Though multibillion-dollar private equity funds raised by well-known industry players often get much of the public attention, a growing market for PE buyout funds worth less than $1 billion has led to more first-time funds, meaning there is plenty of opportunity for attorneys that can capably guide neophyte fund managers to success.
The private equity industry’s penchant for raising capital has not slowed and each year the funds seem to be larger than ever before, but the proliferation of PE fundraising has made things crowded for fund managers trying to woo limited partners. Meanwhile, investors themselves have shown a propensity for seeking out smaller funds with niche focuses, something they believe can diversify their investment portfolios while also generating the strong returns they crave.
“We believe that, for generational and other reasons, there is an increasing number of outstanding investors who are leaving larger firms and starting their own firms,” said Carl Roston, a partner at Akerman LLP and co-chair of the firm’s corporate practice group. “They see this sub sector as an area where the economics are better for them and their investors.”
In 2016 and 2017 there were 41 total first time PE buyout fund closings that brought in a combined $13 billion, which represents the “strongest two-year tally ever,” according to a report released late last month by Akerman in tandem with Pitchbook.
“Today’s PE fundraising environment is very crowded, with the number of firms seeking to raise capital at an all-time high,” said Peter Gilman, a partner at Simpson Thacher & Bartlett LLP. “It’s no surprise that we are seeing an uptick in the number of first-time funds seeking to raise capital in the PE space, driven in part by increasing investor demand for specialized or niche investment strategies to complement their exposure to traditional mega funds, and in part by the overall expansion of the alternative investment asset class.”
Newbie fund managers — even those that have had experience working in other areas of the PE industry — face significant challenges in making themselves stand out among a sea of competitors, and the importance of trusted legal counsel cannot be overstated. Though the people launching first-time funds tend to be “savvy dealmakers with demonstrated track records of successful investments,” they are often less familiar with what it takes to get a new firm and fund off the ground in today’s environment, according to Gilman.
“Having spent their careers doing deals, it positions them well to succeed once the fund is launched," he said, "but it's our job to help them get there — to help them navigate the waters and provide them with a product that accomplishes their commercial objectives and puts them in a position to succeed over the long term while allowing for growth.”
Simply put, many first-time funds in the middle market do not have the internal resources in place that more established private equity groups do, so lawyers can be made to “wear many different hats,” according to Gilman.
“In many ways, because of the relative lack of internal infrastructure and headcount, these first-time funds tend to rely on their funds lawyers more heavily and with more regularity than larger PE firms with legal departments of dozens of lawyers,” he said.
A first-time fund manager will seek legal advisers that are willing to be proactive with their guidance, whether that means assisting with writing up compelling marketing documents to try and solicit investments from prospective investors or putting clients in touch with potential deal partners.
"Clients often will look to their attorneys for practical business advice, market knowledge and strategic advice," said Jeffery Kaplan, a corporate partner at Kirkland & Ellis. "By providing first-time fund clients with an efficient, organized fundraising process and timeline, commercially acceptable documents and knowledge of the market and guidance on terms, attorneys can be an invaluable resource to first-time fund managers as they seek to balance offering an attractive investment opportunity to investors with terms that give them the flexibility and protections they need to be positioned for long-term, future success."
In particular, sourcing deals has become an area where law firms can be of value. Attorneys can help first-time fund managers in their pursuit of developing deep relationships with key industry players by putting them in touch with executives, investment bankers, lenders and others. Those types of connections can lead to a client being in touch with people who will be effective in sourcing proprietary deals and facilitating relationships with management teams, in some cases even before companies come to market, Roston said.
Akerman seeks to provide clients with connectivity to facilitate deal flow in a number of ways, according to Roston, including by hosting events that feature brief, rotating, one-on-one meetings and other relationship-building activities with investment bankers and others.
“We’re very focused on listening to our clients in order to deliver what’s important to them,” Roston said.
In addition to seeking help with launching the fund in general as well as deal sourcing, first-time fund managers’ main needs include having people on their side who can get deals done efficiently while effectively managing risk. The need for attorneys who can capably manage risk is universal, and especially so when it comes to first-time fund managers in the middle market.
“The key to managing risk effectively while getting deals done efficiently is understanding — based upon empirical evidence — the client’s organizational and transaction-specific goals and risk tolerances, so as to prioritize the limited number that are worthy of major focus,” Roston said.
The needs are plentiful and the challenges are unique, but with more first-time fund managers seeking to raise funds worth less than $1 billion with a focus on the middle market, there is ample opportunity for attorneys to land new clients that are just beginning their business.
“As a funds lawyer, you are in a position to help not only set up a fund but see it thrive over time and develop into a large-scale organization, which ... makes you feel pretty good about the positive change you are helping to promote," Gilman said.
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