Neel Sachdev has a reputation for going above and beyond to ensure his private equity clients get what they want. The power the London lawyer wields over Europe’s $2 trillion buyout market is testament to that, and a reflection of the dominant debt finance practice he has built at US law firm Kirkland & Ellis over the past decade.
(Bloomberg) — Neel Sachdev has a reputation for going above and beyond to ensure his private equity clients get what they want. The power the London lawyer wields over Europe’s $2 trillion buyout market is testament to that, and a reflection of the dominant debt finance practice he has built at US law firm Kirkland & Ellis over the past decade.
Now, however, tactics he has used to his client’s advantage — such as influencing which law firms he comes up against in deal negotiations and even playing a role in the recruitment of lawyers into rival law firms — are facing scrutiny by market participants as the era of easy money ends.
Originally heralded as a way to make the often-fractious buyout process more efficient, the widely-used designated counsel arrangement is now viewed by many, including some of Wall Street’s biggest names, as a potential conflict of interest. It allows private equity firms, guided by their lawyers, to appoint and pay for the law firms that represent the lenders funding their deals.
The International Organization of Securities Commissions (IOSCO) has begun looking into the designated counsel arrangement as part of a wider probe into leveraged debt markets, a spokesperson for the regulator said. Other regulators such as the Financial Conduct Authority are involved in IOSCO’s work.
Since the early 2010s, market pressures — and access to plentiful cheap money — meant many lenders lacked the negotiating power to push for stronger protections. Sachdev and his buyout clients have used this imbalance to convince lenders, like the credit units of private equity groups and Wall Street’s largest banks, to agree to lesser safeguards around debt levels and dividend payments on deals they help finance.
The gradual erosion of these terms has allowed private equity firms to pile debt onto the companies they own, take out huge dividends and move valuable assets out of the reach of lenders.
That sophisticated lenders — often the credit arms of the same private equity firms pushing for changes in deal terms — accepted such arrangements raises its own questions. But recent moves by creditors to hire their own counsel and actively avoid working with certain law firms suggest this goes beyond simple buyers’ remorse.
The deterioration in the global economy has strained the relationship between buyout firms and lenders. Soaring inflation, interest rates and energy costs mean many of these highly-indebted businesses are facing their first prolonged test since the financial crisis. How they weather the storm will dictate what happens to billions of dollars of investor cash and thousands of jobs across Europe.
Bloomberg News has spoken to over 40 lenders, lawyers and buyout firms about the use of designated counsel, a legal practice that became commonplace in Europe and the US after the global financial crisis. Some people with direct knowledge about hiring practices at specific law firms, the relationships between lenders and their lawyers, as well as deal negotiations, spoke on condition of anonymity for fear of damaging their career prospects. Others said they needed to protect institutional relationships.
Sabrina Fox, CEO of the European Leveraged Finance Association, a trade body representing debt investors, says the industry is scrutinizing the practice. “Potential conflicts of interest hinder independence and impartiality where it is necessary,” she said. “Now more than ever, it is critical that these issues are addressed.”
ELFA plans to engage with regulators – likely to include the FCA and the Solicitors Regulation Authority – to explore potential conflicts of interest in the use of designated counsel, Fox said.
Kirkland & Ellis, which declined to comment for this story, is not the only law firm to use this arrangement. But its partners, led by Sachdev, are widely regarded by buyout firms, lenders and other lawyers as the most aggressive in deal negotiations. Being on the wrong side of them can result in law firms being frozen out of future deals, people familiar with how Kirkland operates said. They asked not to be identified as they did not want to jeopardize future relations with the firm.
“It is very difficult to feel you have independence when the other firm sitting across the table may have played a role in getting you your job,” said Trevor Clark, a former finance lawyer, turned law lecturer at the University of Leeds. Clark, who specializes in the ethics and professionalism of corporate lawyers, was speaking generally about rival lawyers being involved in the hiring processes of other firms.
Booming business
Kirkland has grown from a mid-sized Chicago player to the world’s highest grossing law firm with more than $6 billion in revenues in 2021, largely off the explosion in private equity deals. Its growth has seen it usurp London’s so-called Magic Circle firms, that have dominated the European legal landscape for decades.
One of the biggest winners of this shift in power has been 47-year-old Sachdev, who joined Kirkland in 2003. A charismatic figure with a reputation for winning business, Sachdev — who declined to comment for this story — rose quickly, becoming a partner in his 20s.
Sachdev’s practice, which he runs with another partner Stephen Lucas, has negotiated debt financing terms for successful deals ranging from Allied Universal’s £3.8 billion cash offer for UK private security firm G4S to the €2.1 billion takeover of Ahlstrom-Munksjö Oyj by a Bain Capital-led consortium in 2021. It was not possible to determine whether these deals involved the use of designated counsel.
