By Benjamin Horney

Law360 (September 24, 2020, 3:13 PM EDT ) In this installment of Coronavirus Q&A, the chair of Paul Hastings' global private equity practice discusses the ongoing effects of the pandemic on the market for mergers and acquisitions and PE investments, and explains how his workload didn't let up despite the disruption caused by COVID-19.

Brian F. Richards is a partner in the private equity and M&A practices at Paul Hastings LLP in Chicago who serves as chair of the firm's global PE practice. He shared his perspective as part of a series of interviews Law360 is conducting with law firm practice leaders about the wide-ranging fallout and effects of the coronavirus crisis.

This interview has been edited for length and clarity.

From your perspective, how has the coronavirus pandemic impacted the state of the M&A and PE industries at large?

It both has and hasn't affected those industries. Obviously, deal flow slowed almost to a stop right after everything hit. Then, for certain industries and types of deals like add-ons, activity continued, and over the last couple of months, and particularly over the last two weeks, we've seen a significant pickup in deal activity. At Paul Hastings, we are currently working on more active transactions than we were at this time a year ago. 

The actual execution of deals hasn't really been impacted, because we're able to do our jobs from wherever we are with technology. We can communicate with clients, counterparties and investment bankers, and we can do due diligence on the buy side and provide diligence on the sell side.

Everybody in the dealmaking world has been able to do what we did before on a pretty seamless basis. The only really important difference is that we don't have the same ability to spend time with management teams. You like to spend time with management before an acquisition so you can have real conversations, ask questions and get to know each other. That's really important for both sides, especially in private equity, where management wants to be comfortable with the private equity buyer and the private equity buyer wants to be comfortable with management.

Normally, you have social interactions, like dinner the night before a management presentation, that can be as important as the actual presentation itself. On Zoom, it's just impossible to replicate the spontaneity and rapport that you can establish in an in-person meeting.  

It sounds like your home setup has made the transition much easier. What is your home office like?

The firm had set me up before the pandemic. Most of my colleagues and I have multiple screens, I have a dedicated phone line, which calls to my office line get forwarded to. My office has been basically fully replicated, and my setup is every bit as effective and efficient as it was in the actual office.

Are you concerned about a potential second wave of the virus having a significant impact on deal activity?

I think that, from a deal perspective, parties are not waiting around to see if a second wave is going to happen. People understand which sectors were adversely affected by shutdowns, so for deals in certain areas there's a little more skepticism, but deals are mostly proceeding as if there's not going to be a second shutdown. It's proceeding as if there's going to be a slow, gradual reopening. Nobody expects everything to be back up and running at full speed tomorrow.

What are some of the significant issues that private equity clients are grappling with at this point in the pandemic?

Surprisingly, very few portfolio companies we work with have been completely devastated. Most were able to pretty quickly take action, manage their cost side, and live to fight another day. For some of them, that's not going to be sustainable forever, but across the private equity industry people did a good job.

At first, there was some confusion with regards to government support programs, but when it became clear the government was not going to help the private equity industry, that clarity actually helped. Companies knew they were on their own and that the government wasn't going to help, which allowed decisions to be made more quickly. We really haven't had any failures yet as a result of the pandemic, which may not be sustainable forever, but that's what we've seen so far.

Are there any types of transactions you are working on regularly during the pandemic that were less popular when we weren't in a pandemic?

Add-ons, for sure. That's partly because sponsors and management teams understand the industries they're in already. Oftentimes, they know the players and don't need to have those in-person meetings we talked about before, because they've already spent time with some of these people through conferences, trade associations and the like. 

They understand the industry and the lenders understand the industry. Both the lenders and owners can see what impact the pandemic has had on the base business and extrapolate that towards the target. You don't need third-party industry due diligence.

We've also seen plenty of [special purpose acquisition companies]. We're doing more of those than ever. I don't know if that's a function of the pandemic necessarily, or if there was just an emerging and growing market for SPACs before that might have accelerated at this rate even without the pandemic. It's certainly been more noticeable because of the absence of other types of platform acquisitions.

In the aftermath of the pandemic, have there been any provisions or clauses that are either being included more often in deals or require more discussion than usual?

In some deals, there has been a gap in the pricing expectations, so we've seen more earn-outs than you normally would see, although it's still a relatively small percentage of the market. I still think earn-outs are always either to bridge a gap between pricing expectations or just to deal with uncertainty that both parties might acknowledge exists. It allows both sides to share the risk of uncertain future events, as opposed to putting all the risk on the buyer.

We've also seen a ton of attention paid to material adverse effect clauses. There has always been a lot of attention paid to MAE clauses, and previous economic crashes and events have highlighted MAE provisions, but none like COVID did.

And it's not just MAE clauses, but provisions related to the pre-closing covenant period between signing, and whether you have to operate the business in the ordinary course. Lawyers will spend 20 hours on the MAE but five minutes on the pre-closing covenants

Let's say I'm the seller and I got the MAE clause I want — it carves out pandemics and the implications and impacts of COVID. If I have a pre-closing covenant that says I have to operate the business in the ordinary course, how do I do that when the government is shutting me down? When my supply chain has broken down? You might have won the battle when it comes to the MAE, but lost the war because of those covenants, which could potentially give the buyer the opportunity to walk away from a transaction. 

It's important to join those two provisions and make sure they work together. There needs to be a recognition that we need to give sellers the opportunity to make adjustments to the business to operate in a commercially reasonable manner in light of these external events that might happen, whether it's a change in law, the pandemic, other acts of God or terrorism, those types of things.

How has your day-to-day work and personal life changed since the coronavirus outbreak?

We have family dinners almost every night. I have four kids in school, ages 11 to 18. So we're having those family dinners, and not only because I'm home, but because they're home instead of being at sports or other activities. More time with my kids and my wife has been great. Fortunately, we like each other. 

This also led to more family movie nights. We watch Modern Family and The Simpsons, and we've watched all three seasons of Stranger Things.

Obviously, I have a more efficient commute. I walk downstairs to be at work. I've been able to sleep and exercise more. Probably the only downside is that maybe I drink a little more wine. That's a coping mechanism.

--Editing by Kelly Duncan.

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