Regulators are probing the role of top law companies in lucrative private equity deals, it has emerged.
The number of buy-outs has ballooned over recent years, fuelled particularly by ultra-low interest rates.
Supermarket group Morrisons and defence group Ultra Electronics are among the big names to have been bought by private equity barons since the pandemic.
Debt fuelled deals: The number of private equity buy-outs has ballooned over recent years, fuelled particularly by ultra-low interest rates
But as the cost of borrowing soars and deals dry up, questions are being asked about the legal tactics being used by some lawyers.
Watchdogs are reportedly focused on the use of ‘designated counsel’ arrangements, which allow private equity firms to appoint and pay for the law firms that represent banks and other lenders funding their deals.
While private equity companies have traditionally appointed the legal counsel used by lenders, in recent years they have delegated that power to their own lawyers.
The practice may give rise to a potential conflict of interest as it weakens lenders’ negotiating position.
This in turn could enable private equity firms to pile more debt onto companies they own, or to take out bigger dividends.
The International Organisation of Securities Commissions (IOSCO) – a standard-setting body run by financial regulators from around the world – has begun looking into how lawyers are appointed, as part of a wider probe into leveraged debt markets.
City watchdog the Financial Conduct Authority, which is a member of IOSCO, is also understood to be involved.
Sources say there is not necessarily an issue with conflicts of interest so long as they are openly declared and clearly managed.
However, Sabrina Fox, chief executive of the European Leveraged Finance Association, a trade body representing debt investors, told Bloomberg News designated counsel arrangements could raise ‘potential conflicts of interest that hinder independence and impartiality where it is necessary.’
‘Now more than ever, it is critical that these issues are addressed,’ she added.
