Transcript- A Private Equity Perspective on Legal Services

Among the many challenges private equity firms have in managing the needs of their portfolio companies is legal counsel, guidance and advice. Numerous issues related to regulatory, HR, data privacy, contractual and many other matters require legal guidance and needs among portfolio companies vary greatly depending on their size and industry among other factors.

This is Kevin Donahue with Protiviti, welcoming you to a new installment of Powerful Insights. Many private equity firms may be unaware of all their options for legal counsel and solutions. I’m pleased to be talking today with Protiviti Managing Director Rob Gould and Robert Half Managing Director Joel Wuesthoff, who will talk about some of the benefits of an on-demand model to address a broad range of legal needs for private equity firms. Rob is the leader of Protiviti’s private equity industry practice, and Joel has legal consulting solutions for the Protiviti–Robert Half family. Joel, thanks for joining me today.

It’s a pleasure to be here.

Rob, it’s great to speak with you as well.

Thank you, Kevin. I’m looking forward to it.

So, Rob let me ask you our first question. Traditionally, how have private equity firms approached lining up legal services they might need for one or more of their portfolio companies?

That’s a great question, Kevin, and we do see a lot of variations of that play out in the marketplace. Sometimes, it’s driven a lot by their interrelationships, or partnerships, with some of the law firms that are heavily involved in part of their ecosystem for executing transactions.

Those carry forward to some of the future support for the entities that are involved in those transactions. When we think about the different size of the entities that they’re either targeting or acquiring or transacting with, there are various capability gaps within those businesses, and legal is definitely one of those areas for some of the mid- to smaller-size entities that are typically understaffed. So, they do look to the outside for a significant amount of support when it comes to more complex situations, but even also some of the more routine types of legal needs and support that every business needs to contend with.

So, sometimes those smaller entities just kind of stay sticky with the providers that the private equity firms bring to the table – introduce the very sophisticated law firms that they are working with through very complex scenarios – and they are able to support many of the day-to-day needs as well.

Where we do see some challenges exist is, you know, for some of those smaller mid-size companies, there’s definitely a big price differential for what they are looking to pay for some of those more routine services versus the complex ones, and they get caught into a vacuum there. So, it does end up having a pretty significant impact on their overall legal spend for those types of activities until they’re able to build out a more traditional legal department, which often takes a lot of times and also has its cost. It does vary in practice from what we see, but the private equity firms, for the most part, are a little bit hands-off in terms of the prescriptive ways of addressing that sort of need. It’s really more in the management team’s arena for deciding that, but it does put a little bit of pressure when there are strict time frames and transactions being contemplated.

So, Joel, Rob just give us a great rundown here about how private equity firms are managing this process – those varying needs – and lot of times, they’re deferring to the management teams of the portfolio companies. What do you see are some of the underlying issues, or maybe the challenges with this approach? I’d like to know what some of the limitations are that private equity firms may encounter or learn as they wade through the demand for legal guidance and expertise, and how they determine to address it.

I think Rob led it out really nicely. A couple of words I picked up as he lay the groundwork: specifically, routine services, and that vacuum area where companies are struggling to get the services they need, the specific service they need at the price point that they can handle.

Obviously, there’s a bit of a hands-off between the private equity folks and some of the management, but to the extent that the PE world is driven by profit maximization, and cost-minimization management, particularly, I think that those routine activities need to be looked at a little bit more judiciously in terms of what alternatives there may be – additional or spiky staffing, or some technology that they can use.

I think that given the regulatory environment, increasingly, we’re seeing plaintiffs’ litigations, some class-action lawsuits, redirecting their attention to the ultimate investors. I think that that group of players needs to be more mindful of some of the cost opportunities and cost-saving opportunities and creativity that can be won from being a little bit more hands-on, as well as being mindful of some of the downstream risks when deals go south. We can talk a little bit about some of the dynamics and some of the drivers there, but I think that that vacuum area that Rob talked about is right for cost savings.

