Legal Issues in Private Equity

Despite the COVID-19 health crisis and extreme levels of market volatility, the private equity market has been on fire. In this episode of Law, disrupted, John Quinn joins Brad Berenson, Partner and General Counsel at TPG, and Chris Green, Managing Director and General Counsel at Bain Capital, two of the largest private equity firms in the world.

Having both navigated the challenges presented by the pandemic, Brad and Chris describe how this period of time has showcased what’s valuable and differential about private equity, relative to other asset classes. They contest critics’ views that the industry operates under a model of “financial engineering and cost-cutting,” outlining how private equity has provided businesses with access to capital, job preservation and business protection through turbulent times.

John and his guests discuss the new disclosure rules proposed by the U.S. Securities and Exchange Commission (SEC), which presage sweeping regulatory and enforcement changes under the Investment Advisers Act. Aimed at increasing transparency from private companies, the SEC’s proposed rules represent an unprecedented level of scrutiny and oversight from the commission, striking at the heart of how the industry has historically done business. Together, John, Brad and Chris analyze how—if adopted—the rules will impact private fund investor reporting and documentation, evaluating whether these proposed rules miss the mark of increasing competition and reducing regulatory burdens.

They then discuss a new chapter in antitrust law and the regulation of mergers and acquisitions. In particular, they discuss the apparent shift that merger control agencies seem to be taking from focusing on consumer welfare and competition towards focusing on protecting other interests, such as organized labor, small businesses or environmental concerns. They explain how this transition has led to additional scrutiny for potential deals that pose little risk under traditional antitrust analysis, which delays and injects uncertainty into commercial activity.

John and his guests also examine the importance of ESG analysis when considering potential investments, and the ways ESG metrics are presently measured, such as a business's carbon footprint and climate-related risks. They also address ways in which private equity firms have been able to address ESG concerns more quickly than many public companies.

The conversation turns to the potential liability of private equity firms as sponsors and the economic importance of respecting corporate forms, limiting any upward flow of liability from portfolio companies to private equity firms and their investors. This requires that private equity firms remain mindful of their governance role on their portfolio companies’ boards, avoiding actions that could support “alter ego” liability.

Additionally, John and his guests discuss the dual roles of appointed directors on portfolio companies’ boards and how to prevent problems from arising, particularly in the context of protecting attorney-client privilege. 

They then conclude by covering some of the legal issues surrounding continuation funds, including how to protect the economic interests of limited partners when assets are rolled over into a continuation fund.

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Podcast Link: Law-disrupted.fm
Host: John B. Quinn 
Producer: Alexis Hyde
Music and Editing by: Alexander Rossi