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2025 Global Private Equity Outlook: Key Legal Developments and Trends to Watch · Committed Capital

• 0:09
  Intro: Welcome to Dechert's Committed Capital, where private equity leaders open their playbooks to discuss today's trends.
• 0:18
  Sarah Kupferman: Hello. My name is Sarah Kupferman. I'm a partner in Dechert's global private equity practice group based here in New York. In Q2 2024, merger market, on behalf of Dechert, surveyed 100 senior-level executives within private equity firms with $1 billion or more in assets under management and which were not first-time funds. The results of this survey form the basis of our seventh annual Global Private Equity Outlook study.
• 0:40
  Sarah Kupferman: Today, we are planning to discuss some of the legal implications for private equity in 2025 based on the underlying market observations of our report. I'm delighted to be joined by my fellow partners, Rani Habash, Eliot Relles and Sam Whittaker. To kick things off, maybe each of you could just briefly introduce yourself and describe your area of practice.
• 1:02
  Sam Whittaker: I'm happy to go first. It's Sam Whittaker, I'm based in the London office, and I focus on M&A for the full range of private capital clients.
• 1:12
  Rani Habash: Hi, I'm Rani Habash, I'm a partner in the Dechert D.C. office in the antitrust and competition group with a focus on mergers and acquisitions, defending those for the FTC, DOJ and international competition authorities.
• 1:27
  Unknown: Eliot Relles, I'm based in New York. I am situated in the leverage finance group at Dechert with a focus in representing private credit clients, predominantly direct lenders in middle market finance transactions to primarily sponsor-backed companies.
• 1:47
  Sarah Kupferman: Awesome. Well, thank you all for joining me today. We saw in the report that private equity firms still believe there are significant obstacles to fundraising out there and, as a result, it seems that firms may be seeking out more co-investment and club deals to help bridge that gap.
• 2:02
  Sarah Kupferman: According to the report, 73% of North American firms offer co-investments, and 61% describe club deals as "very appealing.: That's up from 46% in the prior year. To kick things off, Sam, what complexities should PE firms be mindful of when evaluating co-invest and club deal opportunities? before
• 2:21
  Sam Whittaker: Before we get on to the complexities of co-investments, it might be helpful to set out some of the economic and market backdrop that they exist in, which I think was quite neatly set out in the PE report. And I want to pull out a few of the striking figures and reflections in that report. First is in the first three quarters of 2024 we saw a 1% decrease in the number of deals versus that period in 2023. But, in contrast, for that period in 2024 we saw a 47% increase in aggregate deal value versus that period in 2023 which was a very, very significant rise of $224 billion. It's also important to note that this is to the backdrop of PE firms reflecting on multiple and varied obstacles to fundraising.
• 3:06
  Sam Whittaker: And so, perhaps this is a long way round of saying that PE assets are costing more on average, and it remains hard to raise capital. So, to that backdrop, as Sarah noted, we've got 73% of North American PE firms now offering co-investment opportunities to their LPs, and you've got 61% of global private equity firms describing club deals as very attractive, which was up from 46% in 2023. And so, at the risk of oversimplifying what is obviously a very complex ecosystem, and there's going to be multiple motivations and demands in there, we can perhaps surmise from these points that the number of deals that are large enough to warrant a co-investment has increased significantly, and that the willingness on the GP side to bridge funding gaps could perhaps be increasing. And dare we say that this is probably going to be a feature that continues in the future, as fundraising has remained more tough and dual values are steadily increasing. Yeah, thank you.
• 4:07
  Sarah Kupferman: Yeah, thank you. I think that's really important backdrop, and a really good overview of those summaries in the report. But with all that in mind, let me re-ask my original question. Sam, what are the complexities that firms should consider when evaluating co-investment opportunities with all of that as a background?
• 4:23
  Sam Whittaker: Yeah, fair point.
• 4:23
  Sam Whittaker: I think a key trend that's worth considering, first up, is transaction fees. And so, this is going to be the gating item for any co-investment, for both LPs and GPs, what types of fees are going to be charged and in what amount? So, are we talking just a management fee? Are we talking some sort of carry arrangement? And what percentage are we talking in each case? So, it seems probable, at least to me, that most LPs' motivations in participating in a co-investment is probably going to be driven by the fees, and they would probably expect those to be lower than investing in a private capital firm's fund. And the reason for that is you are getting a higher risk exposure to one asset, rather than aggregating your risk across a whole portfolio of assets which the private capital firms offer you. So, our research has shown through the report that both carrier management fees are charged by 40% of GPs and 58% of firms have charged one or the other in their co-investments.