Thank you both. I think we have a good rundown of the current landscape for private equity firms or portfolio companies and some of the legal needs. Rob, there are alternative and effective approaches for private equity firms to handle some of their legal needs and the needs of their portfolio companies that maybe they’re not familiar with, one of which is bringing in attorneys and legal support essentially on demand. How does this work, and why would this be a good fit for private equity firms?

Well, to Joel’s point earlier, they are very focused on right-sizing costs within the different investment. This is definitely one of those areas that bubbles up in their analysis as impactful, where we’ve seen some interest from private equity firms is something a bit more systematic, an alternative type of model that they can offer out to all of their investments and the entities where they are involved in some way, shape or form of assisting with the operating model and driving their value calculation as well to get the cost where they need to be, get the revenue where they need to be, make it more sustainable without adding a whole lot of overhead at the same time.

So, what we’ve seen interesting from some of the bigger private equity firms is some sort of variable cost models, something that could be more on demand, and particularly for those routine services as they pop up. They could just call, get the assistance when they need it and then move on without having to only have that resource come from one of those more traditional or more expensive law firms. So, having a more variable-cost temporary-type scenario is something that they’re interested in having as an option for their investment.

I meant to ask this earlier, and either or both of you can respond. Do you think the landscape, some of the challenges and maybe the needs around legal support, have become more complex in recent times or recent years for these smaller portfolio companies? I was just wondering whether the regulatory landscape has become more complex, where some new approaches are definitely warranted.

I definitely think there’s an increase in those routine types of things associated with the HR needs, the personnel needs, the actions, and stuff like that – also, filing needs that they have. There are tax reasons that drive some of that, and there are also other human capital compliance needs that tend to occur on a fairly high volume. That said, for the types of resources that are needed for that, a lot of the companies don’t necessarily have the staff. The general counsel can’t do everything. That’s usually where there tends to be a bit of a bottleneck because they don’t have all that support with some of these mid- to smaller-size companies.

That said, there’s also the ability to bring in and augment that internal legal group with temporary staffing for the piece of the effort associated with transactions – onetime events as well. So, I wouldn’t limit it to the routine types of things. I think it does provide some additional options; if you think about the level of effort associated with searching for documents, compiling, preparing sort of drafts and stuff like that that are leverageable type items that management or the internal legal teams often would be asked to do, but when they don’t exist, they need to go to the outside, and it definitely has a pretty significant impact on the cost for those services.

Kevin, I’m just going to pick up on Rob’s comments. I think we’re clearly seeing in the marketplace a high demand for individuals who got the experience around creative tax pinnacles and corporate structures, and how to incentivize the deal that got both the legal knowledge as well as seeing themselves as business partners, or partners to the business, in terms of structuring deals that are minimizing the risk and optimizing the profit.

Consistent with that, at least speaking clearly about what we do and what we see in the marketplace, the demand for individuals that can bring that kind of experience during spiky times or simply during routine times, it seems to be high demand right now. So, you talk about a little bit of the complexity, and that’s clearly there – those individuals that can navigate that, loop in at some of the areas around global interdependence or maybe even tensions between security, between privacy laws or conflicts in jurisdictions.

And one of the things that Rob meant, and I’m kind of cherry-picking things here and there – the volume, the volume of data, volume of deals – all of these drive the needs not just for the individuals who can navigate those technical legal operational areas but also for those who can manage the flow of data, the analysis of data, the searching of data and, oftentimes, the due diligence and sometimes the reduction of data. By that, I mean what needs to be shared, what can’t be shared, how do we do that, how do we ensure that outside of the legal process, we’ve got a system in place to manage simply the colossal amount of data that’s flowing in and flowing out of companies.

That’s a great rundown. Thank you both. Joel, I wanted to follow up on another point. You’ve got some examples of how this approach we’re talking about has benefited private equity firms. Can you share some of those?

