Last year was the breakthrough year for private equity club deals. Such buyouts, in which funds team up to jointly acquire a target, aren't new; in recent years their clout in the private equity world has been growing. But in 2005 club deals were dominant, as clubs nabbed some of their biggest prey ever.
Among the quarry were The Hertz Corporation, acquired by a three-member club for $15 billion; SunGard Data Systems Inc., picked up by a seven-member club in a $11.3 billion acquisition; and Toys "R" Us, Inc., acquired by a three-member club for $6.6 billion. Those deals dwarfed the largest private equity deals of 2004--the $4.3 billion sale of PanAmSat Holding Corporation, and the $3.7 billion sale of Boise Cascade Holdings, L.L.C.
Teaming up--rather than going it alone--helps private equity funds "spread the risk," says R. Ronald Hopkinson of Latham & Watkins. And as the funds team up, so do law firms. In club deals, one firm typically acts as lead counsel to the club and handles negotiations with the seller. But each firm also usually has its own firm. For example, in the SunGard buyout, Ropes & Gray, which represented Silver Lake Partners, took the lead counsel spot--but each of the other six funds also had their own counsel. (Ropes & Gray also represented Bain & Company, Inc., as well as Silver Lake; Simpson Thacher & Bartlett represented The Blackstone Group, Inc., and Kohlberg Kravis Roberts & Co.; Wachtell, Lipton, Rosen & Katz represented GS Capital Partners, L.P.; Weil, Gotshal & Manges represented Providence Equity Partners Inc.; and Cleary Gottlieb Steen & Hamilton represented Texas Pacific Group.)
Naturally, competition for the lead counsel spot is heated. The result is that beauty contests are in, and so is the attendant trotting out of track records. "The biggest demand is [for] industry expertise," says Hopkinson. For example, when a fund is looking at an investment in the energy industry, Hopkinson says, he will typically bring along an energy law and regulatory specialist to a beauty contest, even if that lawyer does not have dedicated private equity experience. "You need a law firm that has done hydroelectric deals in Siberia," Hopkinson says.
In 2005 American private equity funds looked hard at equity investments abroad. "Europe is the big playground," says Kirkland & Ellis's Jeffrey Hammes. "Asia is in its infancy." Hammes says Kirkland represents about 60 active buyout funds, 25 of which have $1 billion or more in capital. They include Bain, Golden Gate Capital Corp., and Madison Dearborn Partners, LLC. (Kirkland tops Mergermarket's league table for most private equity deals handled by a law firm last year.)
Funds' growing appetite for investments abroad may lure new players into private equity practice. Thanks to its presence in China, Sullivan & Cromwell--a firm not traditionally known for private equity work--represented The Carlyle Group and CVC Capital Partners Limited in private equity transactions in Asia last year.
Another trend in private equity last year: Sellers started playing hardball. The trend began in the first quarter of 2005, when SunGard extracted extremely favorable deal terms--such as an absence of a financing condition from its buyers ["Going for the Gold," March]. After SunGard, buyers for both Hertz and The Neiman Marcus Group, Inc., agreed to similar provisions ["Deals 'R' Us," "In the Driver's Seat," March].
When private equity shops compete for a company in play, contract negotiations become crucial; in bidding wars among public companies, price is more likely to be the sticking point. Says Simpson Thacher's David Sorkin, who regularly represents private equity funds: "Where your field is composed solely of private equity buyers, assumptions of valuations are similar. You are likely to get a fairly tight pricing range, and therefore, contractual issues can take on greater importance." Those issues can involve such things as financing restrictions, as well as how much funds will pay if a deal does not close.
With private equity so hot, firms say they are eager to find midlevel associates who can handle deal work. None, however, say they have been pushed to reassign associates from public company M&A work. "No question about it, things are busy," says Kirkland's Hammes. "We are in the market looking for people." Cleary's Michael Ryan agrees that midlevels are a wanted commodity, but says that he has sufficient resources within the firm. "Private equity is the sexy stuff that associates like to do," he says.
That's a good thing, because Ryan, like others, says that the outlook for the rest of 2006 is more of the same. Such firms as Blackstone, KKR, and Texas Pacific Group are all raising cash for funds of over $10 billion, and they are hungry to make more investments. With so much money in the funds' pockets, and funds' continued willingness to team up, "the universe of companies that can be acquired can expand exponentially," says Ryan. Private equity lawyers: Get set to expand your universes--or at least your billables.
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