• 5:23
  Sam Whittaker: So, that leaves 42%, let's say, not charging a fee at all. But of those 58%, let's say the vast majority of fees charged are significantly below what are charged to the fund participants themselves. So, for example, if you're an LP in a fund, you would expect to pay a higher fee rate than you would if you're a co-investor. So, the balancing act for the GP is going to be making the co-investment work financially. For them, they've got to charge a level of fee, perhaps, that makes it worth doing. But for the LP, they're going to want a lower level of fee to reflect the higher risk exposure for them.
• 6:02
  Sam Whittaker: Yeah, and if I can just jump, I think it's also worth noting that the report shows that large pension funds and those similar sort of large- type investors, they expect no fee whatsoever.
• 6:11
  Sam Whittaker: So, that's presumably the quid pro quo for large commitments to the GP funds, but also due to just the usefulness of very large co-investment checks that they're able to write just given who they are.
• 6:22
  Sam Whittaker: Yeah, that feels absolutely right to me. And I would
• 6:23
  Sarah Kupferman: Yeah, and just to pivot for a little while, encourage everybody to take a look at the PE Outlook report.
• 6:28
  Sarah Kupferman: There's a whole section on the level of fees that are being charged and indeed that the large checks are sometimes coming with no management fee or carry at all. And so, I think Markus Bolsinger in there, one of our M&A partners, summarized it when he suggested that GPs are still feeling their way in this there's far from market consensus in what fees are being charged and at what level, which I think is quite clearly reflected in those stats we gave earlier.
• 6:56
  Sarah Kupferman: Eliot, I'm just curious how you're seeing this trend of increased deal size and more prevalent co-investment structures on the private credit side of things.
• 7:05
  Eliot Relles: Sure. Well, finding other private equity funds to club together to help fill a funding gap is not the only option. Another carrot being used by private equity funds to attract LP investor commitments is offering them private credit opportunities in addition to their private equity investment. Knowing that many prospective LP investors are increasingly interested in private credit as a means to hedge their investment portfolio, many private equity funds that frequently turn to the private credit markets to finance their private equity investments are requiring, or strongly suggesting, to their debt provider that is, "if you want this deal, it would be great if you did X." They're requiring that a certain percent of the debt facility being raised to fund the acquisition be offered to the private equity fund's LP investors, who would be participating as co-lenders, alongside the main debt provider. My clients are often referred to as direct lenders.
• 8:10
  Eliot Relles: They usually act as the lead arranger in their deals. In roughly half the LBO financings I closed in 2024 to support private equity acquisitions my direct lender of clients agreed to allocate between 5% to 25% of their credit facility to the private equity fund's LPs, usually no more than one or two at a time. As lenders, these LPs will be entitled to receive the robust reporting that the direct lenders typically require from the private equity fund's portfolio companies as borrowers. Thus, the private equity funds are knowingly pulling the curtain back a bit by giving these LP investors access to private credit investments where they will be receiving more granular performance information about these investments than what the investors would otherwise be receiving directly from the private equity fund. But this is a tradeoff that many private equity funds are willing to make in order to attract additional LP equity commitments. As the private credit market continues to expand and mature, more LP investors are becoming better educated with the risk return opportunity that private credit offers as compared to the more accessible publicly traded investment grade debt. Private equity funds are leveraging their relationships with the debt providers, knowing there's great competition among debt providers for the limited pool of decent quality deals. The private equity funds are leveraging this competition dynamic to offer their LP investors access to an investment product, private credit that these investors would not otherwise have.
• 10:11
  Sarah Kupferman: Really interesting. To shift a little, the report noted that 68% of respondents believe market conditions for exits and liquidity events will continue to be unfavorable over the next 12 months. We actually saw an uptick in exits, I think, in the last quarter of 2024, so maybe those responses from earlier in the year are just a little overly pessimistic. But Sam, maybe you could give some color about some creative solutions you've seen clients implementing to obtain liquidity in tight markets.
• 10:40
  Sam Whittaker: Yeah, absolutely.
