Editor: Is your large private equity practice in the Dallas office primarily Texas-based or is it part of the larger Global Private Equity Practice of the firm?
West: While we live in Texas, our practice is global. Our clients come from all over the U.S. and abroad. Because our firm generally, and the Dallas office in particular, has been at the forefront of the private equity practice for almost 20 years, we have been actively involved with and frequently are engaged with our offices in New York, Silicon Valley, Houston, Washington and Boston, as well as Frankfurt, Munich, Paris, London, Prague, Budapest, Warsaw, and Shanghai, all of which have strong private equity practice groups. We draw upon each other's expertise, and work together with a number of the same clients who are doing cross-border transactions. As a result, we are able to deliver a unified private equity expertise across all geographies in which we operate.
The Dallas market happens to be the base for a large number of private equity firms who make investments all over the U.S. The Dallas office got its start in private equity by representing many of those Dallas-based firms. As a result of that experience and doing deals across the nation for the Texas-based private equity firms, we were exposed to and began to be engaged by private equity firms based in other parts of the country. We continue to do work for the original group as well.
Editor: Tell our readers a bit more about your private equity practice and the type of transactions you work on.
West: We represent traditional private equity sponsors doing primarily leveraged deals. Our strength in that area lies in the team of private-equity focused lawyers we have assembled, many of whom have been active in this area for almost 20 years. We have developed a completely private equity-focused corporate group. We have lawyers who have spent most of their careers representing private equity firms, taking companies private for equity sponsors, buying platform companies and then doing add-ons to those companies to grow them for an eventual exit through an IPO or sale transaction. We understand what private equity clients are looking for, what their concerns are, what their limited partners' requirements are; and we do not have to be trained in that process every time we do a deal. We are not just corporate lawyers who have decided to do private equity. We are private equity lawyers who know how to do corporate transactions for and on behalf of private equity sponsors.
Secondly, we have developed a specific financing practice that is designed particularly with the private equity sponsor in mind. Our group is not just a bunch of banking lawyers who represent lenders and then decide to switch hats and represent private equity sponsors. Ours is a developed practice that I started 18 years ago and that is now headed by Angela Fontana. This is a group of acquisition finance lawyers who specialize in the needs of private equity firms in the LBO context. We know the market - what banks are offering to other private equity sponsors - because we represent most of them and can provide this kind of market knowledge to our private equity clients.
The third factor is that we can draw upon the strength of the entire law firm, which consists of over 1,200 lawyers in 20 offices throughout the world. The firm has private equity expertise in virtually every one of its offices and it is and has been a major focus for the firm. We operate on a "one firm" approach in delivering quality service to our clients across the globe.
Editor: How many lawyers in your office are performing M&A work? What portion of your overall matters does this represent?
West: We have approximately forty lawyers who do M&A and private equity work out of a total of 75 in the Dallas office. M&A and private equity represents a little more than half of the work of our office.
Editor: Do you also represent hedge funds?
West: We do, however it is not a core part of our practice in Dallas and is more concentrated in the New York office. We represent hedge funds when they are doing private equity type transactions, as opposed to traditional hedge fund transactions.
There has been a lot of press about the convergence between private equity and hedge funds, but it is not clear that this is as widespread a phenomenon as some have suggested, as it is still a different type of practice.
Editor: In February we interviewed Jeff Tabak, Co-Head of the Private Equity Fund Formation Practice Group in the New York office. Are your attorneys, like those in the New York office, specialized as to the various areas of practice within private equity?
West: Yes. In Dallas we are primarily on the private equity execution side of the practice. In other words, we do the deals. We are the ones helping the private equity firms execute on a transaction. However, we do have lawyers in the Dallas office who are part of Jeff Tabak's and Barry Wolf's industry-leading Fund Formation practice that is headquartered in New York. Particularly, Jeff Hitt in the Dallas office is involved in that practice.
Editor: Do you counsel strategic buyers any differently from financial buyers as to the traps they should be wary of in making an acquisition?
