Editor: Please tell our readers about the focus of your practice.
Thompson: I am co-chair of King & Spalding's private equity practice and in charge of our international private equity practice, which covers Europe, the Middle East, Africa, Russia and the CIS countries. Most of my deals are for clients from the Middle East or the U.S. seeking investment in Europe. We also do a fair amount of investing in emerging markets as well.
Editor: King & Spalding has quite a presence in the Middle East - probably more than almost any U.S. firm.
Thompson: We are one of the largest U.S. firms in the Middle East. We have offices in Dubai, our largest office, Abu Dhabi and Riyadh. I visit the Dubai office about every six weeks, which is a good base for meeting with clients in the region as well as getting deals done both inside and outside the region.
Editor: In the current economic crisis where are your efforts being focused?
Thompson: Everyone is struggling with that question right now. Given the current situation, the number of deals is depressed. Buyers are on the sidelines looking to see where the credit markets will go. Sellers don't want to sell right now because prices are so uncertain. We are staying close to our clients, both the private equity funds and the corporate strategic clients, and basically working with them to see what their priorities are going to be in the next 12 to 18 months. In the Middle East we are in touch with many of the banks and funds to see where they want to invest. They are struggling because oil prices have fallen - they're not as flush with cash as they were eight to 12 months ago - although there is still a tremendous amount of cash in the region. From a European perspective, we are also focusing on a number of our U.S. clients - the dollar-denominated strategic buyers and private equity funds. Particularly for strategic clients and other investors who don't need to finance acquisitions, the dollar's rise in value creates buying opportunities in Europe. In a broad sense we are focusing on dollar-denominated clients who are less reliant on debt, that is, U.S. corporations and Middle Eastern capital.
Editor: What about sovereign funds? Are you working with them at all?
Thompson: Yes. Middle Eastern capital includes sovereign funds. We do work with some of the funds in Dubai as well as Abu Dhabi and others. Sovereign funds are major players in the Middle East - for example, ADIA (the Abu Dhabi investment authority), ADIC (Abu Dahbi Investment Company) or Mubadala (an investment vehicle of the Abu Dhabi government). Sovereign funds invest their capital directly, as well as through other regional and international private equity funds and banks. There have been indications from many Middle Eastern funds - including some sovereign investors - that they may focus their investments more strictly within the GCC region in this time of crisis, and we believe our offices there are well-positioned to help them do that. One concern with this approach is that there is a lot of money but not a lot of deals, particularly not a lot of good deals. There is not as much of a culture of selling businesses in the Middle East as in the U.S. and Europe.
Editor: The UK has followed on a path similar to that of the U.S. in terms of government intervention in the financial system. Would you say that Gordon Brown's move to inject money into the banks at the onset of the crisis was the correct remedy at the time?
Thompson: As a general rule, we needed the government, whether the U.S. or the UK, to inject cash into the banks. I think it was absolutely imperative that the government try to unlock the credit markets, which had clearly seized up. In the end, as taxpayers, we need to look at these infusions of cash as investments, because the way the U.S. and the UK governments injected the funds into the banks will hopefully ultimately pay off when these investments are liquidated.
Editor: Much has been said about the number of regulatory agencies in the U.S. that often overlap in their jurisdictions. Great Britain has one principal regulator, the FSA. Would you suggest that the U.S. follow this pattern in the future to simplify and add transparency to our regulatory system?
Thompson: I'm generally a fan of the U.S. regulatory system. While it is not perfect, and as this crisis has shown needs to be updated and improved to keep pace with the ever changing global financial system, as a general rule, it does a good job at regulating the securities and financial sector. I would not hold out the UK system as being superior to the U.S. system. In this particular crisis, the UK regulatory system, while taking a somewhat different approach from the US, did not stop the English banks from buying collateralized mortgages.
The U.S system is relatively transparent. There are a number of different regulatory agencies, but it's generally clear where and what the rules are. One thing in particular I like about the U.S. system is that the laws are rules-based in that when you read the laws, you know more or less what they mean and how to navigate them. By comparison, many UK rules often are more principles-based, so it can be harder to work within the rules creatively.
