Lawyers: your most valuable asset?

The current employment market for private equity legal professionals is remarkably dynamic. "Over the last year on the fund formation side, there has been significant market disruption," says recent Proskauer Rose hire Kate Simpson, who joined the firm last year alongside SJ Berwin's Nigel van Zyl and Oliver Rochman to form a fund structuring team. Whole teams have been poached and partners have hopped firm to firm, some more than once.

Proskauer's three-pronged hire echoed that of Weil Gotshal & Manges, who pinched a four-strong fund formation team from Clifford Chance a month earlier. More conspicuous though was Dewey & LeBoeuf's short-term appointment of Mark Davis and Russell Van Praagh. Hired from Taylor Wessing to launch the firm's private equity practice, the pair jumped ship to rival practice McDermott Will & Emery after just a year. They join the mass exodus of more than a hundred partners from the firm, sinking under the weight of bank and bond debts.

Unfortunately for Dewey & LeBoeuf, in the absence of physical assets the true value of a private practice lies in its partners, the constituent parts of a firm's brand. While this can be argued of legal practitioners in general, the nature of private equity legal work in particular enhances the value of the individual lawyer.

As the burden of regulation increases, lawyers have become coveted by private equity firms

"Fund formation work is long-haul. You become very ingrained with the client, their fund documents, internal corporate documents and carried interest arrangements," explains Simpson. "And once developed, that relationship is vested in a limited number of people." Partners are the real assets, and partners can move.

What's more, the relationship between a GP and legal professional is often far more enduring than their relationship with any particular legal firm. "There is a lot more loyalty now towards individual lawyers than towards brands," says Claire Wilkinson, general counsel at MVision and founder of the Private Equity Lawyers Forum. "When it comes to individual loyalty, private equity is at the far end of the spectrum because the teams that are needed to raise a fund in a law firm provide a fairly niche service," she adds. "A fund is a very long instrument, so if you instruct a lawyer in private practice you will tend to stay with that lawyer for the entire life of the fund and return to them for secondaries." Given the recent downturn in M&A activity, the longevity of the relationship is reason enough for recently bolstered private equity teams within private practices.

The last year's hiring spree is, however, not the first of its kind. With the introduction of the Financial Services and Markets Act (FSMA) at the turn of the millennium, many private equity houses saw their incumbent CFOs overburdened and so took on new hires. "It was due to increased regulation and the globalisation of deals then, so you needed someone in house to act as procurement officer," explains Wilkinson.

A decade later, amid a financial downturn that has seen recruitment slump and headcounts shrink, private equity has bucked the trend in financial services and continued to hire legal professionals. Why though is this second wave occurring now?

The obvious reason is upcoming regulation. With the imminent advent of the AIFM Directive, lawyers are having to future proof documents for forthcoming changes and prepare clients for compliance. Add to that the arsenal of regulation such as Dodd Frank, Solvency II and FATCA that will hit the industry, albeit ricocheting from other financial services, and legal professionals become invaluable.

"The broad trend here is that compliance is a much bigger issue for the industry and in fact governance issues in general are becoming more important," highlights Nick Hedley, founding partner of executive search firm Hedley May. "Therefore, more private equity funds are having to bolster their legal and compliance teams."

Since failure to comply will at best incur fines, at worst the revocation of authorisations, a mid-level compliance professional appears to represent an increasingly wise investment for a private equity house. "As a result, we have seen an increasing number of lawyers with 7-10 years' experience being hired by private equity firms to deal with compliance and regulatory issues," says Wilkinson.

A second reason for the contemporary competition for legal professionals could lie in the widening eyes of US investors, whose focus is falling to European markets. "US firms have started to move more strategically into the European markets, firstly because they want to be in Europe but also because they see it as a gateway into Asia," says Simpson. "As a result, fund formation houses are looking for international counsel that can manage US and European elements." Indeed, a number of the recent moves have involved lawyers from Europe-focused practices moving to firms with a wider, international focus.

Industry changes have incurred a shift in industry ethics too. "Lawyers as a whole have become more influential because nowadays the industry has got more complex from a regulatory, investor and reputational standpoint," summarises Hedley. "Thinking back to the historical model, this used to be a fairly unregulated, cloak and dagger sector. And, I suppose, the ethical dimension of investment has also increased. A lot of those issues fall broadly into the remit and concerns of a lawyer," he adds.

Perhaps then, regulatory changes and the shifts they incur make private equity a particularly suitable environment in which the legal professional may excel. The migration of certain in-house lawyers into more corporate roles would support this argument. Tim Pryce is the most notable example, joining Terra Firma as general counsel before becoming CEO in 2009. Buchan Scott of Duke Street began in a legal role, before taking over investor relations and fundraising, while Andrew Sandars of LDC began as head of legal and risk management and is now operations director. Similarly, Guy Semmens joined Argos Soditic in a legal capacity and now heads up the firm's Swiss operations. Examples abound.

Regulatory, ethical and focal changes within private equity appear to grant legal professionals with an increasingly important role. As such they have become a much coveted asset. With the imminent introduction of strict and complex regulation, no doubt those who invested in recent hires will hope for high returns.

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