Craig's Corner For Counsel: Private Equity

Sunday, February 1, 2009 - 01:00

This month, The Metropolitan Corporate Counsel focuses on private equity in today's economic climate and its impact on the role of in-house corporate counsel. I recently spoke to Aaron Rachelson, an attorney at Horwood Marcus & Berk in Chicago and author of Corporate Acquisitions, Mergers, and Divestitures , published by West. Rachelson concentrates his practice in general corporate and business matters including mergers and acquisitions, debt and equity financing, and employment arrangements

"A lot of what's going on now with private equity reminds me of the dot com bubble [except] banks are a little more gun shy right now compared to then," says Rachelson. "My expectation is that good deals will still get done. If you have a good company with good fundamentals, it makes sense for a rational investor to invest if they can get the funding from both private equity and from banks."

Still, he cautions, "With the sort of earthquake that has occurred with the credit markets, investors do not know how to price the deals that they want to do. Once the investor finds a bank willing to do the deal, he must determine what the bank wants to see first, such as a reasonable debt to equity ratio."

Because of the uncertainty with private equity, the investor cannot rely on previously established guidelines or benchmarks.

The other issue, Rachelson believes, is the reductions in the stock market and the reaction to those reductions. From an equity perspective, companies might be less likely to contribute to hedge funds. Rachelson explains, "I don't think this is the best time to be looking for private equity money but it is the right time to set yourself up so that when the markets get better you will be in prime shape." He also states that companies need to focus on their cash on hand and be in good shape to accept money when private equity funds come calling with more to invest.

Rachelson agrees with the school of thought among corporate counsel that private equity is a major liquidation event where "owners and operators can diversify their holdings, receive some substantial cash and still run their business. This is not a situation in which you look with hostility at these private equity funds. For owners who want to have a liquidation event, it is a great option. It can happen to any company. Corporate counsel needs to be prepared."

If your company is considering accepting funds, corporate counsel must know the private equity group intimately. Rachelson warns, "There's going to be a lot of due diligence that the private equity group will request from the company. In my experience, however, companies don't do enough of their own due diligence. Corporate counsel must examine the track record and the history of the private equity firm."Rachelson says that the company is essentially accepting a new partner and, potentially, a new boss. It is important for the company to know exactly who it is dealing with at the time of the transaction.

"When times are good, they're going to have no trouble with the private equity company," says Rachelson. "But the question is, when times are bad, what is the private equity group going to do? Is their history to come in and scold management for having a bad quarter, tell them the sky is falling and that the private equity group needs to take over? Or, is it to say we understand you had a bad quarter, and let's work together to make it better."

Overall, Rachelson is optimistic for a turnaround for private equity. "It's a tough time for a lot of private equity funds right now but my expectation is that sometime in the second quarter the credit markets will move because there are enough bankers and people out there whose job is to lend money so they will lend, uncertainty will be reduced and there will be some deals."

Aaron Rachelson's book , Corporate Acquisitions, Mergers, and Divestitures , is available on the West Web site at He can be reached at Horwood Marcus & Berk at (312) 606-3249 or

For additional insight on private equity, the following Westlaw databases also are available:


For additional insight on private equity, the following Westlaw databases also are available:

Corporate Acquisitions, Mergers and Divestitures (CAMD)

Model Documents: Private Equity (MODELDOC-EQU)

BNA TM US Income Portfolios: Private Equity Funds (TMFEDPORT-735)

Journal of Private Equity (JPRIVEQ)

Private Equity Week (PRIVEQUITY)

BNA Corporate Practice Portfolios: Corporate Stock Repurchases and Going Private (BNACPS-SRE)

US Securities Law for International Financial Transactions and Capital Markets, Second Edition (SECINTFTCM)

Blue Sky Practice for Public and Private Direct Participation Offerings (BSP)

United Kingdom Current Awareness Private Client (UKCA-PVT)

Legal Due Diligence Reports: Public and Private Companies (GSI-DDR-ALL)