An Alternative Approach to Legal Staffing in Portfolio Companies

Bespoke over Brooks Brothers: Reinventing and Re-Fashioning the Legal Staffing Model for Portfolio Companies 

When a private equity firm invests in the operational and investing arms of its organization, it focuses on defining a strategic path for economic growth and efficiency. A critical element of paving this path for success is ensured by thoughtfully and creatively selecting seasoned and skilled leaders with proven track records. The best and most successful firms choose operational and investing leaders, who are not only financially successful but who are also “disruptors” willing to make bold, calculated decisions and to take a chance.

In contrast to this approach, most private equity firms lack both strategy and creativity when building the legal and compliance teams for their portfolio companies. Instead, the majority of private equity firms rely on arcane and outmoded staffing approaches that worked in the 1980s. While there is no denying that Don Johnson’s Armani suits of the Miami Vice era are iconic, they no longer remain in fashion nor should staffing approaches conceived during that period be either. This article examines the traditional approaches employed by private equity firms when staffing their portfolio companies and makes suggestions for modernizing and/or breaking the traditional mold.

 The “Devil You Know”—Keeping the Existing General Counsel in Place

Often when a private equity firm purchases a portfolio company, it does so with the intention of assimilating/integrating the interests with another of its portfolio companies or with a mind toward selling the company within a brief time period. For this reason, many private equity firms will choose to keep the existing general counsel in place. The rationale for this approach being that the devil you know is better and that “this devil” likely has institutional knowledge. While this approach is not without merit, it, like a 1980s Brooks Brothers suit, is serviceable but far from the best or most ground-breaking approach. A more strategic and fitting approach requires asking a few questions:

  • Is this the right person for the role? We all know of that example where the GC was the founder’s best friend and had as much knowledge of corporate law as Robert Kardashian had of criminal procedures. Tied into those personal feelings is likely a salary that is not commensurate with experience.
  • Is this person willing to stay through the transition and guide the company to success? Likely, he or she is looking for the next opportunity.
  • And ultimately, does the size of the company necessitate having its own GC at all?

What if instead of keeping with that traditional “Brooks Brothers” approach, the private equity firm hired a general counsel for its portfolio company, who, directly reported to the private equity firm’s general counsel? This approach would allow the GC to work with a portfolio company for a year or two prior to integration or sale of that company.  Depending on the size of the companies, this GC could potentially oversee one or two smaller companies at the same time. Once the portfolio company is sold/merged/etc., he or she can move on to the next company purchased by the firm. Since this person would be employed directly by the private equity firm, he or she has a pride and/or financial stake in the portfolio company doing well. The GC will most likely not be looking for a job and become a potential flight risk since he or she will be employed by the firm and knows there is another opportunity on the horizon. This will also give the GC an interesting mix of career experience, and the firm will know that the GC has the right credentials and capabilities since it did the hiring.

But I Love the Partners at the AmLaw 100 Firms

A second, slightly outmoded approach employed by private equity is wholesale reliance on AmLaw 100 firms. An oft repeated refrain is: “But I love the partners at [insert name of large, well-respected AmLaw 100 firm here].” While there is, undoubtedly, comfort in reliance on the name of an AmLaw 100 firm and its esteemed partners, wholesale reliance on this approach is as ill-conceived as wearing Manolos to climb Mount Kilimanjaro. While there are times when reliance on the bright, sparkly firm is needed (i.e., niche company work), solely relying on outside law firms comes with downsides—namely the sizeable hourly rates and the oft unnecessary hours of research that may need to be done and the multiple hands (i.e., the education of associates) that touch each matter.

We agree that AmLaw 100 partners should be “loved”—and, in full candor, we have placed many of them—but a more strategic approach requires an examining of the economic efficiencies involved in using those partners. Is the “relationship” and “love” worth in excess of $1,000 per hour for every piece of work? Would it not make more financial sense to use those partners on the most crucial, niche types of work and use an interim GC as described above for the vast majority of the work?

We’ll Just Borrow an Associate from that Large AmLaw 100 Firm

A third frequently employed approach is reliance on a secondment from that same AmLaw 100 firm where the private equity firm “loves” the partner. While it’s arguable that “borrowing” an associate from an AmLaw 100 firm is more economically attractive than wholesale reliance on a partner, the private equity firm will “pay” for this in terms of time and social efficiency just as someone will “pay” for the H&M/high-end designer collaboration. They are simply not the same product. The law firm associate, regardless of how brilliant he or she is, will lack the in-house experience and communication cadence. Having been insulated by the partners for whom he or she works and writing countless memoranda, it will take the seconded associate time to learn to focus on business efficiencies rather than the 99 potential risks and advise accordingly. Similarly, it will take the associate time to learn to comfortably speak with and advise all members of the organization.

Conclusion: Interim but Bespoke and Efficient

Rather than adopting a one-size-fit-all approach, consider hiring interim or contact legal professionals who have the substantive legal experience and have worked in in-house environments. They can be hired on a set hourly basis for a timeframe that fits the private equity firm’s short- and long-term plans. They will turn work product around faster as they have no hierarchy to address and no billable hour goal. They have experience in similar environments so they are more likely in tune with a business-minded approach and communication style and will deliver on your needs without being distracted by their own agendas.

 

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