Law firms with private equity clients can expect to be burdened with a heavy workload in the next 12 months, but determining exactly what practice groups will shoulder that workload requires partners to look at their clients’ situations.
There is a consensus among industry sources that 2010 will see a great deal more activity in the M&A market after severely depressed valuations limited the number of sellers in 2009. Valuations have rebounded strongly since their low in March last year and this, along with management change, accounting adjustment, and ongoing liquidity and performance challenges, will bring more sellers to the table.
There are only two reasons that an owner of an asset decides to sell – either they have to, or they think they are getting a good price relative to what will be available in the future. This year, both of those factors will come into play. On the buy side this will create opportunities for the healthy private equity firms and on the sell side it will see all private equity firms looking keenly at opportunities to sell existing positions. Law firms that have private equity clients should see a major resurgence of activity on all these fronts.
Corrs Chambers Westgarth partner Richard Lewis says that many PE funds spent last year securing their position and will look to add assets to their portfolio this year. “In 2009 a lot of funds mainly focused on their portfolio and stabilising portfolio companies and getting them through the crisis,” he says. “I think they’ve mainly done that now and in the last few months of 2009 a number of funds were beginning to focus more on new investment opportunities.”
What services do your clients need?
|PE fund situation
|Good credit, track record and tax situation
||Advice on acquisitions and investments
||Advising on sales, tax-related matters
||Advising on sales, performance matters
However, obtaining debt for those leveraged acquisitions may be a problem for some funds. While the banks have the means and the motivation to provide debt to leveraged acquisitions, the economic downturn has motivated them to examine their lending criteria and has led them to demand a resilient track record of borrowers before debt funding is available at competitive prices.
“You’re back to logical, rational levels of debt but not for everybody because you’ve got a relatively small audience of banks who have had intimate insight into how the different investors have invested in turbulent and challenging times,” says Pacific Equity Partners founder Tim Sims. This means that the banks know close up how the firms have invested and how they have fared under pressure. Those that have had significant problems will be less able to secure the debt necessary to make new acquisitions.
In recent months a new issue has been brought to the fore by the ATO’s response to the TPG/Meyer transaction – PE funds facing tax issues will need their legal and tax advisors to help them navigate those issues before they are in a position to re-enter the acquisition market. The three main tax issues facing PE firms appear to be treaty shopping offshore, whether income is considered capital or revenue, and the status of overseas investors relative to permanent establishment or deal sourcing issues in Australia.
“They’ll be a spate of sales later in the year if the market holds up,” Sims says. “Either law firms will be able to work on exits as funds seek to realise cash and show their investors they’re getting good IRRs and good liquidity, or they will see selective opportunities on the buy side for those that have the funds and are not unduly distracted by debt, performance or tax related issues.” For those that have been less fortunate in terms of portfolio performance there will continue to be bank restructuring and financing questions to be resolved by law firms.
The PE clients that will provide the least work for law firms are those that are at the end of their fund’s life. While things have been improving in recent months it is a difficult time to raise new funds and those that are near their expiration will be unable to benefit from the increased deal levels expected this year.
Even fund managers that have a strong performance history and a solid investment thesis are finding it difficult to raise money because of the ‘denominator effect’. When listed equities plummeted last year, institutions suddenly found themselves overweight in the non-listed equities sector. While the stock market recovery has helped balance the portfolio somewhat, institutions are still shunning private equity funds until they have achieved the ratios they are looking for.
In order to predict the amount and type of work private equity clients will provide over the next 12 months, it is essential for law firms to examine their clients’ positions and provide the resources to help. Those firms whose clients came through the downturn in good shape can be expected to be busy buying and selling – getting back to business as usual – while those whose clients have trouble accessing debt or will have to help them right the ship before normal business can resume.
NB: Firms are listed alphabetically under each subheading
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