The Increase In Regulatory Oversight Prompts Innovation In The Private Equity Arena

Thursday, February 1, 2007 - 01:00

Editor: Mr. Tredennick, would you tell our readers something about your professional experience?

Tredennick: I am a corporate and securities lawyer at Bracewell & Giuliani. I have been with the firm since I accepted an offer to join its summer associates' program, and I have now been here for 10 years. I am a graduate of the University of Virginia Law School.

Professionally, I have spent my time working on corporate and securities-related transactions across a range of industries. Most recently, I have been focused on the energy industry, where I represent corporations, both publicly- and privately-held, and private equity companies.

Editor: What were the things that attracted you to Bracewell & Giuliani?

Tredennick: I was attracted by the firm's entrepreneurial spirit and the opportunity to grow and develop the firm's corporate practice over the course of my career. That initial perception has borne itself out over the years, and we have succeeded as a firm in improving our relative position in a very intense competitive environment.

Editor: Please tell us about your practice. How has it evolved over the course of your career?

Tredennick: What has been most interesting to me has been the dramatic shift in capital markets since 1999. This coincides with the passage of the Sarbanes-Oxley legislation and the emergence of a regulatory environment that is considerably more intense than what prevailed in the past. As a consequence, there has been a significant shift from the public company arena to the private in terms of deals and capital raising.

In light of the pressures and the intense scrutiny associated with the regulatory environment today - and enhanced compliance requirements - finding the right sources of capital for public firms has become increasingly difficult. The expansion of private equity funds and hedge funds as investment vehicles has been a dynamic change. Historically, investors placed their funds with public corporations. If they do so today, it is more likely to be through alternative investment vehicles.

Editor: Can you share with us any particular high points?

Tredennick: There are several deals that stand out for me. Recently, I had the opportunity to represent a special committee in the context of a majority/minority transaction where the majority shareholder was trying to acquire the minority position. From a lawyer's perspective, those transactions are always interesting. This was a special committee of National Energy Group, a company majority owned by a Carl Icahn affiliate, and our representation constituted a unique opportunity.

We also had the opportunity to represent Norsk Hydro in the expansion of its oil and gas operations in the Gulf of Mexico. Norsk Hydro acquired Spinnaker Exploration Company at the end of 2005.

Somewhat earlier in the decade, I represented Dynegy Inc. in several substantial divestitures as they recovered from their difficulties and reorganized into the company they are today.

Editor: And Bracewell's private equity practice. Would you give us an overview?

Tredennick: The practice is transactional in nature. We represent firms in a broad number of areas, but we are focused on several special niches. One is in the energy industry, where we have been very successful in conducting a number of significant energy transactions for private equity firms. Our New York office has a specialized focus on distressed transactions, where the emphasis is on companies that are forced to file for bankruptcy or recapitalize. We also represent a number of private equity firms which are more mainstream in their activities, including banking, the manufacturing sector and so on.

Editor: Are there industries that are hot right now?

Tredennick: Industries tend to boom geographically for a variety of reasons. Houston is the energy capital of the world, so energy is a significant source of local deals, and it is a very hot sector now. Even with oil and gas prices trending down at the moment, it does not appear that the trend is having a strong impact because demand is still playing a dominant role. As a result, demand for exploration and production and oil field services investments remains strong. On a broader basis, the healthcare industry has been very active, in particular the healthcare information technology industry.

Editor: Do you deal with Canadian clients in your practice?

Tredennick: I do. I spent the latter part of last year working closely with a Canadian company on some wind power and renewable energy deals in Montana and Alberta. We also work closely with a number of infrastructure companies and even companies which are active in Canada.

Editor: There is, then, an international dimension to the practice?

Tredennick: There is. Recently I worked with a Spanish wind development company that was making its first entrance into the U.S. and Canada. The firm has also had some notable successes in representing Banco Santander and other Spanish companies over the last year. The international dimension is going to become an increasing dynamic in the U.S. merger and acquisition and capital markets.

Editor: Is there a full-time cadre of private equity practitioners?

