The Private Equity (PE) boom of 2021 shows no signs of slowing down in 2022. What is the general outlook for private equity in 2022, and what consequences does it have in store for law firms?
2021 in review
The statistics for 2021 speak for themselves. Between January and September of last year $1.17 trillion worth of deals were recorded, eclipsing every prior full-year total stretching back to 2015 and shattering the previous record of $846bn, set in 2007. Furthermore, there were 4,605 buyouts globally from the first to the third quarter of 2021, again beating the annual record for global PE volume with three months of the year to spare. This spending has, unsurprisingly, been buttressed by record-breaking fundraising volume; in the first nine months of 2021, $630bn was collected by private equity firms. The rise of the megafund continues unabated – Hellman & Friedman Capital Partners X successfully closed on US$24.4bn in July, while Carlyle Fund XI, with a target of US$27bn, will become the largest PE fund ever raised if that figure is reached.
The outlook for 2022 is positive. Activity is expected to remain robust given the large volume of dry powder - which refers to the amount of committed capital that has yet to be spent - sitting in PE firms. According to a recent Lincoln International survey of nearly 400 PE investors, 62% expect deal activity to be up slightly or remain flat year-over-year; a 2022 that is flat to 2021 would continue a pace of transactions that is unprecedented. Dechert, in their 2022 Global Private Equity Outlook, predicts that “record deal volumes, historically low interest rates and huge amounts of dry powder, a combination for explosive alternative asset industry growth, [will] continue for several years”.
This market saturation has led PE firms to explore novel strategies to gain an edge over competitors. Christopher Field, co-head of Dechert’s global private equity practice, believes that “thinking creatively and using diversity of approach is paramount. Getting to know the company early and then leveraging that is becoming more and more important”. Building relationships with potential targets is now a must for any PE firm seeking to thrive. Special Purpose Acquisition Companies (SPACs) and the secondaries market are here to stay. SPACs saw a steep decline in the second and third quarters of 2021, due to a host of reasons including increased scrutiny by the Securities and Exchange Commission, the poor performance of a number of SPACs and subsequent litigation, as well as investor fatigue. However, they will remain entrenched as a viable exit option for GPs (General Partners, the people responsible for managing the fund). GP-led secondaries have burgeoned – the volume of the private equity secondaries market is projected to have reached $113 billion in 2021. Furthermore, throughout the first three quarters of 2021, $46 billion of the $79 billion secondary market involved GP-led transactions, up from $37 billion in the full year of 2020.
Yet market saturation inevitably sees some firms lose out. David Layton, CEO of Partners Group, has said that capital is increasingly being directed toward large platforms that can identify the best acquisition opportunities far in advance: “Resources matter right now, and [it benefits] the firms that have a lot of resources and can spend speculatively on researching assets that aren’t for sale… the medium-sized generalists are going to have to figure out how to compete”.
Firms in London have been bolstering their private equity teams to capitalise on the deluge of work that has come their way. Just one of many examples, Gibson Dunn added partners Till Lefranc and Wim De Vlieger to their ranks from Sidley Austin in late December 2021. Like those mid-sized private equity firms, their legal counterparts must also figure out how to compete. Giants such as Latham & Watkins and Kirkland & Ellis have all the resources at their disposal to be a “one-stop-shop” for their PE clients, offering the brawn necessary to power through a market that demands increasing foresight and innovation.
Yet the explosive rise of PE has had a less obvious impact on the legal profession. According to a recent Financial Times article by Cat Rutter Pooley, the end of lockstep pay (whereby lawyers are paid according to the year they are in, not according to performance) in London law firms is a direct consequence of the private equity boom.
According to Pooley, powerhouses of the London private equity market such as U.S. firms Kirkland & Ellis and Latham & Watkins “turbocharged the value of individual lawyers” through their pay-for-performance salary structure. U.S. firms have poached top partners at established London firms. As a consequence, in October 2020, the partnership of Allen & Overy voted to reform its lockstep pay model in an attempt to keep star performers. Allen & Overy had already sought to keep up with big U.S. hitters by trying to merge with one - O’Melveny & Myers - and, while eventually falling through, talks did produce a reform model that would see a select few “superstars” paid approximately $8 million a year. Slaughter and May are the only Magic Circle firm still operating a lockstep pay model, Linklaters the last to change in December of last year.