Editor: Please tell our readers about your role in Proskauer’s Corporate Department and Private Equity Practice.
Shilling: I am a partner in the Los Angeles office, where I work in the Corporate Department. I am also co-head of the Private Equity Group.
Editor: One of your unique areas of practice has to do with advising clients on the establishment of business development companies, or BDCs. Please describe what constitutes a BDC.
Shilling: Essentially a regulatory-driven term, a “business development company” is a special kind of closed-end fund that is subject to certain relaxed regulations under the Investment Company Act if it invests in “eligible portfolio companies.”
BDCs tend to trade on stock exchanges (like the Nasdaq and the NYSE) and file 10Qs, 10Ks and 8Ks like any other operating company. BDCs invest the funds provided by their shareholders in eligible portfolio companies that traditionally have had challenges attracting investment. Generally, eligible portfolio companies must be U.S. based and cannot have listed equity in excess of a $250 market capitalization.
BDCs take many forms because they can have different investment objectives. Some behave as publicly traded private equity, others as venture companies and still others as quasi-banks. (One BDC even finances taxicab medallions in New York City.) The ones I work with tend to look like banks; for the most part they provide debt financing. Because BDCs are malleable and because there are so few of them, there is a fair amount of confusion about what they really are. I began working with them in 2004 when I came to Proskauer. My first deal was an initial public offering of a BDC, and I’ve helped them grow the business ever since. I find BDCs very interesting and think they lend themselves to creative structures.
Editor: You represented an Ares Corporate Opportunities Fund in the recent acquisition of 99 Cents Only Stores. Would you tell our readers about the delicate path you had to follow in moving that transaction forward?
Shilling: Ares Corporate Opportunities Fund (or “ACOF” for short) is a private equity fund managed by Ares Management. The lead partner on that transaction, Michael Woronoff, has been my mentor since I started practicing. I handled the equity commitment letters for Ares and its co-bidder, Canadian Pension Plan Investment Board. I was negotiating both with the other side and among the co-partners to determine just how far people were willing to go to close the deal.
Editor: Your practice also includes a much broader area of private equity. Do you find that the size of deals on the West Coast is smaller generally than those found on the East Coast? What accounts for this disparity?
Shilling: The average size of deals generally does tend to be smaller because there are less of the “megadeals” here. The West Coast market is very middle-market-focused, possibly because people feel the need for someone to be physically in New York when they do the multibillion dollar deals. This has actually turned out to be a strength for us, because when the downturn occurred and the megadeals fell off the table, those of us historically in the middle-market space didn’t feel it to the same extent that those in the larger deal space did. That said, we do our share of multibillion dollar deals.
Editor: What institutional investors do you rely on to finance your private placements, LBOs and other going-private transactions? Do you still rely on insurance companies?
Shilling: While I do not work with insurance companies often, I have been involved in amending some old insurance company debt, which can be very difficult because you have to get a lot of people with very different points of view on the same page.
I generally work on deals whose size is between $100 million and the low $2 billions. One of my clients, Ares Capital Corporation, does a lot of acquisition financing for sponsors. It’s been a good time for alternative financing providers. With banks being less likely to invest than in years past, more and more alternative providers are filling that need.
Editor: Are you finding that banks are trying to unload parts of their portfolios that BDCs might be interested in?
Shilling: That may happen. The BDCs I represent tend to be originators and don’t often buy other people’s debt. However, other BDCs have done so; certainly, they did at the beginning of the credit crisis. At that time, private equity funds were also buying distressed debt from banks because of the returns available. I haven’t seen that as much lately, which makes me feel better about the economy.
Editor: Do you see institutions on the West Coast starting to make more investments than were made last year?
Shilling: Yes, my sense is that M&A activity has ramped up slightly from last year. We’ve been very fortunate -- we have highly creative clients who, during the downturn, may not have been doing as many traditional private equity investments but were still investing, just in different ways. I would say, too, that the more traditional deals – such as taking a company over as a strategic acquisition, running it for a few years and then looking for an exit – have increased over the last 12 to 18 months.
Editor: In working with private equity funds, what services do you normally provide? Do you follow deals from start to finish?
Shilling: I work from start to finish, and Proskauer can provide the full gamut of services. I came to Proskauer around the time that a group of attorneys went to Proskauer’s newly opened Boston office – a very well-known, very advanced fund formation group. Sometimes we work from the very formation of the private equity fund to giving assistance with its M&A work and then to the IPO or M&A disposition – at which point our clients might also bring in a partner or do a strategic acquisition to enhance the value of the portfolio company.
One of the benefits of being a West Coast lawyer is that I don’t specialize as narrowly as I would in New York because the departments here simply aren’t as large. From my senior point of view, I’ve found that having a strong capital markets and M&A background has helped me greatly in terms of servicing my clients because I can see the big picture. If they’re doing a dual track M&A IPO exit, I can run the whole project.
Editor: Define “dual track IPO exit.”
Shilling: A dual track exit is when a party simultaneously files a registration statement for an initial public offering and pursues a private auction process. In a healthy capital market and M&A environment, you’ll see a lot of dual tracks – as we did nine months to a year ago. At the moment, the market is too volatile for most dual tracks.
Editor: What exit vehicles are you seeing private investors using in today’s environment?
Shilling: IPOs are still occurring in the healthcare, tech and some financial services sectors, but elsewhere I see M&A deals, or control partners being brought in. In some cases, people are just grooming the company and waiting for the market to open back up.
Editor: Do you see other private equity funds buying up property?
Shilling: Sometimes. This year, I’ve been focusing on real estate, where there seems to be a significant uptick in interest. I’ve been helping people acquire real estate investment management companies or the assets and the personnel from those companies. I have a REIT IPO on file as well. I get the sense that as information becomes more and more readily available, markets have compressed. It seems to me that we may be seeing very rapid financial cycles, and being a lawyer, I have to be able to react quickly on behalf of my clients.
Editor: There has been interest on the part of FCPA regulators in looking into private equity firms. Have you experienced any greater regulatory impact on any of your private company deals?
Shilling: In the last few years I haven’t done many cross-border deals, so I don’t see FCPA as often. That said, I have seen most of my private equity clients going back through their FCPA policies and making sure their compliance and anti-fraud programs are robust. I have not seen more regulators per se, however.
Editor: How do you see the future for private equity on the West Coast?
Shilling: I see it very positively. The legal market on the West Coast is such that there are few of us who do this work, so a few deals can change market share dramatically, which was our thesis when we came to Proskauer to build the transactional department on the West Coast. Since then, we’ve been able to break into the top ten private equity/M&A transactional representation in Southern California and have built a very talented group of associates. We have wonderful PE fund clients who are doing extremely interesting deals and who have inventive and loyal investment professionals. It has been a joy in my practice to partner in meaningful ways with the different PE funds and help them achieve their goals.