In a nutshell
Private equity and investment companies operate funds, which are pools of money from investors. Private equity firms use this money to buy other companies or assets and sell them on for a much higher price. Often, the firm also takes a sizable sum of bank debt to make the purchases – this is known as a leveraged buyout.
Lawyers who specialize in investment management play two roles: they help to actually form the fund in the first place (these are usually structured as limited partnerships) and help the firm negotiate how the investors can donate their money. Their second function is to represent the fund when it buys and sells the investments.
Venture capital is a part of private equity that concerns investors putting money into startups, with the hope the startup will eventually be sold or taken public. These are high-stakes investments as startups don’t always succeed, but it can return very high profits. To reduce the risk, investors usually put forward smaller sums of money over a short period.
Securities and assets need to be managed if the investors want to achieve their end goal. This is where investment management comes in. Investment management lawyers often specialize in a particular area, but they all advise on funds’ formation, structuring, regulation and taxation.
A hedge fund is a private fund. They invest in a variety of markets in the hopes of returning a profit to the investor, irrespective of the state of the market. The more successful hedge funds are typically clued-up on derivatives.
Can funds club together? Yes. These are called mutual funds. These collective funds pool money from several investors to buy securities. Mutual funds are often sold to the general public.
Investors occasionally want to add to or withdraw from the fund. Funds that enable this are known as open-end funds – both mutual and hedge funds fall under this category. Investors usually buy shares in the funds from the fund itself, rather than buying shares from fellow shareholders. The fund will issue an unlimited number of shares throughout its lifecycle. The opposite of an open-end fund is a closed-end fund. Here, the fund issues a limited number of shares, and issues them all in one go. The shares are usually traded between the investors (rather than being purchased directly from the fund itself.) Closed-end funds and their managers must be registered with the Securitites and Exchange Commission.
REITs – or Real Estate Investment Trusts (or Funds) use investors’ money to invest in mortgages and properties. These are publicly traded.
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.
The market & advice
Private equity has enjoyed a meteoric rise over the past few years. So far recruitment numbers into this practice have remained stable under COVID-19, reflecting a slow in growth rather than a downturn. Like M&A, the sector took a significant hit during the first half of 2020 but recovered more quickly than other transactional areas.
PE related deals worth $460 billion took place in 2020, around $337 billion of which came from the second half of the year. Research from Bain Capital shows that though global fund-raising was lower than the all-time-record of $1.09 trillion set in 2019, 2020 still reaches the podium as the third highest on record with a total $989 billion raised. Research from White & Case shows that eight of the ten largest PE-related transactions were exits. Unsurprisingly given their general strong showings during the pandemic, the technology, media, and telecoms sectors dominated the scene, accounting for 769 deals worth $217.6 billion. The healthcare, financial services, and industrial goods sectors were similar resilient; collectively, these accounted for 65% of activity.
Many commentators expect 2021 to be a very strong year for private equity, highlighting the success of the global vaccine rollout, record levels of 'dry powder' (committed but unallocated capital), and strong credit markets. ESG concerns are going to be high priorities in any future transactions, with many PE firms now integrating comprehensive ESG metrics into their portfolios.
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, private equity partner at Kirkland & Ellis: “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."
“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.”