“The Powerful City Lawyer at The Center of a Private Equity Storm” —

• “Neel Sachdev has a reputation for going above and beyond to ensure his private equity clients get what they want. The power the London lawyer wields over Europe’s $2 trillion buyout market is testament to that, and a reflection of the dominant debt finance practice he has built at US law firm Kirkland & Ellis over the past decade.”
• “Now, however, tactics he has used to his clients’ advantage — such as influencing which law firms he comes up against in deal negotiations and even playing a role in the recruitment of lawyers into rival law firms — are facing scrutiny by market participants as the era of easy money ends.”
• “Originally heralded as a way to make the often-fractious buyout process more efficient, the widely-used designated counsel arrangement is now viewed by many, including some of Wall Street’s biggest names, as a potential conflict of interest. It allows private equity firms, guided by their lawyers, to appoint and pay for the law firms that represent the lenders funding their deals.”
• “The International Organization of Securities Commissions (IOSCO) has begun looking into the designated counsel arrangement as part of a wider probe into leveraged debt markets, a spokesperson for the regulator said. Other regulators such as the Financial Conduct Authority are involved in IOSCO’s work.”
• “Since the early 2010s, market pressures — and access to plentiful cheap money — meant many lenders lacked the negotiating power to push for stronger protections. Sachdev and his buyout clients have used this imbalance to convince lenders, like the credit units of private equity groups and Wall Street’s largest banks, to agree to lesser safeguards around debt levels and dividend payments on deals they help finance.”
• “The gradual erosion of these terms has allowed private equity firms to pile debt onto the companies they own, take out huge dividends and move valuable assets out of the reach of lenders.”
• “That sophisticated lenders — often the credit arms of the same private equity firms pushing for changes in deal terms — accepted such arrangements raises its own questions. But recent moves by creditors to hire their own counsel and actively avoid working with certain law firms suggest this goes beyond simple buyers’ remorse.”
• “Sabrina Fox, CEO of the European Leveraged Finance Association, a trade body representing debt investors, says the industry is scrutinizing the practice. ‘Potential conflicts of interest hinder independence and impartiality where it is necessary,’ she said. ‘Now more than ever, it is critical that these issues are addressed.'”
• “ELFA plans to engage with regulators – likely to include the FCA and the Solicitors Regulation Authority – to explore potential conflicts of interest in the use of designated counsel, Fox said.”
• “Kirkland & Ellis, which declined to comment for this story, is not the only law firm to use this arrangement. But its partners, led by Sachdev, are widely regarded by buyout firms, lenders and other lawyers as the most aggressive in deal negotiations. Being on the wrong side of them can result in law firms being frozen out of future deals, people familiar with how Kirkland operates said. They asked not to be identified as they did not want to jeopardize future relations with the firm.”
• “‘It is very difficult to feel you have independence when the other firm sitting across the table may have played a role in getting you your job,’ said Trevor Clark, a former finance lawyer, turned law lecturer at the University of Leeds. Clark, who specializes in the ethics and professionalism of corporate lawyers, was speaking generally about rival lawyers being involved in the hiring processes of other firms.”
• “Advocates of designated counsel argue that selecting a single law firm to represent all lenders in a deal means negotiations are less likely to get bogged down with multiple teams of lawyers arguing.”
• “But the arrangement encouraged some lawyers to develop close relationships with their counterparts acting on behalf of private equity groups. For some law firms that translated into repeat work and a lucrative stream of business, according to people working at credit funds and law firms, who did not want to speak publicly to avoid damaging institutional relationships.”
• “The extent to which some lawyers became dependent, at least partially, on this designated business has triggered concerns among a number of lenders about potential conflicts of interest.”
• “Early last year, Europe’s largest-ever direct lending deal came to market when two private equity firms wanted to refinance The Access Group, a software company, represented by Kirkland. Shearman worked for a large group of lenders including Arcmont Asset Management, Intermediate Capital Group and HPS Investment Partners, as designated counsel on the Access Group deal. During the negotiations, some of the lenders hired their own lawyers, in addition to Shearman. These so-called shadow lawyers were employed to give additional legal advice after concerns arose over the perceived independence of the sponsor designated counsel, people close to the talks said.””Deals where other law firms were appointed designated counsel have also prompted direct lending arms of groups such as Apollo, Carlyle Group Inc. and KKR & Co. to hire their own shadow lawyers, Bloomberg News reported last year.”
• “Some private lenders are now going one step further than hiring shadow counsels. Direct lending units at firms such as Blackstone – which declined to comment for this story – are said to be drawing up lists of preferred law firms to act as designated counsel and actively pushing back when certain law firms are selected for the role, people familiar with the matter said.”