In a nutshell
Private equity and investment firms operate funds that pool the investments of anybody prepared to part with their money for a sustained period of time. Private equity firms use investors' cash (equity) in combination with money raised from banks (debt) to buy companies or other assets with the goal of selling them on at a profit. When the targeted company's assets are used as leverage and a significant amount of bank debt is employed, the transaction is known as a leveraged buyout (LBO).
Venture capital is a subset of private equity that sees investors put money into startup companies or small businesses in the hope they will be sold to a private equity firm or taken public. Although this typically entails high risk for the investor, it has the potential for above-average returns. This high risk is typically offset by investing smaller amounts over a shorter timespan.
Investment management is the professional management of various securities (shares, bonds etc.) and assets in order to meet specified investment goals. Investment management lawyers advise on the structuring, formation, taxation and regulation of all types of investment funds.
A hedge fund is a private, actively managed investment fund. It aims to provide returns to investors by investing in a diverse range of markets and financial products, regardless of whether markets are rising or falling. Using the derivatives market helps hedge funds achieve this.
A mutual fund is a collective investment vehicle that pools money from many investors to purchase securities. The term is most commonly applied to collective investments that are regulated and sold to the general public.
A real estate investment fund/trust is a publicly traded investment vehicle that uses investors' money to invest in properties and mortgages.
Both hedge funds and mutual funds generally operate as open funds. This means that investors may periodically make additions to, or withdrawals from, their stakes in the fund. An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders. This contrasts with a closed fund, which typically issues all the shares it will issue at the outset, with such shares usually being tradable between investors thereafter.
What lawyers do
- Advise private equity firms on how to structure new funds.
- Help private equity firms negotiate the terms on which investors contribute their money.
- Act for private funds when they buy and sell investments.
- Assist clients throughout the fund-raising process. This includes the preparation of offer materials and partnership agreements, advising on and documenting management and compensation arrangements, and closing fund formation transactions.
- Conduct diligence and negotiate contracts.
- Draft the numerous organisational documents necessary to form an investment fund. The private placement memorandum is key – it's a prospectus detailing the terms of the investment, minimum investor requirements, risk factors, who the investment manager is, and the strategy to be employed by the fund. If the fund is a limited partnership, it will need a limited partnership agreement, and if it's a limited liability company, it will need an operating agreement, as well as an investor subscription agreement.
- Inform and advise clients on the constantly changing regulatory and compliance issues arising under UK and international securities and tax law.
- Provide day-to-day advice with respect to issues such as performance and advertising and brokerage and portfolio trading practices.
Realities of the job
- Small teams mean that trainees can get high levels of responsibility and client exposure rather than being stuck doing more mundane tasks. You can expect to be involved in drafting key documents and reviewing transfer agreements and to play a part in large-scale negotiations that could involve hundreds of parties at the same time.
- Structuring funds requires an intimate familiarity with the relevant securities and investment company rules. Understanding and being able to apply knowledge of key financial legislation is a vital skill.
- Setting up funds also requires a significant amount of tax and general finance industry knowledge. Funds lawyers often work in close collaboration with their tax and finance colleagues.
- Good people skills and a tough attitude are a must. Private equity lawyers work closely with clients to offer advice on a wide range of areas and need to be able to explain the constantly evolving private fund markets to them as well as understanding the time-sensitive nature of fund organisation. Fortunately, clients are entrepreneurial and tend to have a good understanding of the world of business, meaning they can pick up on issues quickly.
- The UK is a lucrative market for private equity; household names are regularly snapped up by private equity firms. In retail, most of the high street has at one time or other been in their hands: Debenhams, Halfords, Pets at Home, to name but a few.
- The first half of 2018 saw an increase in deal volume compared to previous years – 137 were completed, up from 119 in the first half of 2017. Investors' confidence continues to re-bound after the uncertainty of the US presidential election and Brexit. In 2017 the $100 billion Softbank Vision Fund became the largest private equity fund ever raised, and the $24.6 billion Apollo Fund IX became the largest ever buyout fund. Experts reckon there’ll be more records broken over the course of 2018.
- Under-performing companies are attractive to investors who may see an upside in potential efficiency gains.
- Much like the wider M&A market, private equity has been plunged into uncertainty following the UK's vote to leave the EU. Buyers are concerned that any acquisitions may lose value or be forced to operate under different regulations after Britain leaves the EU, while sellers worry their assets are being undervalued due to the nervousness of buyers.
- Private equity investors are paying ever closer attention to emerging markets, like the BRICS (Brazil, Russia, India, China and South Africa), but also countries you might not immediately think of, such as Mexico and Colombia.
- Private equity firms and other commercial organisations are now bidding against public sector providers for public service contracts after recent government austerity measures have led to a move towards privatisation. So far the healthcare and social housing sectors have been the main targets for private equity buyouts. In the past seven years, over 400 NHS contracts worth £2 billion have been awarded to Virgin Care. Private equity firms are also moving in on educational institutions – the University of Law (bought in 2012 and sold three years later by Montagu Private Equity) is a prime example.
- The EU and the Financial Conduct Authority (FCA) have both been making efforts to extend the rules governing banks and investment firms to private equity houses. The FCA has been keen to highlight the benefits of aligning UK policy with that of the European and international norms, so Brexit negotiations in this area may run somewhat smoothly. PRIIPS regulations (which amplify the standards of protection to insurance-based investment products) came into effect in January 2018 and have since come in for some hefty criticism: the FCA claims investment managers have made errors in calculating costs under the rules. The European Commission is due to review the rules at the end of 2018, but the German Investment Funds Association has urged it to begin as soon as possible.