Editor: Would each of you gentlemen tell our readers something about your professional background?
Fryer: I am a senior partner at King & Spalding and coordinate the firm's real estate and capital markets practice groups. My own area of practice is real estate with a decided equity and corporate bent that would include public mergers and acquisitions, rollups, large portfolio and building acquisitions and funds formation.
Culhane:I am a partner in the private equity and investment funds group of King & Spalding. For the last 12 years, I have focused on private investment funds, which comprise private equity funds, real estate funds and hedge funds. In my capacity as a private funds lawyer, I support the real estate practice as well as other groups within the firm.
Editor: How did each of you come to King & Spalding?
Fryer: I came straight from law school over 30 years ago at a time when the firm was less than 10 percent of its size today. Needless to say, I have seen a great deal of change in the firm.
Culhane: I joined a year ago. King & Spalding was a firm with an established reputation and a growing presence in New York. The firm's vibrant and growing funds practice and talented teams of lawyers across many legal disciplines represented a very attractive platform for me.
Editor: Would you tell us about your respective practices? How have they evolved over the years?
Fryer: The evolution of my practice has been one that is reflective of what has occurred in the real estate industry generally. It has gone from beingproject driven to being enterprise and capital oriented. That is, it reflects two fundamental trends: consolidation and globalization.
Culhane: There has been enormous growth in the private funds industry over the course of my career. There has also been a trend towards greater institutionalization of the industry and greater convergence among the types and investment of private investment funds. I had the privilege of working with many leading hedge fund and private equity managers, who have now spun out into new groups and contributed to this tremendous growth in the industry.
Editor: When the economy is booming - or at least some important segment of it, like technology or IP - what kinds of projects do you find yourselves handling? And then when the bubble bursts?
Fryer: Having been through four or five recessions, I can say that a bubble bursting is not a good thing. In general, in an up market we feed off transactional activity. There is currently a considerable amount of core money portfolio balancing gravitating to real estate. In a down market, there is a combination of workouts and opportunistic capital formation, but the overall volume of work is diminished.
Culhane: I see similar rotational trends. During good times, capital formation, private equity and real estate are very active. In the down times, there is a movement towards distressed investment funds and hedge funds. Irrespective of the state of the economy, then, there is always one group or another raising and investing money.
Editor: Real estate is cyclical in nature as well. We appear to be in a rising real estate market just now. What are the implications for your practice?
Fryer: It has been in an up cycle, and the principal reason is the unprecedented amount of liquidity in the marketplace. As long as that liquidity exists, it sustains a remarkable level of transactional volume. Certainly, our real estate industry practice has benefited from this level of activity.
Editor: Mr. Fryer, one of your responsibilities is to coordinate the firm's real estate and capital markets practice groups. Would you tell us about this aspect of your work?
Fryer: When we refer to capital markets, we mean our corporate practice. The capital markets group includes the three legs of a traditional corporate practice: mergers and acquisitions, corporate finance and private equity. The real estate industry is such a voracious consumer of capital, and creates such a tremendous transactional volume, that it cuts across all of our transactional practice areas, and it is natural for me to play a key role in promoting and growing our corporate practice, the focus of which is in New York and London, with particular reference to the private equity area. This is a wonderful source of highly desirable, and active, clients.
Editor: Who are the clients here? Institutional investors? High net worth individuals?
Fryer: They include the traditional real estate investment managers, the Morgan Stanleys of the world, opportunity fund sponsors like Apollo, and, to a degree, the REITS. There are non-U.S. investors as well, and on the investment side, large tax exempt organizations, corporate pension funds and investment companies.
Editor: Would you tell us about your efforts with respect to funds formation and project developments relating to real estate securitization? Is this a recent development?