Editor: You have been active in private equity as well as other corporate finance practices. What is the current state of private equity in the UK and Europe generally? Are any of the sovereign wealth funds performing the function that the banks formerly did in supplying financing for leveraged investments?
Thompson: Without question, at this time, private equity in the UK and in Europe is slow. The credit markets are depressed, and it is very difficult to get financing. If we were having this discussion this time last year, we would be discussing the fact that the mega-deals aren't there any more but that the mid-market is still moving along. Starting in late summer the mid-market seized up as well. As for private equity funds, it does not make sense for them to do deals without leverage since they cannot get the kinds of returns they need. Similarly, on the equity side, we are hearing that the limited partners are putting pressure on their fund managers not to do deals in order to avoid capital calls.The funds in the Middle East that don't rely on debt are quieter now as well. Primarily, they don't see the returns in the current climate and do not want to commit new capital before the bottom of the market.
Some of the U.S. private equity funds are thinking of creating their own debt funds to help finance their own deals. That may be a way to break through this credit morass. A sovereign fund could effectively do the same thing if it so chose. If you talk to most professionals in the private equity and M&A fields, whether they are lawyers, investment bankers or commercial bankers, most will say that the best use of their time right now is to stay close to their clients and be prepared when and if the economy breaks. Since our economy relies on debt capital, at some point the debt markets will come back . Perhaps it won't be the private equity heyday we saw over the last couple of years - I think that's unlikely - but there's just too much cash sitting idle for the competitive marketplace not to return.
Editor: Your practice also included investments by Middle Eastern interests in the UK and Western Europe as well as American and European investors in the Middle East. What has happened to that practice today?
Thompson: These clients are to a large extent taking a wait-and-see attitude. We are seeing some activity on the part of European and U.S. funds investing in the Middle East. Our offices there continue to be busy, but, not surprisingly, at a slower pace from the crazy markets of last year.
Editor: Since the larger investment banks in the UK have been swallowed by the commercial banks (such as Barclay's), has this been an impediment to getting transactions done?
Thompson: We haven't seen the combining of commercial and investment banks as an issue at this point. It's hard to say if that will have a detrimental effect, partly because the M&A markets have seized up and it is hard to tell what the long term impact will be.
Editor: What do you see as the future for corporate finance activity in view of the Northern Rock, Woolworth and other business failures?
Thompson: It's going to be rocky for the next year or so. In the long run, you're still going to need the credit markets. There is no substitute for bank financing, and even securitizations will continue. The credit markets are going to come back; even collateralized mortgages will come back in one form or another, but the market will be more heavily regulated. For some time you may not have quite so much debt in the economy at the individual company or personal level, which may ultimately be a good thing.
Editor: What is the favored exit vehicle today for venture and private equity?
Thompson: Right now it is extraordinarily difficult to do a public offering, so to the extent that a company needs an exit, the sale route is really the only way to go. That being said, because banks are reluctant to finance, multiples are going down.A sale to a strategic buyer, who can pay cash or draw down a credit line, is the likely exit alternative for a middle-market company. In addition, we work with some Middle Eastern funds that do deals without financing, that could be a good exit alternative. Another type of arrangement we expect to see more of next year while credit remains difficult are late-round venture or minority investments. In these, funds come in and buy a sizeable piece of equity, where once debt would have been the source. Investors can gain board seats and some control rights, which allows the buyer over a year or two to decide, for example, whether to buy the company or force a sale.
Editor: What advantages does your London office offer the firm's clients looking to make acquisitions or seek merger partners?
Thompson: The real advantage we offer is that we specialize in cross-border transactions, in particular, U.S. and Middle Eastern companies buying in the UK, Europe and emerging markets, and the converse - companies going into the Middle East or the U.S. We are very familiar with U.S. and Middle Eastern expectations and can help our clients understand what to expect going into a deal. Not surprisingly, cultural differences often ultimately create the biggest difficulties. There are hundreds of law firms in London, but we differentiate ourselves by focusing on these types of transactions and we use this experience to make our clients comfortable doing these types of deals.