With private equity funds singling out household names such as Sainsbury’s as targets among the multi-billion pound deals dominating the business headlines, the industry has never been under greater scrutiny.




In Europe alone last year, £118 billion was spent in private equity takeovers, a 41% increase on 2005. The chief protagonists have traditionally kept a low profile. But they have been forced to defend themselves publicly after the unions, angry at job losses following the buyouts of the AA, Birds Eye and National Car Parks, labelled them ‘amoral assetstrippers after a quick buck’.



In a rare interview recently, Damon Buffini, managing partner of Permira, Europe’s biggest private equity group, described the industry as ‘unforgiving’ with ‘no parachutes for failure’. Both he and Guy Hands, head of the private equity group Terra Firma, acknowledged the need for greater openness, with Mr Hands warning at a recent conference that the top ten buy-out firms risked becoming the ‘unacceptable and unaccountable face of capitalism’.



So how do lawyers make their mark in a world which, according to Will Hutton of the Work Foundation, is casting a ‘plutocratic shadow’ over British business?



Unsurprisingly, lawyers specialising in this area take a sceptical view about the way private equity is being characterised as hero or villain. ‘That is rather childish,’ says Marco Compagnoni, a private equity partner in the London office of US firm Weil Gotshal & Manges. ‘However, I am encouraged by the government pointing out what private equity contributes to business generally.’



When it comes to demands for greater regulation, he says: ‘I personally don’t see a crying need for it but, as there is a sufficient amount of noise and clamour, it is probably helpful to look at it – though I suspect it will be more to do with disclosure and public relations.’



The industry bodies in both the UK and Europe are considering drawing up codes of conduct over disclosure of the portfolio companies being run by private equity houses, although that greater openness would not extendto the pay packets of the private equity executives, who argue that this would amount to ‘financial voyeurism’.



Alan Greenough, head of City firm Lovells’ private equity practice, says the three big issues are ‘disclosure, public relations and tax’, with the Treasury launching a review last week into the tax treatment of private equity funds. ‘Private equity houses haven’t had to publish results or explain what they are doing to the press. Now there are such mega funds, I don’t think that is feasible.’



Charles Martin, private equity partner with City firm Macfarlanes, which has a strong share in the midmarket field, particularly public-toprivate deals, agrees there is a ‘presentational’ issue. ‘Private equity has been extremely successful and there is a danger of the gold egg disappearing if you overdo regulation. Where the industry has done a poor job is in communicating the benefits it offers. It has now reached a size and significance in the economy where it needs to pay more attention to what people think of it.’



Chris Bown, co-head of Freshfields Bruckhaus Deringer’s international private equity group, says it is ‘naive to say that what private equity is doing is somehow unfair, wrong or immoral – we live in a capitalist society’.



He adds: ‘When I started in private equity 21 years ago, a really big fund was £5 million. Private equity houses are generally paid a management fee of 2% of the size of the fund to cover running expenses and 20% of the profit. If a £5 million fund quadrupled in size over four years, that was £6 million to share out. What has changed is that the £5 million fund is now a £5 billion fund, so you add three noughts onto the figures. It is extraordinary.’



However, while it is important that private equity houses provide information about the companies over which they are stewards, he says: ‘I don’t understand what public interest is served by knowing if Damon Buffini made ten, a hundred, or a thousand million. That is just motivated by curiosity.’



With so much money at stake, choosing your lawyers is critical. Mr Compagnoni says: ‘It is totally relationship-driven.’ It would be quite rare for a private equity client to say, “Okay, I’ll accept Joe Schmo whom I have never met or heard of”. Clients are more likely say, “If I can’t get partner A or B at this firm, then I will go to partner C at another firm”.’



When it comes to the skills a lawyer needs, Darryl Cooke, Manchester-based joint head of private equity at DLA Piper, leaders in mid-market deals, says it is important to be strong technically and a very good project manager.



Mr Greenough, who was recruited by Lovells from White & Case to help rebuild its London team after Mr Compagnoni’s highprofile move to Weil Gotschal last year, agrees. ‘First and foremost you have to understand the financing and the structures because that is how private equity houses make their money. But you also need to be a good project manager because most of the big deals are multijurisdictional. While the client won’t expect the lead partner to do all the work, they will expect him to be in control of the transaction and to know what the issues are as they come up.’



Mr Bown sums up the required skills succinctly: ‘You have to be able to explain the most complicated things accurately and coherently in no more than half a page. That’s all.’



When it comes to ‘club’ deals involving several funds, Mr Bown says one law firm will act for the consortium collectively, while each investor will have their own lawyers to negotiate the terms of the agreement between them. ‘You need judgement to work out what matters, as well as great organisational skills and great powers of negotiation and diplomacy, because you need everyone pulling in the same direction.’



What is clear is that, because of the intensity of the deal-making, the hours are ‘brutal’, he says. ‘It does make it a fairly maledominated world on both the investors and the law firms’ side. I have 12 partners in London doing private equity, of whom two are women, both with families and with husbands who can be at home when needed.’



Mr Martin agrees the hours are ‘brutal – but no more so than in M&A [mergers and acquisitions] generally. It would also be wrong to characterise it as any more a maledominated fiefdom than the corporate world generally. It is changing – slowly.’



Last year, there were some highprofile moves to US firms, including Mr Compagnoni’s move with his team from Lovells to Weil Gotschal, and Graham White and Raymond McKeeve, who left Linklaters to spearhead Kirkland & Ellis’s UK buyout practice.



Mr Compagnoni explains his move: ‘I wanted to go to a particular US firm that had the right platform to private equity in Europe, plus the position in the US, so it was a better brand than the one I was at before.’



With so much going on in the market, private equity lawyers are at a premium. Mr Bown receives calls ‘all the time. So, why don’t I go and join a US firm? Part of the answer is that the service we provide is very different to what they offer. All they can do, as they have very small teams in the UK, is to provide deal management advice and subcontract everything else. When you have spent the last ten years selling to clients the business offerings that a firm like Freshfields has, it is a bit difficult to turn round and say “Forget that – this is a better idea”.’



When it comes to fees, some deals are negotiated on a contingency basis. Mr Compagnoni says: ‘Clients never want to pay full whack on transactions that don’t happen but they know their advisers have to be compensated in the round for things going forward.’



Mr Cooke did a deal before Christmas involving an auction. ‘The private equity house I was acting for was very keen to win it so, when they put their offer in on the Monday, they also promised they would complete two days later. They underwrote massive amounts of fees to be able to do that because they were asking people to work very unsocial hours.’



Given that pressure, what is its appeal? Mr Bown says: ‘It is fascinating and challenging work. If you enjoy doing deals, these are fast moving and you are working with people who are incredibly intelligent and committed. We have very talented and ambitious lawyers working here and they are like sportsmen – they want to push themselves and these deals help them find out what they can do.’



What has also happened, says Mr Martin, is that the world has ‘woken up’ to the fact that private equity is an important driver in the economy, and people want to understand it better – ‘and I don’t think that is unhealthy’.



Grania Langdon-Down is a freelance journalist