Private Equity and Investment Management

In a nutshell
Private equity and investment firms operate funds that pool the investments of anybody prepared to part with
their money for a sustained period of time. Private equity firms use investors' cash (equity) in combination
with money raised from banks (debt) to buy companies or other assets with the goal of selling them on at a
profit. When the targeted company's assets are used as leverage and a significant amount of bank debt is
employed, the transaction is known as a leveraged buyout (LBO).
Venture capital is a subset of private equity that sees investors put money into start-up companies or small
businesses in the hope they will be sold to a private equity firm or taken public. Although this typically entails
high risk for the investor, it has the potential for above-average returns. This high risk is typically offset by
investing smaller amounts over a shorter timespan.
Investment management is the professional management of various securities (shares, bonds etc.) and assets
in order to meet specified investment goals. Investment management lawyers advise on the structuring,
formation, taxation and regulation of all types of investment funds.
A hedge fund is a private, actively managed investment fund. It aims to provide returns to investors by
investing in a diverse range of markets and financial products, regardless of whether markets are rising or
falling. Using the derivatives market helps hedge funds achieve this.
A mutual fund is a collective investment vehicle that pools money from many investors to purchase
securities. The term is most commonly applied to collective investments that are regulated and sold to the
general public.
A real estate investment fund/trust is a publicly traded investment vehicle that uses investors' money to
invest in properties and mortgages.
Both hedge funds and mutual funds generally operate as open funds. This means that investors may
periodically make additions to, or withdrawals from, their stakes in the fund. An investor will generally
purchase shares in the fund directly from the fund itself rather than from the existing shareholders. This
contrasts with a closed fund, which typically issues all the shares it will issue at the outset, with such shares
usually being tradable between investors thereafter.
What lawyers do
 Advise private equity firms on how to structure new funds.
 Help private equity firms negotiate the terms on which investors contribute their money.
 Act for private funds when they buy and sell investments.
 Assist clients throughout the fund-raising process. This includes the preparation of offer materials
and partnership agreements, advising on and documenting management and compensation
arrangements, and closing fund formation transactions.
 Conduct diligence and negotiate contracts.
 Draft the numerous organisational documents necessary to form an investment fund. The private
placement memorandum is key – it's a prospectus detailing the terms of the investment, minimum
investor requirements, risk factors, who the investment manager is, and the strategy to be employed
by the fund. If the fund is a limited partnership, it will need a limited partnership agreement, and if
it's a limited liability company, it will need an operating agreement, as well as an investor
subscription agreement.
 Inform and advise clients on the constantly changing regulatory and compliance issues arising under
UK and international securities and tax law.
Provide day-to-day advice with respect to issues such as performance and advertising and brokerage
and portfolio trading practices.
Realities of the job
 Small teams mean that trainees can get high levels of responsibility and client exposure rather than
being stuck doing more mundane tasks. You can expect to be involved in drafting key documents
 and reviewing transfer agreements and to play a part in large-scale negotiations that could involve
hundreds of parties at the same time.
 Structuring funds requires an intimate familiarity with the relevant securities and investment
company rules. Understanding and being able to apply knowledge of key financial legislation is a
vital skill.
 Setting up funds also requires a significant amount of tax and general finance industry knowledge.
Funds lawyers often work in close collaboration with their tax and finance colleagues.
 Good people skills and a tough attitude are a must. Private equity lawyers work closely with clients
to offer advice on a wide range of areas and need to be able to explain the constantly evolving
private fund markets to them as well as understanding the time-sensitive nature of fund
organisation. Fortunately, clients are entrepreneurial and tend to have a good understanding of the
world of business, meaning they can pick up on issues quickly.
Current issues
 The UK is a lucrative market for private equity; several household names have recently been
snapped up by private equity firms, especially in the retail market. In the summer of 2014 Cath
Kidston made headlines by selling a large chunk of shares to Baring Private Equity Asia, while in
2015 Alteri, a specialist vehicle created by US private equity fund Apollo Global, bought Austin
Reed. Alteri reportedly also made an offer on BHS, which eventually sold to Retail Acquisitions for
£1.
 Private equity funds prefer to invest in real estate and companies with steady income streams but
cheap stock prices. A business facing the need to increase efficiency, but with guaranteed demand
for its products and services, is potentially a good investment.
 The average hold time for buyout investments in the private equity industry fell for the first time in
five years in 2015, marking the end of a steady rise brought on by the financial crisis, and signalling
that firms are more actively trading investments again. However, the result of the Brexit referendum
has caused a period of stagnation in the market: acquiring capital has become more difficult, and
major deals, such as the sale of Telefónica's stake in O2, have been put on hold.
 Much like the wider M&A market, private equity has been plunged into uncertainty following the
UK's vote to leave the EU. Buyers are concerned that any acquisitions may lose value or be forced
to operate under different regulations if the UK were to trigger Article 50 and begin extracting itself
from Europe. In turn, sellers worry their assets are being undervalued due to the nervousness of
buyers.
 Brexit isn't the only issue causing jitters in the global market; China's rapid shift from growth into
slow growth and the possibility of a US recession are both cause for concern. Nonetheless, in such a
market non-cyclical or counter-cyclical assets become more attractive. For example, the price of
gold (a counter-cyclical asset) has boomed since the UK voted for Brexit.
 Private equity investors are paying ever closer attention to emerging markets, like the BRICS
(Brazil, Russia, India, China and South Africa), but also countries you might not immediately think
of such as Mexico and Colombia. China is proving a particularly attractive market as it offers
favourable tax rights for entrepreneurs.
 Private equity firms and other commercial organisations are now bidding against public sector
providers for public service contracts after recent government austerity measures have led to a move
towards privatisation. So far the healthcare and social housing sectors have been the main targets for
private equity buyouts, but firms are also moving in on educational institutions.
 The EU and the Financial Conduct Authority (FCA) have both been making efforts to extend the
rules governing banks and investment firms to private equity houses. The FCA has been keen to
highlight the benefits of aligning UK policy with that of the European and international timetable,
so Brexit negotiations in this area may run somewhat smoothly.