European private equity: The great divide

Author: | Published: 1 Dec 2006
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Private equity in Europe has now grown to such an extent, both in volume and size of targets, that no M&A practice can afford to be without private equity expertise. The different approaches to gaining that expertise have been sharply divided between US and UK firms. The former has tended towards hiring super-specialized partners while the latter, like many continental European firms, has simply expanded the role of more generalist corporate lawyers.

But what is the result for the client? Should they choose the super-specialized or the generalist lawyer? Opinions are as sharply divided as the attitudes. The head of the London office of one US firm says: "I don't think the more specialized approach can last for long. It just doesn't make sense and allows for less overlap. You end up stuck in a bubble." By contrast Richard Youle, a private equity specialist in Linklaters' London office, says: "You need private equity lawyers because the big clients aren't idiots. They know what they're talking about and will know the difference between a corporate and a private equity lawyer." Other senior lawyers, including Christophe Eck at Gide Loyrette Nouel and Laurent Legein at Cleary Gottlieb Steen & Hamilton, insist that both approaches are valid.

UK private equity
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Theoretically, the growth in private equity deals, in volume and value, should hand the initiative to the specialized UK firms. They can specialize because, on the simplest level, they have larger European offices – the high number of partners means that they can afford to have a series of lawyers with narrowly-defined practice areas. Not so for American firms. "US firms often have only a handful of corporate partners in Europe," says a leading private equity specialist. "Lawyers do the work that's available and in small offices that means a wide variety of deals and little specialization."

But the causes of the specialist/generalist divide go beyond simple partner numbers. "It's also to do with the way we're remunerated," says Youle. "Magic circle firms have a fixed lock-step so we get paid according to how many years we've been at the firm. If I'm not best placed to do a job I'll happily pass it on to, say, a public equity specialist. In the US there is more of an 'eat what you kill' approach, so lawyers may accept deals in areas where they are not super-specialized."

This hints at a more abstract cultural difference between British and American lawyers that defies material explanation. "It is in the DNA of Wall Street lawyers to be broad based, just as it is the English lawyer's nature to be super-specialised," says Legein. "I couldn't say what the cause is. We could go into sociological trends but I'm really not qualified to talk about that."

And some US firms take a different route, opting for a specific private equity focus, such as Simpson Thacher & Bartlett. These firms compete with UK specialists by working by proxy. If a deal is in a major European country they will work alongside a big European firm for aspects of local law. In more remote jurisdictions smaller local law firms are used. This tactic is also employed by the likes of Weil Gotshal & Manges, Latham & Watkins and Kirkland & Ellis.

"US firms appear on European deals but they may not have actually done much," comments one private equity specialist. "In each jurisdiction US firms can't do things like the tax, IP, pensions, environmental law and so on. They are almost superfluous."

Whichever way it is done, law firms are all reacting to the need for private equity specialists. Over the last couple of years the market has witnessed a series of lateral hires, some of which are particularly high profile. Christophe Eck points specifically to David Acknin joining Weil Gotshal from Linklaters in late 2003, and Ashurst's hire of Thomas Forschbach from Latham & Watkins in September 2004. Laurent Legein had just moved to Cleary from Clifford Chance when he spoke to IFLR in November. Also, as deal sizes grow year on year partners have gravitated towards private equity while remaining in the same firm.

That growth in deal size shows little sign of slowing: "A lot of money is being invested and the market will continue to thrive" predicts Eck. Youle agrees: "Private equity represents something like 40% of UK M&A and 20% of European M&A. You can't ignore that."

Law firms certainly have not ignored that, and private equity is now considered a crucial element of any M&A practice. "A firm does not need to advise on private equity to have a thriving M&A practice, but it does give more balance if a firm has capabilities in public and private equity," says Laurie McFadden, a private equity specialist at Freshfields Bruckhaus Deringer in London.

Youle goes further: "It is feasible to have an M&A division without a large and focused private equity element but it wouldn't make a lot of sense. There's no way an M&A division without private equity experience will win deals at the high end of the market. That could mean sacrificing something like 20% of the market."

That is 20% of a very valuable market. When private equity deals began to take off in Europe they were not worth a great deal. But now transactions valued at more than $2 billion are routine. The large US private equity houses are investing in Europe, and the growing number of club deals has multiplied the resources of these companies. Private equity houses are increasingly willing to look at listed companies and take on public M&A processes. As recently as September a consortium of KKR, Silver Lake Partners, Bain Capital, Apax Partners and AlpInvest Partners completed a $9.5 billion deal to buy 80% of Royal Philips Electronics' microchip-making unit. Clifford Chance and Simpson Thacher & Bartlett advised the consortium.

Yet as the deals grow and take on more public companies, the divergence shows no sign of eroding. It remains to be seen whether this blurring of the lines between private equity and M&A will benefit the specialized UK firms or their generalist American counterparts. PJ