Editor: How did you get involved in representing private equity clients?
French: I began my career in 1990 as a general M&A transactional lawyer. In 1993, I joined the oldest firm in Boston at the time, Hutchins, Wheeler & Dittmar. It was a middle-market firm ahead of its time. It was already focusing on the legal aspects of private equity as a separate asset class and had a stable of private equity clients such as Thomas H. Lee Partners, Summit Partners and Berkshire Partners, some of which relationships started back in the '70s. As our private equity clients began to evolve – bigger funds, more complex deals, teaming with other private equity firms, cross-border transactions – the private equity practice group at Hutchins knew we needed to evolve with them. By opening Weil’s Boston office in 2012, we were able to offer our clients a global platform with sophisticated practice groups, such as financing and tax, which are critical to private equity practice.
Editor: Please describe the private equity practice in Weil’s Boston office.
French: Since our office opening in 2002, private equity has continued to flourish over the last decade and has turned into one of the most significant drivers of deal activity. Prior to the credit crash, PE represented about 20 percent of all M&A activity globally. The Boston office’s historical relationships and early entry into the industry gave us an advantage in understanding this growing industry, and we’ve been able to parlay that expertise into continually attracting new private equity clients, both locally and nationally, as well as continuing our relationships with clients that we’ve known for decades.
Editor: What trends are you currently seeing in PE?
French: 2013 has been a volatile year. The first half of the year was a slow period in deal-making, but we’ve seen a significant uptick in the second half in both deal activity and the pipeline.
Generally, it is a sellers’ market. Prices as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) remain high. We’ve seen deals done this year at double-digit multiples of EBITDA. We attribute that to a few factors. There is a significant amount of cash and more parties chasing deals. There was a lull in deal activity after the credit crunch, and PE firms have built up capital commitments that they want to put to work. Corporate buyers are also sitting on a lot of cash. We also continue to see pension funds making more direct investments and being very competitive in auction situations. While PE firms are still joining forces, we have not seen the large club deals among PE sponsors that we saw with more frequency prior to the credit crunch when “mega” deals were being closed regularly.
The debt markets have been extremely robust this year as well. In 2013 banks have been willing to lend at higher leverage multiples, and we’ve had consistently low rates and less restrictive covenants. We have seen a number of foreign deals this year that have taken advantage of our attractive credit markets and have been funded using U.S. debt.
We also have seen an uptick in activity in Latin America. It's an area that’s fertile for PE firms generally. While we have seen both infrastructure and energy sector deals, we’ve also seen telecommunications and retail deals. It’s been active across the board. In the Boston office alone, we’ve done half a dozen deals in Latin America this year.
On the legal front, we’ve seen an increase in the number of deals taking advantage of representation and warranty insurance. In a sellers’ market, one way that a bidder can distinguish itself is to agree that the seller has no or low post-closing indemnity liability if there is a breach of a representation or warranty. This insurance product has actually been around for some time – I recall inviting insurers to present to the law firm back in the '90s, but it didn’t seem to gain much traction. Buyers were nervous about an untested claims and payment history. Pricing of the policies was not attractive either. Now that there has been some history and pricing has become more acceptable, we’ve seen a number of buyers going this route.
Editor: Are there specialists in the insurance industry that sell this kind of insurance?
French: There are many carriers, and we work with the brokers and insurers to obtain competitive quotes and to negotiate the terms and limits of the policy. We have a dedicated team at Weil that works regularly with this insurance product and consults with the client and deal team to obtain an appropriate policy.
Editor: In your opinion, what is the most important development in PE over the past several years?
French: Over the last decade, one of the most important developments has focused on PE sponsor liability. Even though our clients obviously depend on debt financing in order to fund and consummate a deal, we’ve seen the elimination of debt financing contingencies as closing conditions. A highly developed and complex legal framework has evolved that holds sponsor funds directly liable for a set negotiated amount in the event the buyer is unable to close because the debt financing is unavailable.
Editor: What debt sources are you seeing most prominently now? Are you seeing more junior debt players taking on an equity role?
French: For our clients, the large banks such as Bank of America, Goldman Sachs, Barclays and J.P. Morgan Chase remain the primary source of funds. Hedge funds are active in the institutional term loan B market. Subordinated debt often comes from the private equity funds themselves, with some PE players having dedicated debt funds, while others do not.
Editor: How strict are the covenants in these deals?
French: The covenants have gone back to being much more flexible with a return to covenant-light deals. However, some bank regulators have indicated that they will be taking a hard look at loans with flexible terms.
Editor: So the banks are really loosening their formerly tight standards?
French: Exactly. The last time we spoke with you in early 2010, debt financing was difficult to obtain. Instead, players in the PE industry had to be really creative to finance a deal, relying on either seller financing or doing smaller deals financed with all equity.
Editor: What have you seen as a debt to equity ratio?
French: It varies, but we’ve been seeing it inch up. We’ve seen it at five times or higher.
Editor: In your Boston office, are you seeing more deals being done by financial buyers or by strategic buyers?
French: We’ve seen a good mix in 2013. In the first half of the year when we were not seeing a large volume of new PE deals, a number of corporate clients were busy doing add-on acquisitions. We also saw a number of deals in the $100-$400 million range. Finally, there was a high volume of corporates taking advantage of the attractive credit markets and doing refinancings.
Editor: What other areas of practice are you involved in?
French: I spend the vast majority of my practice executing deals, whether those are buyouts or minority investments, representing both PE sponsors and corporate clients. The rest of my practice focuses on counseling companies on a day-to-day basis with anything and everything that comes up in their corporate life cycle. I rely on the broad network of Weil attorneys, both geographically and practice-wise, to render the specific advice that a client needs, whether it be employment related, tax, litigation or otherwise.