The 'Ruthless' Acquisition Spree by Private Equity: Impact on Law Firms
According to the Daily Mail, private equity firms have been on a ‘predatory’ and ‘ruthless’ investment spree, acquiring UK-listed companies at the fastest rate since the 1980s. Whilst private equity has indeed become increasingly active in light of the pandemic’s depressed valuations (further supported by the Brexit vote), the characterisation of private equity as comparatively more ‘ruthless’ than ordinary corporate acquisitions is peculiar.
On the one hand, the incentives structure of private equity is arguably incompatible with the need for quality service and sustainable investment in certain sectors, but on the other hand their advantages in encouraging efficient operational management is desirable. And given the current climate, it is the latter that is needed with several companies falling into financial despair. The current supply chain issues means that private equity firms are more than happy to provide this support, however, one question remains. What will this mean for law firms?
1. Firstly, the economic precarity caused by the pandemic and the recent rise in inflation across the international community means private equity activity will not be halting for the foreseeable future. Accordingly, law firms will need to reflect this growing trend and adapt their models to reflect this in their corporate work. This may take several forms. A particularly attractive model particularly among US firms is the strengthening of their private equity practice through lateral hiring.
2. Secondly, the attractiveness of UK companies as valuations rise in other countries further means increased cross-border work for law firms. This is seen among the private equity giant KKR establishing a team of five to focus on acquiring British companies as well as its rival Blackstone hiring partners solely to pursue UK deals. Whilst this means further objections of ‘predatory’ deal-making for defenceless UK companies, for global law firms it is an opportunity to flex their international prowess.
3. Thirdly, law firms will need to respond to the increasing ESG concerns surrounding private equity firms. The demands for sustainable investments, further pushed by traditional fund managers and stakeholders, means firms will need to counter private equity’s traditional image as concerned with short-term profit-making. This is especially the case in sectors such as healthcare where service quality is paramount and arguably inconsistent with the incentives structure of private equity. Similarly, in the context of retail, firms will need to demonstrate regard for job security and pensions. Thus, unless firms can demonstrate long-term thinking regarding companies’ futures, portfolio diversification to sectors with less ESG concerns may become necessary.