Yes, a couple of examples – and frankly, they apply to other industries and other sectors solely in the area of reviewing contracts and due diligence. We’ve seen, certainly, outside, very experienced sophisticated counsel charging $800 upward to $1,000 for reviewing contracts of basic terms and structures, and we’ve been able to identify equally competent attorneys who can do what we might call a first-pass review to identify areas that could be risky or trigger a potential downstream review, and be able to provide a client with outside counsel – a blended rate, and so that can operate on the savings of upward of 75% of the entire deal.

So, whether it’s us or some other company who provides similar services, we’ve been able to use some of the contract resources that Rob talked about on a spiky situation where you need additional headcount. Maybe the budget isn’t there for a partner-level resource with the outside counsel, but it is for someone who can provide similar types of services for that particular time frame and for that subject matter.

Maybe a second example would be in the due diligence space, where, as I mentioned before, we’re dealing with a lot of data, a lot of decision points, a lot of data points, and having to develop some type of approach to funnel the data into priority areas for outside counsel or inside counsel, the compliance team, to look at data.

There is a science and a process behind all of that where we’re starting to see individuals with advanced analytic skills, and individuals with project management skills, who were able to take that data and serve it up to counsel or the client or the PE firm in a way that allow them to make the right decision at the right time. That, I think in the last 10 or 15 years, has been one of the big drivers of the complexity that you talked about before, where the data has to be dealt with and has to be dealt with in a way that makes the decision-making process transparent and easily digestible.

I want to thank you both for joining me today. This has been a great conversation. I have a final question for both of you, and Rob, I’ll have you respond first. In your view, how might a private equity firm assess whether this legal consulting services approach would work for them? What are some key questions they should consider?

A couple of things to consider there, Kevin. One is overall legal spend as they’re working with those portfolio companies and understanding their overall spend profiles, paying some particular attention to the legal items and accumulating that data across the group of portfolio. Companies will give them some indication on where those portfolio companies might need some more help in terms of achieving some savings in that spend.

That’s one of the considerations. The other consideration is, when do they see that there’s significant improvement needed in those legal groups. So, if there’re capability gaps and some skill set gaps, this is another opportunity for them to address those rather quickly through the use of some specialized or even generalized experts that can participate in those activities.

The other thing that I consider is upcoming events with those businesses if there are acquisitions planned, or if there are some other transactions planned, or even significant growth that can drive some of the volume of some of the routine activities, or even changing the paradigm of complexity that I believe the group will need to contend with as they achieve that growth. Those are some of the key considerations that are most important and impactful to the private equity firms.

Joel, your thoughts on this?

Probably fairly consistent with Rob’s comments. Is the PE firm receptive to the alternate options that’ll help bring the overall spend down? It’s hard to envision the answer there that’s not yes. Is that need spiky? Is it other cross-border issues that may be in scope, and again, that seems to be pretty much a yes. Those trigger different types of technology solutions, process solutions and technical solutions.

Other predictable costs are those costs – again, I’m riffing off what Rob is talking about – but if they’re not predictable, then there may be an opportunity for some alternative staffing where you can use some individuals at a lower rate, and how nimble do they need their legal talent to be? Are they looking for the legal talent to come with everything that they need for every deal, or is every deal going to be a little bit different, requiring a different talent set?

Maybe, last two or three, other multiple parties that may require some kind of centralization to endeavors, and again, any number of deal reviews or deal platforms that could be a leverage at a fairly low cost, and certainly, when you leverage those across multiple deals, then maybe filing a data-specific piece. There are all sorts of tools that allow a company to slice and dice data in almost real time, and those are really an essential piece.

I think the question is, how do you identify the known unknowns and the unknown unknowns sufficiently to make good judgments about when to outsource the outside counsel, when to bring in some additional resources with some technical legal talent, and then, when to plan long-term and look for permanent individuals who can bring the kind of experience that you need for the future, for a 12-month or 18-month period?

Thank you for listening today. To learn more about our private equity and legal consulting solutions, I encourage you to visit protiviti.com/private-equity and Roberthalf.com. I also encourage you to subscribe to our Powerful Insights podcast series.