• 10:40
  Sam Whittaker: Look, and I think none of these are going to come as a great surprise to the audience of this webinar. It's the classic GP-led secondaries and continuation funds, you know, remain very, very popular and important. I feel like NAV facilities, fund-level finance is really coming to the fore these days.
• 10:58
  Sam Whittaker: It's always been around, but it's much more so now. Pref equity is something that we've had a lot of imbalance over 2024, and have done a number of those to release value from investments. And then you've also got your classic dividend recap to get the money out.
• 11:15
  Sarah Kupferman: Yeah, I think it's also really interesting to think about. I think, historically, some of these types of alternative exit scenarios or ways to extend your hold period have been negative signals to the market about the value of your asset, and it'll be sort of interesting to see if some of these become a little more consistent and positively thought of, and not necessarily those negative indicators that they may have been otherwise previously if this becomes more of a standard part of the playbook for alternatives to an exit if you're ... if you have an asset that's not quite ready, or if you have an asset that's still bearing fruit and you just want to continue holding onto.
• 11:48
  Sarah Kupferman: We've seen enormous growth in the private credit markets, I think that's clear. I think it's exceeded the $2 trillion mark for the first time in 2024. So, due to such rapid growth, the IMF actually issued a warning in 2024 urging regulators to be more proactive and intrusive in their supervision of these products. Considering that potential for new regulatory hurdles, Elliot, do you think that there are certain best practices that firms should be implementing, even if not currently required by regulators, but that would leave firms well positioned to react to any new oversight?
• 12:23
  Eliot Relles: Sure. With private equity funds unwilling to exit their investments at returns that they believe are below what they would normally be and more standard interest rate environment - or, said another way, you know, unable to find buyers willing to pay an attractive premium over the fund's investment costs - many private equity funds are holding onto their investments for a longer duration, and thus needing to refinance or replace the debt that they originally incurred to finance that investment and, as a result, they're turning to the private credit market to help find creative solutions. However, these private credit products often carry a higher debt service cost than the original debt incurred three or five years ago, just given the elevated interest rate environment. Sarah, as you noted, there have been rumblings that private equity funds' use of leverage could come under some level of regulatory scrutiny. Usually, the regulatory chatter is focused on the need to provide better or enhanced daylight to LP investors about the fund's use of leverage the variety of the products that are at the fund's disposal, the debt service costs associated with those products, the valuation of the private equity investments supporting that leverage and the potential impact to the private equity fund's returns. From an LP investor best-practice perspective, I would want to know how the fund uses leverage.
• 14:04
  Eliot Relles: How is the cost to support that leverage funded? Where's the money come from to pay the fees, the interest and principal back?
• 14:12
  Eliot Relles: And probably most importantly, I would want to know the valuation methodologies used by the fund in order to determine that the fund's assets are adequate to support its debt. How frequent does the fund mark its investments, and by what means or measure does the fund employ to come up with these marks, given that most of the assets in the fund's portfolio are not publicly traded? Does the fund take a cautious or conservative approach to coming up with these valuations, or does the fund infrequently conduct such values and use methodologies that provide or afford the fund greater liberties in establishing these values? Given the fundraising obstacles we just previously discussed, I would think that more private equity funds are using the concept of enhanced transparency- transparency as it relates to the types of leverage and the valuation methodologies used - I would think that they're using those discussion points as a marketing tool in their conversations with prospective LP investors
• 15:30
  Sarah Kupferman: On the topic of regulatory oversight and sort of the specter of regulatory oversight, according to the report, 66% of respondents expect increased scrutiny from antitrust authorities to have a negative impact on their dealmaking plans. We've seen a flurry of activity at the FTC over the past several months, first with respect to changes to the pre-merger filings required under the Hart-Scott-Rodino Act- those just recently went into effect on February 10 - and then the more recent appointment of Andrew Ferguson as the next chair of the FTC, replacing Lina Khan. As we wait to see how the new administration will evaluate antitrust matters, Rani, what do you see as the outlook for antitrust enforcement as it relates to private equity deals?
• 16:12
  Rani Habash: So, first of all, I thought the survey results there, the 66% are concerned about greater antitrust scrutiny, I thought that was really interesting and I think it's a good sign, because people should have antitrust as one of the key items. In terms of deal certainty and in terms of timing, it should be top of their radar. One of the good things, I think, that we're looking ahead to for the Trump administration, is that we are expecting improved regulatory predictability in both the U.S.
