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Recently, there have been significant changes due to private equity in the legal sector. Law firms such as A&O Shearman and Macfarlanes are currently advising on the £700 million acquisition of a wealth manager. Slaughter and May firm is advising the private equity Fortress Investment Group on its £388 million buyout of UK-listed hospitality group, Loungers plc.
What is private equity (PE)?
Private equity consists of investing in companies, typically private companies (companies not listed on the public stock exchange) in exchange for an ownership stake. In simpler terms, private equity involves firms or investors directly financing companies to help them grow.
What is the key objective of private equity?
The main goal of private equity investors is to invest capital into companies to help them grow and then sell these companies for a profit.
But who are the investors?
Private equity investors are professional shareholders. Their investors/customers include private equity firms, wealthy individuals, pension funds, sovereign wealth etc.
Example:
A prime example of a private equity firm is the Blackstone Group Inc., one of the biggest private equity firms in the world. As of 2024, the firm has more than US$1 trillion in assets under management.
Who are the competitors of private equity?
Their competitors are every other way you can invest money such as bank accounts, stock markets, and other financial instruments.
How does private equity work?
Well, we know private equity firms gather funds. Private equity funds are structured using limited partnerships (LPs). A common and simple structure is shown below:
(Investment in the diagram above represents companies invested in )
Why is a limited partnership structure used?
The limited partnership structure is preferred for its simplicity. It is cheaper and easy to set up.
How do the firms identify the target?
PE firms will first identify the target amount of capital to raise. Then the firm will thoroughly analyse the investment opportunity and research the business to understand the company’s market position, industry trends, financials etc. This research can help them determine if a company is a good investment target or not.
The PE firms and their investors must be fully aware of what they are buying, and this is known as the ‘buyer beware’ or ‘caveat emptor’ in Latin. This means an individual buys at their own risk and is warned to do their research as there are no laws protecting you when you buy a company.
So, this research is undertaken through something called due diligence. Due diligence involves investigating the target company’s legal, financial, and other operational aspects to ensure you have a good understanding of its state. Due diligence helps identify any potential risks or pending issues that the company may have.
There are different types of diligence:
This diligence is then sent to other departments and asks them to fill in their relevant part.
What other departments could be involved?
If due diligence reveals no issues, the deal will go through.
What category of law does private equity fall under?
Private equity is transactional law as you are trying to get deals done.
Solicitors’ responsibilities in a private equity deal:
Why does private equity matter to law students?
There has been a demand for legal professionals with PE knowledge in top law firms and in-house counsel roles.
Commercial awareness:
As of December 2024, the Bank of England decreased its interest rate to 4.75%. What does that mean for private equity firms or businesses in general? Lower interest rate means clients/firms can buy companies more easily as they can get cheaper loans/debt.
Why is private equity currently trending?
The private equity industry is popular when stock prices are high, and interest rates are low. When interest rates are low, clients/firms can buy and invest in more companies easily as they can get cheaper loans or debt.
However, recently, labour introduced an increase in capital gains tax from 28% in 2024 to 30%. This might cause private equity firms and clients to relocate firms to cities such as Milan and Geneva as they have less strict laws. This might not rattle many PE firms, but we will have to wait until 2026 to see any drastic effects.
Finally:
Reading surrounding cases from law firms and news or doing virtual work experience in private equity is best to have some basic understanding of what private equity is, as many law firms are striving to lead in this area.
Article written by Amanpreet Singh, Birmingham City University LLB graduate and current LLM student at University of Birmingham
Sources:
https://www.investopedia.com/terms/p/privateequity.asp
https://www.allaboutlaw.co.uk/stage/areas-of-law/private-equity-law
https://www.investopedia.com/terms/l/limitedpartnership.asp
Legal Considerations for Purchasing a Business – LegalVision UK, https://legalvision.co.uk/corporations/five-legal-considerations-when-purchasing-an-existing-uk-business/.
https://www.blackstone.com/our-businesses/private-equity/
Private Equity Explained With Examples and Ways to Invest – Investopedia, https://www.investopedia.com/terms/p/privateequity.asp.
