In this blog post, Faraz Salat, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the role of a Private Equity lawyer in private equity transactions.
Private Equity Firm
A Private Equity Lawyer advises during acquisition and disposal and oversees legal issues during ownership. A private equity company is an investment firm which invests money by owning businesses.
In an ideal situation, a private equity company will buy the shareholding majority of a company.
Further elaborating, the private equity firm brings in cash from individuals, debt from banks and then buys companies or assets. In hindsight, the private equity firm sees lucrative prospects and returns on the investment years later. The idea is that the private equity firm is better placed with their industry contacts, market trends and technology to scale up the business and increase its value beyond what the original founders can do with the limited resources at their disposal.
Coming back to the individuals and banks who funded the private equity company, these persons will be given their returns after deducting a fee, maybe anything upwards 20%, for the profit that the private equity company made for them. The private equity business will repeat their investment in several such lucrative prospects to multiply its earnings.
The central idea that fuels the private equity business is to control the business which can only happen when you become a major shareholder in the business.
These private equity companies don’t intend to run the businesses for long, perhaps 3 to 7 years is the time they may run the business and increase its value. Once the business is grown, they’ll either sell their shares or the company, if they own it, calling for an exit.
Additional Read: How can an investor exit private company?
Let us go through a Few Concepts that we hear often –
- Private equity and investment firms operate funds by pooling investments from people, individuals who are willing to lend their money for some time. These firms will utilize the cash and a lot of bank debt to make an LBO “leveraged buyout” to buy companies or assets in the company with the goal of selling them later at a lucrative return.
- Venture capital is a part of private equity. Here, investors actively look for funding startups that show good prospects of growing. However, there is a high risk for the investors but the potential for returns is beyond usual or average. Considering the risks involved in funding the startups, the investor seeds in smaller amounts over a period of time.
- Investment management deals with Securities and Assets to meet investors’ goals about returns.
- Hedge fund is a private, active fund. The aim is to provide returns to investors through a diverse range of investments in varied markets, instruments and strategies. The strategy is to achieve returns irrelevant to the market’s rise or fall. One may achieve this through his expertise in the derivatives market.
- Mutual fund is a vehicle which pools money to buy securities. It’s sold to the general public and is commonly collective investments.
- Real Estate Investment Fund/trust uses public investment to achieve returns from properties and mortgages.
Role of a Private Equity Lawyer
A Private Equity lawyer here has a couple of intrinsic roles. He/she will structure the funds and negotiate on behalf of the private equity firms on the terms of investments or the contribution of funds in the equity firm, subsequently act on behalf of the company when there is a buying or selling of investments.
- Private Equity Lawyer(s) may be working in a myriad of specialized financial roles, however, he/she will eventually advise on the incorporation of entities, its structure and formation, tax, audit, compliance and regulations.
So, let us break it down into an example –
Consider a private equity transaction. A law firm will represent the fund that will buy a company. Meanwhile, another law firm will act for the company, which is being sold, and a third law firm will be with the bank that will provide finance to the equity firm.
Also, there can be another fourth firm to advise the senior management board the company being sold. A Private Equity Lawyer or solicitor may be involved in several deals at a time.
The transaction time varies from one jurisdiction to another. At the preliminary stage, private equity lawyer will study and analyze the target company. Once the acquisition begins, many private equity lawyers and auditors will be tasked to perform due diligence and contractual arrangements to further the financing process.
The number of lawyers involved in this process may vary from one transaction to another since each would have its own complexity and peculiarity vis-à-vis the number of jurisdiction involved.
Quite a few law firms also have training programs for young and fresh law graduates. The trainees could find themselves busy in due diligence, structuring, and going through numerous documents to close a transaction.
While established lawyers are a class apart, the young lawyers must possess a commercial inclination, people skills, and a sound accounting understanding. Mostly, one would deal with the niceties of commercial, company and contract laws. There will be an opportunity to travel the globe.
While this is not the case with every private equity lawyer involved in private equity transactions. This will be subject to the firm and the clients’ base. The work will be round the clock.
- While few days you’ll be doing a nine to five, however, sometimes, you may be on your toes twenty-four seven. Since these deals are competitive and lawyers will be busy with auctions and buyers, there will be more midnight coffees. The industry is young and meritocracy is valued. Trust is central to the relationship between clients and lawyers, therefore, one must build that trust through social bonding. Since banks are conservative and the process of funding is elaborate, tiresome, the private equity aids companies struggling to raise finance.
- As a private equity lawyer, you’ll make deals happen and retain the clients’ custom. Lawyers are central to the buying and selling of businesses. They structure, negotiate the acquisition and perform due diligence on the documents. They also close the transaction, establish the business and legal structure for the company. The lawyers in private equity get to work with some of the very influential investors who seek sound legal advice on various aspects of a deal or transaction while showcasing their commercial expertise. As they’re involved in the financial market in their routine business, they develop proficiency in business solutions.
- As a private equity lawyer, one may learn many of the skills that an M&A lawyer is adept at. The nature of investments may make the deal more complex and the work more challenging. The private equity law will most often overlap with finance, taxation, and competition law at various stages in the deal. To succeed, you need determination, passion and the ability to work in a team and thereby solve problems.
- Being commercially aware is important as your advice needs to be relevant, on point and updated. You may work on a wide range of projects involving different team members. Deals may last for weeks and you may even get exposure to the broad cross-section of the team’s work.
Let us dig further in the typicality of a private equity lawyer-
- Private Equity Lawyers job includes and is not limited to advising clients on the structure of the funds, negotiate, assist in fund raising, by preparing offering materials, partnership agreements, advising clients on documents management, compensation and closing the transaction. One may also find themselves involved in the drafting of documents, memorandum, agreements and subscription agreements.
- The Private equity lawyers work in small teams, therefore, even the most junior associate will get hands-on experience in gaining insight into the business. Any lawyer who has tried his hands at private equity would confirm that the private equity clients are of a very demanding category. Also, these are a bunch of people who are smart and are fairly acquainted with the legality around the transaction. They try to keep the legal costs to a minimum.
- Many private equity firms are willing to invest in diverse business. Thus, hiring the services of one or two lawyers would not be ideal. As Private Equity lawyers would encounter difficulties, therefore, they hire the services of a full-service law firm which has a diverse practice area and can cater to the wide spectrum of transactions that make the deal. Top international law firms are favored for such private equity transactions so that the private equity firms avoid hindrances and hire proficient lawyers focused in the relevant area.
In summary, the work can be technical and interesting at times. Your clients are hard working bunch of people, richer, younger and smarter than you, which gives them more leverage to cut legal costs by adventuring in the market and tasking their lawyers with more work and less time.
Deadlines will creep over your nights, weekends, public holidays and just all your leisure time. You may even see the sunrise from your office. However, there is a lot to cherish in the end; the rich experience that private equity business provides can hardly be achieved in various other practices. The learning curve tends to be long.
Earlier, one could get into the profession immediately after their law degree. However, now things are different. You may not easily get through private equity firms. The best bet is to take any corporate role in the firm and then move into your area of practice when things fall in the right place.
A job of the Private equity lawyer is although tiresome but exciting. Do you think the same? Drop your views in the comments below & Share the Article.