ‘multi-product’ managers, raising capital for complementary strategies to their core. Such diversification brings challenges, such as managing conflict scenarios, deal exclusivity where there are overlapping mandates, and operating in a space where they are sensitive to market dynamics.