A legal overview of the Private Equity market



Posted | Matthew Simmons

Posted | Matthew Simmons

detailed look at the Private Equity market from 2018-2020 

There is no doubt that Private Equity remains extremely busy. 2018-20 saw buyout activity in Europe returning to levels not seen since the crash - there were 1,458 buyouts in the European market with a combined value of $195.5 billion. This was significantly bolstered by the pronounced rise in take-private buyouts over the last several years, which in 2018 reached its highest annual value and join-highest volume since the crash $26 billion recorded across 26 deals (13.3% of the year’s buyout value).

With more than $1 trillion in dry powder, PE groups have enjoyed substantial fundraising success over the last few years. In 2018-20, it was the larger firms that dominated, with several huge funds coming to market. In Europe, PAI Partners did a €5 billion raise, Triton Partners targeted €3 billion for its fifth flagship fund, while Inflexion Private Equity Partners LLP, secured £1.25 billion for the Inflexion Buyout Fund V.

Investing in funds managed by large PE houses can be incur large costs in the form of management or performance fees. In 2015, CalPERS (California Public Employee’s Retirement System) which is America’s biggest pension fund, revealed that since 1990 it had paid $3.4 billion in performance fees. Increasingly we have seen, and continue to see, pension funds develop their own direct investing capabilities. This has been driven in large part by the Canadian funds, OMERS’ PE arm leading the way with an $11 billion portfolio of companies. 


Over the last decade as the amount of legislation and regulation governing financial services has increased. Private Equity is no exception, with oversight from the FCA, regulation such as AIFMD and SMCR and changes to the tax environment all having an impact in their own way.


It is no surprise therefore, when one considers the combination of market activity and regulation, that there is increased need for legal support – both in-house and from a law firm perspective.

Such is the importance of the PE market that several US firms have opened their war chests to attract top talent, one such notable deal being the 2018 move of David Higgins from Freshfields to Kirkland & Ellis for a considerable sum. We expect this to continue moving into 2020 and beyond.


When looking at just European Buyouts by value, Clifford Chance topped the 2018 advisory league tables (having been only 3rd in 2017), followed by Freshfields and K&E. Kirkland & Ellis has taken the top spot for high value deals in rankings from 2020. When one factors in Exits as well, the Magic Circle reigns led by Freshfields, Linklaters and Clifford Chance. The most active firms by deal count within Buyouts were DLA Piper, Kirkland & Ellis and Latham & Watkins.


Typically, there are two different approaches when it comes to structuring and utilising in-house legal teams within Private Equity houses. Some houses will have a reasonably sized team and bring much of the work in-house.


Others prefer just a General Counsel and send most of the work, particularly the transactional work, to external counsel. Much of the focus of the team in that scenario would be around risk, reputational and investor relations rather than the heavy-lifting aspects of deal execution. As PE houses are generally not delineated and run lean teams, in-house counsel often deal with a variety of legal and governance issues as it is. 


Although some PE in-house teams are growing they remain, as mentioned, much leaner than most corporates. This is for a number of reasons. Firstly, it is the Fund rather than the PE house itself which pay the legal fees. Secondly, there is the ebb and flow of deal making to consider. During periods of low deal making, having an overly-resourced legal team with little to do may impact the overall performance of the fund paying out unnecessary fees.


One trend within PE that has seen structural change, has been the movement towards multi-asset investment approaches and more multi-line PE businesses. A business like 3i, for example, has navigated this by having a head of legal and specific lawyers who focus on different product lines or internal issues. The entire legal function is overseen and co-ordinated by the GC.


In summary, these are the key messages one can take away from a brief look at the PE market:

  1. The PE market is buoyant in terms of deals done and funds raised.
  2. Consolidation in the market – giant firms are raising ever bigger funds and often going ‘multi strategy’.
  3. Increasingly, big sovereign wealth and pension funds who traditionally invested through PE firms are now building out their own direct investing capability – particularly prevalent amongst the Canadian pension funds.
  4. There has been significant hiring at a senior level in law firms, mainly by US firms looking to challenge the traditional dominance of the Magic Circle. There has been less activity at the Senior End in-house.
  5. More regulation means a further need for infrastructure and expertise on the legal side in-house

Only a month on after leaving the EU, there is a reasonable uncertainty for the private equity market, however as the recovery from Covid 19 begins in ernest there will be some good deals to do across the Private Equity sector.

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