In a nutshell
Private equity and investment companies operate funds that pool the investments of anybody prepared to part with their money for a sustained period of time. The private equity firm takes this cash – often alongside a large portion of bank debt (making it a ‘leveraged buyout’, or ‘LBO’) – to buy companies or other assets with the goal of selling them on at a massive profit. Investment management lawyers, therefore, have two primary functions: they form the funds (which are typically structured as limited partnerships) and help the private equity firm negotiate the terms on which investors contribute their money, and they act for the private equity fund when it buys and sells its investments.
Venture capital is a subset of private equity that sees investors put money into startup companies or small businesses in the hope they will be sold to a private equity firm or taken public. Although this typically entails high risk for the investor, it has the potential for above-average returns. The higher risk compared to private equity proper is offset by investing smaller amounts over a shorter timespan, typically.
Investment management is the professional management of various securities (shares, bonds, etc) and assets in order to meet the specified investment goals of investors. Investment management lawyers may work in any of the specialist areas described below, but ultimately advise on the structuring, formation, taxation and regulation of all types of investment funds.
A hedge fund is a private, actively managed investment fund. It aims to provide returns to investors by investing in a diverse range of markets, investment instruments and strategies. Hedge funds' investment strategies aim to make a positive return on investment regardless of whether markets are rising or falling. Expertise on the derivative markets helps hedge funds achieve this.
A mutual fund is a collective investment vehicle that pools money from many investors to purchase securities. The term is most commonly applied to collective investments that are regulated and sold to the general public.
A real estate investment fund/trust is a publicly traded investment vehicle that uses investors' money to invest in properties and mortgages.
Both hedge funds and mutual funds generally operate as open funds. This means that investors may periodically make additions to, or withdrawals from, their stakes in the fund. An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders. It contrasts with a closed fund, which typically issues all the shares it will issue at the outset, with such shares usually being tradable between investors thereafter.
What lawyers do
- Advise clients on how to structure new funds.
- Help private equity firms negotiate the terms on which investors contribute their money.
- Act for the private fund when it buys and sells its investments.
- Assist clients throughout the fund-raising process. This includes the preparation of offering materials, the preparation of partnership agreements, advising on and documenting management and compensation arrangements, and closing fund formation transactions.
- Draft the numerous organizational documents necessary to form an investment fund, including a private placement memorandum, a limited partnership agreement (if the fund is a limited partnership) or an operating agreement (if the fund is a limited liability company), and investor subscription agreements.
- Conduct diligence and negotiate contracts.
- Inform and advise clients on the constantly changing regulatory and compliance issues arising under US and international securities, tax and ERISA laws.
- Provide day-to-day advice with respect to issues such as performance and advertising, and brokerage and portfolio trading practices.
Realities of the job
- Funds lawyers often work for clients in very small teams, meaning there is the chance for even the most junior associates to gain great experience. “When you start out, you will work on private placement memos, draft key documents and review the transfer agreements,” says Bruce Ettelson of Kirkland & Ellis. “In funds, you may negotiate with hundreds of parties at the same time so typically you get the chance to work in negotiations as a young associate.”
- Structuring funds requires an intimate familiarity with relevant securities and investment company rules. Understanding and being able to apply knowledge of key legislature, such as the Securities and Exchange Commission (SEC) guidelines as well as federal and state laws, is a vital skill.
- Setting up funds also requires a significant amount of tax, ERISA and industry knowledge. Funds lawyers often work in close collaboration with their tax and finance colleagues to realize the best value for clients.
- Private placement memoranda must contain risk factors and material disclosures about the investment manager and the strategy to be employed by the fund.
- Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. It consists of two parts: part one requires information about the investment adviser’s business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the adviser or its employees; part two requires investment advisers to prepare narrative brochures written in plain English that contain information such as the types of advisory services offered, the adviser’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel of the adviser.
- Being responsive to client needs and understanding the time-sensitive nature of fund organization is essential. “A lot of work involves helping clients to understand what the market is and how they can best use such information. As private funds attorneys, we often play a strategic counseling role,” says Bruce Ettelson.
- “I would recommend taking a securities regulations course,” says Lisa Schneider of Fried Frank. “Having a basic understanding of securities law is an important foundation for the practice of asset management and other areas of corporate law.”
