The way the tech industry is financed has changed, and law firms with strong private equity practices were among those reaping the rewards in 2018.
The buyout boom and its effect on the legal industry goes beyond Silicon Valley, with private equity chipping away at the dominance of traditional Wall Street banks—and their traditional advisers. But as Silicon Valley’s darlings are putting off going public, favoring private equity investors over IPOs, the shift is forging stronger alliances between buyout firms and their lawyers in the Bay Area.
Flush with cash, private equity investors have been rushing to inject themselves in technology deals in recent years. According to data recently released by Preqin, there were 1,079 tech-focused global buyouts announced as of November worth $71 billion, approaching last year’s record of 1,096.
That’s been keeping Bay Area partners extra busy at national law firms with strong private equity practices, including Goodwin Procter, Kirkland & Ellis, Latham & Watkins, Ropes & Gray, Simpson Thacher & Bartlett and Weil, Gotshal & Manges.
According to data provided by the firms, Kirkland handled about 80 announced private equity deals in the Bay Area this year—20 more than last year—for a total value of $16.6 billion. Goodwin Procter said it worked on 47 private equity deals out of California with an aggregate value of $11.6 billion. Ropes & Gray said it completed over 18 private equity deals across California worth $6.9 billion. Weil handled 33 deals in the Bay Area, almost double the amount from last year, with a combined value of $12 billion, the firm said. Simpson Thacher said its Palo Alto office has handled 20 private equity deals so far this year.
Kirkland corporate partner Stuart Casillas, who joined the San Francisco office of the world’s highest-grossing law firm from Pillsbury Winthrop Shaw Pittman in 2005, represents private equity clients including Vista Equity Partners, Swander Pace Capital, GI Partners, Branch Brook Holdings, Bridges Ventures, Orchard Holdings, Gryphon Investors and Industrial Growth Partners.
He said his clients are pouring more cash into software and technology deals because those companies offer “solid recurring revenue bases” that drive up their value.
“They are very attractive acquisition targets,” said Casillas. “And a lot of those companies are here in the Bay Area. We have clients that whether or not they are based in the Bay Area, they are acquiring businesses here.”
Kirkland opened its San Francisco branch in 2003 with 11 corporate attorneys. The firm later added a Palo Alto office in 2008 and now has 181 lawyers across its Bay Areas offices. More than two-thirds of them are transitional attorneys.
“If you know if there is an area of the country or internationally where there is a hub of clients you want to work with and are working with, it is very positive to the relationship to have the attorneys that are local,” said Casillas. “We are also close to local trends and the local decisions about the industry.”
Latham, which saw its annual revenue exceed $3 billion last year, opened its San Francisco office in 1990 and its Silicon Valley office in 1997. The 2,500-lawyer firm said it has about 250 attorneys across the two offices, with 20 specializing in private equity.
Luke Bergstrom, who co-chairs the firm’s global M&A practice, is one of them. He said Latham has also seen a “significant inbound interest from private equity funds outside this area that are interested in acquiring technology companies”.
“Generally, funds have a lot of money to deploy right now,” said Bergstrom. “That is no mystery, that has been the case for several years now. There has been a lot of good investment opportunities out here. We also have seen over time the success among a number of funds that are focused on technology.”
Bergstrom, who joined Latham from Cooley in 2004, noted that a number of those funds are now based in the Bay Area as well, not just investing here.
“If you are going to be in the Bay Area and to be a major player in M&A, private equity is a logical offshoot of that, but you can’t do that unless you have the capabilities of really serving private equity funds across the life cycle,” said Bergstrom, emphasizing Latham’s broad practice base.
“In terms of private equity in California, we are seeing a lot of funds sort of focus on unicorns, on large private companies and providing later round financing,” said Jason Freedman, a partner at Ropes & Gray who specializes in representing private equity firms and investors.
The Boston-based firm originally set down roots in San Francisco in 1992 to service a West Coast clientele that included Stanford University. In 2004, it acquired intellectual property law firm Fish & Neave, adding another office in Palo Alto. Over time, the two offices have grown to more than 110 lawyers, including five partners dedicated to private equity.
“Originally this area, Northern California, Silicon Valley, in particular, was associated with venture capital business, a lot of new emerging companies grew up here, and a lot of venture capital firms … but now we are seeing a situation where it’s not just the venture capital funds, but a lot of the hedge funds have moved here, a lot of buyout firms have moved here,” said Raj Marphatia, co-managing partner of Ropes & Gray’s Silicon Valley and San Francisco offices.
Marphatia noted a “broader proliferation” of East Coast buyout firms extending their business to California in recent years, including long-term clients Advent International Corp. and Kohlberg & Co. His firm has also been taking on more work on the West Coast as a number of its private equity clients, such as TPG Capital, Silver Lake, and Genstar Capital, are based in the Bay Area.
“The fact that we have been here since the early 1990s has made it very easy for us to do that work over here,” said Marphatia. Ropes & Gray hired former King & Spalding partner Matthew Jacobson to expand its M&A group in San Francisco and Silicon Valley in October.
Now located in Redwood City, Weil, Gotshal & Manges’ Silicon Valley office opened in 1991 and has about 50 lawyers working in banking and finance, complex commercial and patent litigation, M&A, private equity and technology and intellectual property transactions. Early this year, Weil added Matthew Stewart, formerly at King & Spalding, to its private equity team.
“When looking at the favorable lending environment, together with the massive amount of equity capital the private equity sponsors are holding, it has been a really strong market for the buyout firms, and we are right in the middle of that,” said Craig Adas, managing partner of Weil’s Silicon Valley office.
“We are one of the key law firms in terms of where the private equity sponsors turn to for buyout or for other private equity investment,” he said.
Adas has represented private equity shop Genstar Capital for more than a decade. Most recently, his team handled a series of deals for Genstar and its portfolio companies, including the sale of the global marine and mobile division of portfolio company Power Products to Brunswick Corporation for $910 million and the sale of thermal management and environmental sealing products company Boyd Corp. to Goldman Sachs Group Inc.’s merchant banking division.
“There is still a huge amount of dry powder by the private equity sponsors and the banks, a lot of cash they need to get their return on,” Adas said. “I think 2019 should be a good year.”
With growing uncertainty over the economic forecast for 2019, predictions were mixed about what’s in store for the firms’ private equity clients.
Latham’s Bergstrom acknowledged that corporate and private equity lawyers are “more guarded” about the outlook for 2019, and are watching political and economic developments closely. Others put on a brave face.
“From all of the indications that we have seen in the market and through our clients, we anticipate that the deal activity is going to be at very least stay steady, and potentially increase,” said Kirkland’s Casillas. He said the firm is approaching recruitment and attorney retention “on the theory that we are going to have as much or more work than we had this year.”
Casillas acknowledged the possibility of a bear market in the upcoming years, but he said the firm could weather it.
“We have seen historically at times the market goes down and from time to time, activity actually goes up,” he said.
Even a recession does strike, Freedman of Ropes & Gray predicted his firm will stay busy. “It just might be a little bit different balance of work than the work we are doing now.”
“If and when the market turns from our clients’ perspective, particularly if debt financing continues to be valuable, all of a sudden companies start to look cheap [and] that sort of is a good time to invest,” he said.