Editor: Please tell our readers about the nature of your practice.
French: My practice primarily focuses on M&A and private equity, which covers a broad spectrum of transactions. I regularly represent sellers of businesses, either in proprietary deals or through auctions. I also represent buyers, either corporations or private equity funds, in their purchases of both private and public companies (going-private transactions). Additionally, I work in conjunction with our capital markets specialists in New York to help companies access the public markets, either through IPO's or secondary sales.
Editor: What are the major practice areas in your Boston office?
French: The Boston office has two main practice areas. The first is corporate, which, like my practice, is primarily transactional-based, involving M&A, private equity and hedge funds. We also have a private equity fund formation group. In addition, over the past couple years, our corporate group has become more involved in distressed sale situations, and we work closely with our restructuring group in New York in this area. Finally, our corporate attorneys also provide general corporate counseling. For example, we represent boards of companies or special committees in their consideration of a transaction. Our second principle practice group is litigation, in which we have a broad-based civil practice, including commercial and securities matters and a white collar criminal practice.
Editor: Would you describe some of the major transactions in which you have been involved?
French: Prior to the credit crunch, traditional leveraged buyouts were being done at a fast pace and that was the focus of my practice in the early and mid decade. However, over the last couple years, it has been a difficult environment for M&A and private equity. Reports indicate that the level of activity has declined by 60 to 70 percent. While there were not too many deals, I was fortunate to participate in a few that actually closed.
For example, we worked with Advent International, a private equity client headquartered here in Boston, in connection with a joint venture with Fifth Third Bank in a deal valued at over $2 billion. Signed in early 2009, it was representative of deals done in the first half of 2009 because it involved no third-party debt financing, but rather the seller financed a large portion of the transaction. The seller also retained a significant portion of the equity, and we used some creative ways to bridge valuation gaps. It was a great transaction with which to be involved because it really was one of the first where private equity funds started getting back into the market and doing new deals.
Later in 2009, we closed a going-private transaction with Advent when they acquired the publicly traded clothing retailer, Charlotte Russe. Again, this transaction involved no third-party bank financing but was fully funded by Advent. The deal was structured as a tender offer, which sellers like because the deals can be done quickly and, therefore, with more certainty of closing. However, because debt financing is more difficult in such a structure, historically private equity funds have not utilized the tender. Because many of the private equity deals done in 2009 were funded 100 percent with equity, the tender offer became much more popular.
Editor: Has the credit picture thawed since we last spoke with your office a year ago? Who are the lenders? What is the level of their funding today?
French: We definitely are seeing it starting to thaw. A year ago, we didn't see much in the pipeline. Most of our financing work in 2008, continuing into 2009, was focused on refinancings and restructurings. Companies were looking to extend their debt maturities and deal with any existing covenant defaults. Banks were concerned with their own balance sheets and issues, and no one knew where the bottom would be. The deals our private equity clients were looking at were smaller deals that would be 100 percent equity financed. But over the fourth quarter of 2009 and into 2010, we have seen that changing. We closed a few deals at the end of 2009 that used debt financing, and our clients are looking at deals now that are larger and will rely on third-party financing. There is a sense of cautious optimism that it will be there.
Editor: Is the debt financing coming from the banks, insurance companies or venture capital companies? French: For our clients, it is the banks. Most of the historic players are still there, such as Bank of America, Goldman, JP Morgan Chase, and Deutsche Bank, and they are showing interest.
Editor: They are the mega banks? They are not the small regional banks.
French: Right. For the most part, these are the banks our clients deal with in the mid-market and large LBO private equity arena. However, the terms of the financing have certainly changed. Before the credit crunch, we regularly saw PIK toggle loans (where the borrower can defer paying cash interest) and "covenant lite" deals, where covenants were few, more like a public bond deal. But we don't see those terms anymore. And the leverage has changed. Before 2008, we saw leverage ratios of 30 percent equity and 70 percent debt. Now the amount of equity is increasing to ranges of 40 to 50 percent.
Editor: Do you have any financing transactions currently on which you are working?
French: In Boston, we are looking at potential new debt financings for acquisitions by our private equity clients. We don't have a financing team based in Boston, so we work closely with our financing groups in New York, Dallas and London.
Editor: Why has the Boston area been such a center of capital market activity over the years - whether LBO's, venture capital or private equity? What role do the banks in Boston play today?
French: I think Boston became a prime center for venture capital due to the abundance of technology companies located here, and we have some of the best business schools in the world in Harvard and MIT. And it is a great city, so the talent wanted to stay here and put their financial skills to work. Private equity funds were a natural outgrowth of venture capital. While some of the skills are different, many are the same. Funds raised more money and started focusing on more established companies.
Editor: Were the banks also of a mind to look at new areas of risk not quite as conservative and willing to get into these deals?
French: Certainly. The fact that private equity professionals sophisticated in complex financial arrangements are willing to invest their money behind the banks' money in the capital structure makes the risk analysis more attractive.
Editor: What issues are confronting the New England business community in general? What can law firms do to help their clients?
French: In New England, as well as the rest of the country, people are focused on cutting costs and managing their balance sheets. Also, it is a challenging time to find capital to fund growth.
Law firms can help companies find sources of capital, whether accessing the public markets, raising funds from private investors, obtaining debt financing or selling selected assets. In difficult times, we can advise companies in connection with restructurings, whether operational or balance-sheet focused.
Editor: What measures is the firm taking to respond to in-house counsel's demand for cost control?
French: We are very mindful of the cost pressures on our clients. Communication is key. We work closely with our clients, trying to give accurate estimates up front of what a project is going to cost and keeping them updated frequently. We try to manage expectations and advise them immediately if something unexpectedly happens that likely will result in additional costs. We are focused on the appropriate staffing for a matter, taking into account each client's particular objectives. Finally, in appropriate circumstances we can consider alternative billing arrangements, such as fixed fees for a project rather than fees based solely on hours.
Editor: What measures for financial reform coming out of Washington should have the most salutary effect on your practice?
French: Generally, we would like to see some resolution. There have been lots of proposals regarding different regulatory schemes for the financial industry. It is difficult to plan when there is so much uncertainty. More specifically, proposals that private fund managers register as investment advisors would affect our client base.
Editor: Which I think is very likely to pass.
French: Yes, we think so too. We have hired a partner specializing in, among other things, investment advisor regulations in order to help us with greater client demand in this area.