Tredennick: We have a full-time group in terms of our corporate and securities practices. We make this a core component of our transactional work. In that context, we rely upon support from a variety of disciplines and practice groups, depending on the project. Our team includes environmental, regulatory, tax and labor and employment lawyers. We also depend upon the expertise of a wide range of practitioners from other areas as specific issues arise.

Editor: You have spoken and written about partnership arrangements between corporations and private equity firms. Is this something of a trend in the private equity field?

Tredennick: The traditional investment style for many private equity groups was to either find an investment opportunity in an early stage position and in need of additional capital or to invest in a mature company through some form of recapitalization. Occasionally, this entailed assisting a public corporation to divest itself of what the public company may have considered a non-core asset.

More recently, however, there have been a number of partnering arrangements between private equity firms and public corporations. In these situations, the two organizations work together to develop an investment that neither might be able to develop alone. Private equity firms supply the capital and the informed monitoring of the partnership that the corporation may find difficult to undertake, and the corporation is in a position to continue to take advantage of its strategic capabilities.

While I do not see a major shift toward this type of arrangement, the opportunity is clearly there, and there is incentive at both ends of the equation to make such an arrangement work. This is particularly true with tight capital in the public realm and increasing downward pressure on the returns available to private equity funds. For example, software companies often have enormous inventories of innovative technologies but cannot support internally the staff to enable them to develop all of those products to their full potential. But, if they can partner with a fund with a special knowledge base in the industry, the two together may be able to bring to market profitable technologies that might otherwise have remained in a back room.

Editor: Do the private equity companies have the expertise needed to manage these projects?

Tredennick: A management team for a particular software product or business operation is available, provided the opportunity to develop the asset is present. The private equity side of this equation brings appropriate incentives to bear on ensuring that the options are explored and the asset properly developed.

Editor: Are there other sectors, besides software, where this is playing out? Tredennick: Electricity transmission is a particularly interesting arena. Historically, providers have gone through the utility infrastructure, and the utilities have then sought rate-based increases to develop additional infrastructure. With transmission lines ageing and the magnitude of the projected need for additional capital, there may be room for innovative merchant financing techniques in the industry. There has also been a real move in the public-private arena, particularly in healthcare, where private equity partnerships are being entered into to jointly develop new information services programs as well as scientific innovation.

Editor: Please tell us about the role that Bracewell's private equity practice plays in these arrangements. What are the services that Bracewell brings to the table here?

Tredennick: We try to bring business and industry experience to bear on the transactions at hand. It is one thing to provide the technical legal transactional services and to produce the paperwork for a variety of investments. It is quite another thing to bring industry experience to the deal and an understanding of the business goals the client is trying to accomplish. In that context, we attempt to bring our understanding of the various business industries to the transaction. By so doing, we hope to ease the efforts of the parties in entering into their arrangements. We have talented transactional attorneys who can handle many types of deals, regardless of size or complexity and across a broad range of industries. Bringing that business and industry expertise into play is how we attempt to add value for our clients and differentiate ourselves from our competitors.

Editor: What structures are used to bring a private equity firm and a company together?

Tredennick: The most logical structure has been the joint venture arrangement. A company faced with a great opportunity but lacking the financial means to exploit it, or a company with title to some asset but without the personnel to develop it, may, through a joint venture arrangement with a private equity firm, achieve its goals. In joint ventures structured as limited liability companies we are seeing the emergence of independent and separate entities which are developed and then sold or brought out as an IPO down the road.

Editor: What about the future? How do you see the trend in these arrangements evolving?

Tredennick: As a result of increased regulatory oversight in U.S. markets, partnership arrangements have become increasingly commonplace. Very often these structures are a means by which all of the parties can more easily raise necessary capital and grow a business.

Editor: Where would you like to see the Bracewell private equity practice in, say, five years?

Tredennick: I would like to see our team to be among the first names on a private equity firm's list when they are looking for assistance in making their investments.

Please email the interviewee at steve.tredennick@bgllp.com with questions about this interview.