• 16:40
  Rani Habash: and in Europe. So, under Biden, there was actually record low enforcement according to our Dechert Antitrust Merger Investigation Timing Tracker.
• 16:53
  Rani Habash: So, we actually saw that there were lower levels of enforcement activity, although they did tend to go after some of the larger, splashier deals, and they did tend to pursue some theories that were more novel and not traditionally pursued, and I think that created a lot of unpredictability on deals. The other thing that we saw was that the settlement options essentially disappeared. So, they were either suing to block your deal outright, or they were clearing it unconditionally. But there wasn't sort of this middle-ground settlement option that we had traditionally seen in the past. So, I think on the bright side, the Trump administration is coming in.
• 17:35
  Rani Habash: According to our DAMITT tracker, what we did see was that the Trump administration actually had more enforcement activity than the Biden administration but, you know, a lot of that was these settlement agreements that are this middle-ground solution, as opposed to seeking sort of new theories and seeking, you know, to file complaints to block a lot more deals like the Biden administration had done.
• 17:59
  Rani Habash: So, what we see that doing is we see that improving predictability of deals' certainty, when you have a settlement option, potentially with the agencies, it opens up the opportunity to reach sort of a middle-ground resolution on these deals, instead of having this all-or-none approach. And you know, one other positive that we're seeing so far out of the Trump administration is that the new FTC chair did make a comment about private equity firms specifically, saying that, look, it's not the fact that it's a private equity firm involved that sort of gives the FTC any heartburn. It's just, you know, the underlying conduct, whether it's a PE firm or a company or whatever, it doesn't matter. They're really just looking at the conduct and not sort of who the actor is. So that's a positive sign and, I think, a return to more traditional antitrust theories.
• 18:57
  Rani Habash: So, that's the U.S. side. I think in Europe, what we've seen is that the UK did go after the Microsoft/Activision deal a couple years ago, and they were viewed as sort of business unfriendly, and so we've seen them step back a little bit, and there's been somewhat less hostility out of the UK recently. And then in the EU, I think we saw similar drops in enforcement activity over the last four years or so alongside the Biden administration. And so, we're not seeing as much aggressiveness out of the European authorities as we used to see. Part of that has been a slight shift towards protectionism, with Europe really looking to favor transactions that might help the member states to some extent.
• 19:49
  Sarah Kupferman: You know, also top of mind, think I mentioned a couple minutes ago, is the upcoming changes to the HSR reporting requirements, which are going to become much more burdensome, I think is a probably the most charitable way of putting it. So, just curious if you have any thoughts on what private equity firms can do to be prepared to comply with those new requirements.
• 20:09
  Rani Habash: Yes, we are expecting that it's going to increase the amount of time and the amount of burden that it takes to prepare an HSR filing.
• 20:16
  Rani Habash: Traditionally, we would allocate about five to 10 business days after signing to get that filing in. And, you know, we're expecting that that timeline could approximately double or triple with the new rules that are in place. So, these new rules are really about increasing the disclosures and increasing the amount of documents, both deal documents and ordinary course documents that you have to produce. And so, it makes it more important to have antitrust advice in advance, so that you understand sort of what the issues may be with a merger and also what the conduct, just in the ordinary course, should be in terms of complying with the antitrust laws so that when those documents go in, you're not facing any unnecessary distractions on your deal. We do expect overall the there's going to be continued priority emphasis on antitrust across jurisdictions. And so, need to be prepared for that across the board and, you know, really, I think in the negotiation stages, need to be creative in thinking about what the antitrust risks are and how to address those risks, especially with the return of some of these settlement options, figuring out what the risk-shifting provision should be to address those concerns and address the timing of any investigations as well.
• 21:40
  Sarah Kupferman: This has been a great conversation. Thank you again, Rani, Eliot and Sam for joining me today and for your insight. And I hope that everyone had an opportunity to take a look at the report that Dechert and Mergermarket have put together. There's a lot of really interesting information in there.
• 21:53
  Eliot Relles: Thanks Sarah.
• 21:54
  Sam Whittaker: Thank you, Sarah.
• 21:54
  Rani Habash: Thanks, Sarah.
• 21:57
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• 22:01
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