- “A key personality trait often overlooked that you need in this practice area is emotional intelligence – people skills. One of the things I love about this practice is that in fund-raisings I don't really do one-on-one negotiations, and in terms of large private securities offerings you will be dealing with numerous different law firms. Finding a common denominator and getting everyone to agree to pretty much the same terms means that being able to read, understand and gently move people helps tremendously,” explains Jordan Murray of Debevoise & Plimpton.
- “Attention to detail and the ability to take a step back and understand the big picture” are key attributes for success, according to Lisa Schneider.
- Global private equity assets under management (AUM) are around $2.5 trillion, the highest ever (source: Prequin).
- 2016 was another strong year, the fourth consecutive year when fundraising surpassed $300 billion ($347 billion was raised by 830 funds in 2016).
- There is a trend of fewer funds managing more money. The average size of private equity funds closed in 2016 was $471 million, a record high.
- Private equity accounted for 57% of all private capital raised in 2016, up from 52% the previous year.
- According to Prequin, 95% of investors are happy with their private equity portfolios' performance, up from 81% in 2011.
- Healthcare IT company MultiPlan was both one of the largest private equity buyouts and exits in 2016 when GIC, Hellman & Friedman, and Leonard Green & Partners bought it for $7.5 billion from Ardian, Partners Group, and Starr Investment Holdings.
- 2016 saw 9,719 venture capital deals valued at $134 billion, representing a 13% drop in the number of financings from 2015 – reversing the upward trend of the previous six years.
- Private equity-backed IPOs in 2016 yielded proceeds of only $8.8 billion, down from $11.3 billion in 2015 and $25 billion in 2014. The 2016 figure was the lowest since 2009 (source: Renaissance Capital US IPO Market).
- VC-backed IPOs in 2016 were worth only $3.5 billion, less than half of 2015's $8.9 billion and a fraction of 2014's $35.3 billion. Again, it was the worst result since 2009.
- The slowdown in IPOs began in August 2015 over China growth fears; political uncertainty in the US, conflicts in the Middle East, Brexit, and interest rate rise fears are some of the other reasons why IPOs were fewer in 2016.
- 'Trumponomics' could have a significant effect on the private equity market. Details right now are scant, but the potential repeal of the Dodd-Frank Act would mean less regulation in financial services, including PE and VC.
Advice from the gurus of private equity and investment management
Bruce Ettelson, head of the private funds group, Kirkland & Ellis:
“A real benefit of funds work is that you meet very senior people at the clients early on in your career and become a general corporate counsel to those clients. You're able to represent clients from cradle to grave. You're not only doing the transfers, but also helping them with reports, regulatory compliance, structuring transactions within a fund’s permitted transaction parameters and other issues. A wealth of challenges will come up over ten years of working with a client. It's a very dynamic and challenging practice. The work doesn't end with structuring and closing a fund.”
Lisa Schneider, corporate partner, focused primarily on the structuring and representation of hedge funds and other alternative investment products, at Fried Frank:
“One of the great things about this area of law is that the role of a junior associate is not that different from that of a senior associate or partner. In many fields, junior associates are often relegated to lower-level tasks, such as diligence, and are not exposed to high-level deal negotiations. Juniors in this practice really get exposure to the whole picture. Transactions are leanly staffed, so that junior associates are able to be involved in all aspects of a transaction, including drafting and negotiations.”
“The private fund space is dynamic and is continuously evolving. As the client businesses and products adapt to changes in the market, our practice must change and evolve as well. This is what keeps the private funds practice both challenging and rewarding. It's great to be at the cutting edge of the industry.”
Jordan Murray, deputy chair of the firm’s corporate department and member of the private equity funds and investment management groups, Debevoise & Plimpton:
“I really view myself as a commercial business lawyer who does everything for these private investment firms other than their acquisitions and dispositions. We handle their private securities offerings – which could be viewed as the sexy part of the job – and deal with a whole range of projects, including opening non-US offices, high-level personnel changes, firm restructurings and liquidity events, securities filings, investor reports and communications, incentive arrangements and regulatory and compliance issues, which have become ever more burdensome. My job often involves marshaling the right teams within Debevoise for our clients. It's like being the quarterback who directs everything.”
“For me the real reward is that our clients are so easy to work with. So many of the folks I work with are so entrepreneurial and smart and grasp onto issues and concepts so quickly that it really is quite fun. They are also the type of people who recognize the good work and loyalty we bring to the table – they let you know they appreciate that. For most of my clients I feel like I’m an extension of their organizations. When I speak of my clients it's about 'we'. We enjoy our clients' successes and, thankfully with less frequency, suffer and fight through their challenges as well.”