One thing to start: David Nemecek has left Kirkland & Ellis to join Simpson Thacher & Bartlett after pioneering debt restructuring practices antagonized the firm’s large base of asset management clients.
The past week has brought a series of unsettling developments for the world of private equity and the law firms that serve it, highlighting growing tensions between dealmakers and their lenders. From a high-profile partner defection at Kirkland & Ellis to a private credit fund restricting investor withdrawals, and even a potential sale of a major gas pipeline operator, the landscape is shifting, revealing vulnerabilities in a sector that has enjoyed years of unprecedented growth.
Kirkland & Ellis Navigates Client Conflicts
The departure of David Nemecek from Kirkland & Ellis to rival Simpson Thacher & Bartlett underscores a growing friction point within the legal industry. Nemecek’s expertise in debt restructuring, while lucrative, reportedly created conflict with Kirkland’s established relationships with private equity firms. The firm, according to reports, chose to side with its asset management clients, leading to Nemecek’s exit. This move echoes a similar situation in 2020, when Kirkland parted ways with a travel booking company client after a financing deal displeased its private equity clientele. The firm, which recently advised Ovintiv on a $3 billion asset sale, is clearly prioritizing its core private equity relationships, even if it means sacrificing other revenue streams.
This situation highlights the inherent challenges faced by large law firms that represent both private equity firms and the companies they invest in. As private equity activity has surged, so too has the potential for conflicts of interest. The recent case involving Optimum Communications, which brought an antitrust lawsuit against a significant portion of the leveraged finance market, further illustrates this point. Kirkland & Ellis chose to “dissociate from the lawsuit,” despite affirming it had no involvement, demonstrating a proactive approach to managing potential reputational risk.
Blue Owl Restricts Investor Access to Debt Fund
Adding to the sense of unease in the private credit market, Blue Owl will permanently restrict investors from withdrawing their cash from its inaugural private retail debt fund. This reversal from an earlier plan to reopen redemptions this quarter signals a lack of confidence in the fund’s liquidity and raises questions about the broader health of the private credit sector. While the specifics of Blue Owl’s situation remain unclear, the move underscores the illiquid nature of these investments and the potential difficulties investors may face when attempting to access their capital.
Pipeline Operator Weighs Sale Amid Takeover Interest
Meanwhile, a major gas pipeline operator in the Delaware Basin is considering a sale following unsolicited takeover interest from an Occidental Petroleum-backed midstream energy company. This potential transaction reflects the ongoing consolidation within the energy sector and the continued appetite for infrastructure assets. The details of the potential deal remain confidential, but it suggests that despite broader economic uncertainties, strategic buyers are still willing to pursue acquisitions in key energy markets.
A Junior Banker’s Case and the Demands of Wall Street
Beyond these deals, a civil trial in Manhattan is shedding light on the intense demands placed on junior bankers. The case of Kathryn Shiber, a former Centerview Partners analyst who was fired after disclosing a mood disorder requiring adequate sleep, is forcing a re-evaluation of work-life balance in the investment banking industry. The judge overseeing the case has questioned whether the expectation of constant availability is an “essential function” of the role, sparking a debate about the sustainability of current work practices. The outcome of this trial could have significant implications for how firms manage employee health and well-being, and could potentially lead to changes in industry standards.
Software Deals and Private Equity Losses
The 2021 boom in software acquisitions by private equity firms is increasingly looking like a misstep. The rise of artificial intelligence is now casting a shadow over the valuations of these companies, raising concerns about their long-term viability. The case of Mobileum, a telecommunications software company acquired by HIG Capital from Audax Capital for nearly $1 billion in 2021, exemplifies this trend. The deal has devolved into a legal battle, with allegations of financial misrepresentation and criminal charges against former executives. This situation serves as a cautionary tale for private equity firms, highlighting the importance of thorough due diligence and realistic valuations.
KKR’s Cycling Miscalculation
KKR is also facing a significant loss on its investment in Accell Group, a Dutch bikemaker. The firm’s €1.8 billion acquisition in 2022 was predicated on the continued growth of the cycling industry, but sales have fallen short of expectations. KKR has now handed its equity stake to lenders, accepting a loss of over €1 billion. This outcome underscores the risks associated with investing in cyclical industries and the importance of accurately forecasting market trends.
These developments collectively paint a picture of a private equity landscape facing increasing scrutiny and challenges. While the sector remains a powerful force in the global economy, firms are now navigating a more complex environment characterized by heightened regulatory oversight, increased competition, and a growing awareness of the need for sustainable business practices.