Fryer: We had a great run over the last ten years in this country, as both the equity and debt markets have securitized. We have seen the REIT industry grow to become a component of the S&P. We will continue to see new names that come forward as public companies in the U.S. However, there are three inhibitors to substantial growth for real estate companies in the public market in the U.S. at present: private company valuations are high compared to public company valuations; the private market is awash withliquidity, and thus there is little incentive to go public; and Sarbanes-Oxley has meant higher costs and a higher degree of exposure to risk for public companies. For real estate, the growth of the public market is primarily going to be outside the U.S.
Editor: Mr. Culhane, you had an extremely interesting few years with Goldman Sachs, which, I am sure, informs your private investment fund formation practice. Would you tell us about some of the recent developments in this area?
Culhane: There are a number of things to highlight. In the private equity arena, there has been an increase in the number of funds coming to market after a couple of years of relative lethargy. The regulatory regime has become more intense, and changes in the tax code and the statutes governing investment advisors and investment companies reflect increasing government scrutiny and oversight of the private funds industry. At the same time, domestic funds are seeing a greater number of non-U.S. investors, and the industry is becoming more global than it was a few years ago, driving more standardization of the terms governing these funds.
Editor: In a world which has not seen much investment stability in recent years, what kinds of investment instruments are popular? What does this mean for a practice like yours?
Fryer: There are two types of vehicle that come to mind. One is institutional. The other is a retail product that is symptomatic of a change in the psyche of investors. On the institutional side, we have the phenomenon of the open-ended fund that is non-public and accommodates a variety of different investors, not merely tax exempt organizations. This permits big investors to come in and out of the fund on a quarterly basis. On the retail side, the private REIT format has been successful in raising large amounts of money, and we think that we will see large financial institutions beginning to sponsor such vehicles.
With respect to our practice, these instruments are very complicated and, where the investor is either non-U.S. or a tax-exempt organization, require a great deal of work. We have been, and anticipate continuing to be, extremely busy.
Editor: Please tell us about the resources - the expertise and the personnel - that you are able to bring to bear in serving the firm's clients.
Culhane: With more than 800 lawyers in offices around the world, King & Spalding is a major international law firm at this point. For the fund formation and the real estate practices generally, we draw upon the expertise of a great many practice areas in addition to our own. One of the benefits of the fund business is the opportunity to collaborate with so many different disciplines and practice areas; happily, King & Spalding has a deep bench in each of the relevant practice areas.
Fryer: I would add that in the transaction business, a firm is required to put a team together from many different practice areas. A firm that does not get along very well internally is probably going to be difficult to deal with externally. King & Spalding works on a collaborative basis - among ourselves, with the accountants and bankers and with the lawyers on the other side - in attempting to achieve the desired end. That focus on the end result, and on the means to get there, has served us well. And our clients.
Editor: What about the future? Where do you see this practice - these practices - going in, say, five years?
Fryer: The U.S. will continue to be a huge source of the world's GDP, which places us at the center of the global economy, Today there are about three billion people living in a capital market environment, and property markets all across the world are becoming destinations for investment. We are going to see the continuation of a dramatic transition from private ownership to public outside the U.S., and many of the leading investors in that transition are going to be U.S. institutions. Of particular importance are the tax-exempt institutions, foundations, government pension funds, university endowments, and the like. These are the players that will drive that market, and that fact constitutes a wonderful opportunity for firms like ours with expertise in fund formation and all manner of financial and investment vehicles and the ability to deploy that expertise internationally.
Editor: You have been speaking of the globalization of the economy. What does this mean for a practice like yours?
Fryer: We have had the good fortune to represent several global companies such as The Coca-Cola Company over many years. That represents a wonderful model for us, in that it takes a specific kind of expertise and adapts it to a variety of local conditions all across the world. That is what King & Spalding is attempting to do with this practice. The U.S. has a tremendous advantage in remaining the largest source of capital in the world, and to its competitiveness and investment style, it adds flexibility and an openness to other cultures that means we will continue to be the single most important driving force in the development of the global economy. King & Spalding plans to be at the center of that development.