West: We tailor our advice to the particular client. For example. with respect to material adverse change clauses, there are different expectations and concerns from a strategic buyer versus a financial buyer in terms of what could happen prior to closing that could make the potential target unattractive. If the strategic buyer is in the same business as the target company, it is frequently more aware of what could happen that is outside the control of the particular target company. Therefore, the strategic buyer is better able to assess those risks. In terms of the MAC clause and its reliability as a means of avoiding a transaction if something bad happens that has not been specifically set forth in the agreement, there is no difference between a strategic and financial buyer. There are certainly other areas where strategic buyers may have different sensitivities or concerns than private equity buyers, and as such we tailor our advice accordingly.
Editor: Aren't strategic buyers sometimes more inclined to pay more?
West: A strategic buyer may have a synergistic opportunity with its existing company that a financial buyer would not have. This might enable the strategic buyer to pay more, but it does not appear in the marketplace today that it is as clear-cut as it used to be that the strategic buyer is always going to be the high bidder.
Editor: With so many players looking to do private equity transactions, have you seen a diminution in the quality of deals as well as the returns?
West: Not among our clients. I continue to see the private equity players we represent doing what has always made private equity work. That is, looking at the transaction very carefully, doing their homework, setting parameters on expected returns and pricing accordingly. We represent a large number of private equity firms in the large and middle markets. Our clients continue to target minimum returns when pricing their deals and putting together their models in order to get the right deal to work. Notwithstanding that some pundits are saying that they expect lower returns or more business failures, my experience is that our clients are continuing to insist on only investing in quality deals. There have always been and continue to be bad deals, but in my experience these are not the result of a lowering of standards or lack of diligence on the part of the private equity firms we represent.
Editor: What do you think the exit opportunities for this asset class will be?
West: I think that the exit options available to private equity firms are largely what they have always been, an IPO or sale. Those opportunities continue to exist and are used in various ways by various private equity firms, depending on what the market is at that time. Because there are more private equity firms today than there used to be, there are more private equity buyers engaged in exit transactions with other private equity sponsors - one private equity owner to another - but typically those buyers are looking for new opportunities to increase value at a time when the sellers are looking to monetize their investment. There is nothing different about that than if it were a non-financial buyer acquiring the company.
Editor: Do you see large groups of equity sponsors banding together in doing club deals?
West: There are significantly more club transactions in the marketplace than what we saw five years ago. Club members sign up to engage in a joint bid for and ultimate purchase of a company. The increase in the number of club deals has to do with the size of some of the transactions being done today as well, as the size of the funds themselves and their ability to do bigger deals. The size of the deals often requires that several private equity buyers collaborate in doing them because there is not enough money in one fund to do some of the deals, as big as they are. It is also a matter of spreading the risks.
Editor: These are fairly new transactions and the effects of a negative outcome are not clearly defined at the moment.
West: There are certainly some open questions as to how the club agreements are going to work out if a particular target company becomes troubled. There has not been a lot of experience with that because these deals are of such recent vintage.
Editor: Has the increase in club deals by private equity sponsors impacted the public company markets?
West: Certainly. The result of these trends is that there is an expanding universe of public company targets that are suitable for private equity sponsors to take private. In fact, in 2006, the number of leveraged buy outs of public companies by private equity firms has already surpassed the number in 2005. However, from a private equity standpoint, public company LBO's have different transactional dynamics and risks of which private equity firms should be aware. For example, purchase price mechanics are different, stockholder approval may not be certain, and, most importantly, with a public company, there is a greater risk that other potential buyers will approach the company and offer a higher price. And while we can't predict whether the private-equity backed going private trend will continue, it has become increasingly prominent the past few years.
Editor: What do you see as the greatest challenges for the Dallas office? Do you believe you can maintain the same top quality standards as you grow the office?
West: We have been incredibly fortunate in our Dallas office to have a consistently high level of quality attorneys for a consistent period of time, so much so that we have transferred over 10 lawyers who started in Dallas and are now partners in the firm, but resident in other offices in our system, both in the U.S. and Europe. Because the firm is so focused on private equity and because the Dallas office has been an integral part of the history of that practice, the Dallas office has been uniquely situated to have a large number of people with a lot of private equity experience who have been able to help other offices in getting their practices established or in augmenting their practices with seasoned attorneys. We have been incredibly fortunate and able to train, attract and retain extremely talented people. We see no issues with that. People are attracted to successful practices, and our practice has been and continues to be successful. We have had much success in our recruiting and we see a bright prospect for more growth as we continue to focus on what we do best - private equity deal execution from the financing side and the corporate side.