Since 2013, the firm has seen its market share advising on European leveraged finance deals almost quadruple from 7% to 26.3% last year. It has topped a Bloomberg listing of Europe’s leveraged finance legal advisers three times in the past five years, based on the value of deals it advised on.
Kirkland’s rise coincided with an era of low interest rates, which prompted large institutional investors like pension and sovereign wealth funds and the super-rich to invest record sums into higher-return asset classes such as private equity. Private debt funds also backed some of their deals.
The clamor for higher yielding credit has given private equity groups the power to largely dictate the terms on which they borrow money. And their chosen law firms the opportunity to muscle their way through deal negotiations at breakneck speeds, securing their clients increasingly attractive terms.
“Everything has been so borrower friendly for the last decade,” Natasha Harrison, managing partner at litigation law firm Pallas Partners LLP said. “There has been far too much money in the market which has meant a record number of deals.”
Better Call Neel
Advocates of designated counsel argue that selecting a single law firm to represent all lenders in a deal means negotiations are less likely to get bogged down with multiple teams of lawyers arguing.
But the arrangement encouraged some lawyers to develop close relationships with their counterparts acting on behalf of private equity groups. For some law firms that translated into repeat work and a lucrative stream of business, according to people working at credit funds and law firms, who did not want to speak publicly to avoid damaging institutional relationships.
The extent to which some lawyers became dependent, at least partially, on this designated business has triggered concerns among a number of lenders about potential conflicts of interest.
“The processes give as little scope for the lender side to review documents as possible, all in the name of efficiency: cutting costs and getting deals done quicker,” Clark said, referring to the use of designated counsel. “But in effect it makes it a lot harder for lenders to push back.”
In April 2021, US law firm Shearman & Sterling hired lawyer Sanjeev Dhuna as a leveraged finance partner from rival Allen & Overy. His appointment was an attempt to grab a slice of the booming market for advising on financing private equity buyouts. Sachdev was among the people consulted by Shearman during Dhuna’s hiring process, people with direct knowledge said.
“Shearman & Sterling conducts extensive diligence on potential lateral hires; this includes talking to the banks, credit funds, private equity sponsors and their counsel,” law firm Slateford said on Shearman’s behalf.
“In hiring Mr. Dhuna, Shearman & Sterling saw an opportunity to rapidly gain traction in a market it was not previously as strong as it wished to be by hiring an individual proven to win mandates in this field,” Slateford said.
Soon after Dhuna joined Shearman, the firm secured lucrative sponsor designated counsel mandates. Early last year, Europe’s largest-ever direct lending deal came to market when two private equity firms wanted to refinance The Access Group, a software company, represented by Kirkland. Shearman worked for a large group of lenders including Arcmont Asset Management, Intermediate Capital Group and HPS Investment Partners, as designated counsel on the Access Group deal.
During the negotiations, some of the lenders hired their own lawyers, in addition to Shearman. These so-called shadow lawyers were employed to give additional legal advice after concerns arose over the perceived independence of the sponsor designated counsel, people close to the talks said.
Slateford said on Shearman’s behalf that over the shoulder counsel was appointed in the “normal course of work” rather than due to any question as to the independence of Shearman’s advice.
Deals where other law firms were appointed designated counsel have also prompted direct lending arms of groups such as Apollo, Carlyle Group Inc. and KKR & Co. to hire their own shadow lawyers, Bloomberg News reported last year.
Sachdev’s influence extends to other law firms.
Last year, US law firm Paul Hastings LLP wanted to expand its debt finance business in Europe and was in the process of hiring a team from a rival, Latham & Watkins, which had previously received sponsor designated counsel work from Kirkland.
Sachdev was consulted along with others, said people with direct knowledge of the recruitment.
Some of the lawyers who joined Paul Hastings joked with a lawyer already at the firm about Sachdev’s outsized influence on the market in a Whatsapp message group, said people familiar with the matter, who asked not to be named as the information is private. The messages used the phrase “Better Call Neel,” they added.
Paul Hastings declined to comment for this story.
The Fallout
Some private lenders are now going one step further than hiring shadow counsels. Direct lending units at firms such as Blackstone – which declined to comment for this story – are said to be drawing up lists of preferred law firms to act as designated counsel and actively pushing back when certain law firms are selected for the role, people familiar with the matter said.
Paul Hastings and Shearman are among the law firms that some lenders have tried to avoid working with, the people said. Slateford told Bloomberg News that Shearman is “not aware of any lenders that actively do not want to work with them.”
Lenders now sit on billions of dollars of loans to companies exposed to rising interest rates and soaring input costs. In such circumstances the details in loan agreements become that much more important.
“Litigation and restructuring, for obvious reasons, increase in times of crisis,” Pallas’ Harrison said. “We are already seeing a shift in terms of people pressing the button on litigation.”
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