If you own a home, there was likely a lawyer sitting at the closing table. Who paid for the lawyer and who did the lawyer represent? You paid, but the lawyer worked for the bank. She or he was there to make sure the bank’s interests were protected. There was recent coverage of a similar situation in the context of private equity loans, starting with a story by Andrew Ross Sorkin in the New York Times.
This conflict has been in place for a long, long time. Banks make the borrowers pay for the bank’s lawyers’ fees. This is true when buying a home and is true in complex private equity loans.
As the borrower, you are worried about the cost of the bank’s lawyers and the lawyers’ ability to get the deal done on time.
Since private equity firms are serial borrowers and their loans are complex, having lawyers involved who are familiar with the firm can be a big savings of time and fees. Simple things like knowing the key personnel at the private equity firm can save a great deal of time. And time is money.
The issue raised by Mr. Sorkin was “designated counsel.” Some private equity firms have lists of law firms that the lender must chose among in making the loan. The lender must use one of the designated counsel or the private equity firm may look for a different lender.
The designated counsel list is usually a list of top shelf law firms. Private equity firms don’t want unqualified firms working on their deals.
The coverage was aimed at private equity firms. But I think that is misplaced. Private equity firms should be seeking ways to lower the legal bill because the investors are the ones paying those legal bills. I don’t see a conflict or compliance issue with private equity firms using a designated counsel list, as long as those on the list are firms that a bank might otherwise use.
As for the banks, I see them as the ones who are in a potential conflict. If the bank is not comfortable with the list of law firms, then it has a problem. Compliance professionals at the lenders should be aware of the issue and make sure they are taking steps to address the risk.
Of course there is a conflict with the law firm. That too is a conflict that has been in place for decades. The bank’s lawyers know they represent the bank. They also know the borrower is paying their bill. Until banks start paying for their own lawyers, there will be no resolution to this conflict.
Sources:
- A Growing Conflict in Wall St. Buyouts by Andrew Ross Sorkin in the New York Times
- Preparing for Potential Inquiries into Designated Lender Counsel in PE Sponsored Syndicated Loans by Jason M. Halper and Rob McKenna
- A Private Equity Conflict Grows on Wall Street by Dan Primack in Fortune
- Private Equity Firms Muscling Lenders by Choosing and Paying for Their Lawyers by Yves Smith in Naked Capitalism