Law360 (May 19, 2020, 5:29 PM EDT) -- In this installment of Coronavirus Q&A, one of Dechert LLP's top mergers and acquisitions and private equity lawyers discusses the pandemic's profound effect on deals and associated legal work, including the issues private equity clients are asking for help on as they grapple with the crisis and its aftermath.
Mark E. Thierfelder
This interview has been edited for length and clarity.
From your perspective, how has the coronavirus pandemic impacted the state of the M&A and PE industries at large?
The coronavirus is having a profound impact on businesses and people in New York City and around the world. Law firms, lawyers and business service professionals have also been impacted by the pandemic, although we're awfully lucky to have roles where we can work from home and still be of value to our clients.
Overall, global M&A was down significantly in the first quarter, but there is diversity in how vibrant it's been across different regions and sectors. While first quarter private equity deals were down significantly by total global value, interestingly, PE transactions were the highest percentage of total M&A transactions since 2013, according to the most recent data released by [financial data provider] Refinitiv.
Meanwhile, a number of buyers are trying to step away from closing, or renegotiating terms, for transactions they signed up prior to the crisis.
How has the coronavirus affected the Dechert M&A and PE practices in particular?
Dechert has not been immune to the overall slowdown in M&A. We have continued to close significant transactions over the past several months, including deals signed prior to the crisis and those that were executed after the beginning of the crisis. We have gone pencils-down on a number of transactions over the past couple of months. But some of those transactions have already come back to life as clients have acclimated to a new normal, or parts of the world have started to gradually reopen.
We're currently busy with a number of new mandates that have kicked off since the start of the crisis, however. In fact, we had a couple of deals that started after the beginning of the crisis and have closed already.
Those are often in specific sectors that are doing well. At the same time, we've been very busy assisting private equity clients with a host of issues arising from the pandemic that are impacting both their business and the business of their portfolio companies, financially and operationally.
We have also seen a bit of an upswing in new mandates — both distressed and non-distressed just in the past couple of weeks.
What are some of those issues that private equity clients are grappling with?
When the pandemic began impacting the U.S. economy, many clients turned to crisis management, and we were called upon to assist in addressing their questions. For example, determining if a business is essential to stay open under a particular state or local legal regime, or analyzing the Coronavirus Aid, Relief, and Economic Security Act's, or CARES Act's, Paycheck Protection Program to see whether or not it's applicable to a particular portfolio company.
Additionally, analyzing tax relief legislation, counseling on best labor and employment practices, and addressing significant financing and budget issues.
We've been representing private equity firms for over 35 years now, longer than it's even been called private equity. Our PE practice is really much deeper than M&A lawyers alone, which is necessary. When you look at a private equity transaction or matter, M&A lawyers are just the tip of the iceberg in terms of what it takes to execute a sophisticated transaction.
Dechert represents approximately 300 private equity or private investment firms in some capacity. Our colleagues in other disciplines work closely with our private equity lawyers. For example, these firms need guidance on litigation, including thinking through potential issues, whether it's related to a deal or negotiation. Our financial services lawyers assist with fund formation assignments and advise on the regulatory issues that impact firms, particularly during fast-moving and uncertain times. Our life sciences and intellectual property colleagues work on numerous private equity technology, life science and healthcare transactions.
All of our different resources, and how well the practice works across the firm to service private equity clients, is part of what makes Dechert a great place to work. The added value that comes with our cohesion becomes particularly visible during unprecedented times like this. You have to really listen to clients and help them deal with problems and opportunities in a real-time way while also thinking outside the box.
Are there any types of transactions you are working on with regularity during the coronavirus chaos that were less popular when we weren't in a pandemic?
There was a shift initially in things we were working on as clients turned from a regular deal environment when the pandemic hit. As the lockdown started across the U.S., a lot of clients turned to crisis management.
In terms of the shift in transactions that are currently being negotiated, we're seeing a number of common themes. It's no surprise that there's a focus on allocation of risk, especially when confronting the economic impact of the coronavirus on deals that people are negotiating today.
That trickles down into conditionality on obligations that the buyer and seller would have between signing and closing, and bridging valuation gaps between buyers and sellers on price. There are also issues around the availability of debt financing.
In terms of types of deals, we're seeing a significant increase in portfolio company add-on acquisitions as a percentage of total deals. PE buyers are effectively acting as strategics through buy and build strategies with existing portfolio companies. Like we saw in the 2008 financial crisis, there's increased interest in PIPE [private investment in public equity] deals, other types of structured equity investments, take private, and loan to own strategies. We're also seeing investors look at deals that are for a piece of the capital structure, or minority investments, as opposed to acquiring an entire company.
In the last week or two, there's been an increasing interest in distressed opportunities, including add-ons and consolidations to existing investments, as well as new platform investments.
One trend that will be really interesting to see is how the market develops as people start to execute on new deals. What's likely to happen on relative leverage between buyers and sellers? Over the last six to eight years, leverage had really sided squarely with the seller in many instances. It's also interesting to think about how deal terms may change relative to the availability of debt financing in the market.
You've been in practice during multiple major economic downturns. What is different about this one and how it has affected the market for deals?
This won't be the last. I've been practicing law for almost 30 years. I was in law school during the recession in the early 1990s, which led to lots of disruption, including law firms cancelling summer associate programs and layoffs. Then there was the Russian sovereign debt crisis in 1998, the dotcom bubble meltdown, 9/11, and the financial crisis in 2008.
There are elements of every crisis that look similar, and many elements that are completely unexpected. If they weren't unexpected, everybody would know what was coming and be prepared to deal with it.
One thing I would say is that in past times of crisis, we've seen PE buyers get more creative with different structures, whether it's minority investments or structured investments. People really have to be creative in finding good assets and getting to the price the seller wants. I think we're going to see a lot of those tools come out of the toolbox for a few reasons, including that there's more uncertainty and less availability of debt financing.
How has your day-to-day personal life and work life changed since the coronavirus outbreak?
Luckily, my home office setup is great. I've lived in Princeton, New Jersey for 15 years and have a long commute to New York City, so I have a study in my house that I work out of. Even during normal times, I regularly start my day at 5 a.m. with calls, either on deals or firm stuff with people in Europe or Asia before I get on the train to go to New York.
I've got a full setup, including a high-speed printer, iPad and computers. It's a comfortable space. I've got all my books and fly fishing rods around me. I inherited my dad's library, so I have all those books, which give me some sense of comfort.
Of course, even though it's a great setup, I have found that some days after being in the home office for 15-plus hours, I have to get out of here. I'm sympathetic to clients and people on our team in small apartments in the city in close quarters, sometimes with young children, as sometimes I find I have to get up and go take a call outside.
One thing I never thought I'd miss was sitting on New Jersey Transit stuck in the Hudson Tunnel for 30-plus minutes. While not having a commute is great, and so is being with my family every night, the hours and days sort of just blur.
Law, and M&A and PE in particular, have always been a 24/7 job, because you have to work when the clients need you. But now it's just a blur. It becomes one continuous day. You have to try and set periods of time to go for a run, or go have dinner with the family. Otherwise, you can literally be in the office for 18 straight hours.
--Editing by Kelly Duncan.
Check out Law360's previous installments of Coronavirus Q&A.
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