IVCA Scholar Q&A: Azure Nelson of Baird Private Equity

IVCA Scholar Q&A: Azure Nelson of Baird Private Equity

July 29, 2008

CHICAGO - “ In anticipation of the 2008 IVCA Awards Dinner on Dec. 8, 2008, the IVCA is profiling this year's winners. This week, we honor Kevin Evanich. He's a partner with the Venture Capital Group at Kirkland & Ellis.

Evanich, who will be presented with the Stanley C. Golder Medal, shares his thoughts on the currently industry landscape and reveals how Golder himself helped to launch his career in private equity.

Bruce Rauner of GTCR has worked with Kevin Evanich for more than 25 years.

Rauner said of Evanich: - œKevin has been our lead attorney since Stan Golder began to build the firm in the early 1980s. He is one of the top legal minds in the private equity industry. He is a can-do driver of M&A transactions and has been a source of creative deal structures for more than 25 years.- 

Illinois Venture Capital Association: How long have you been in the private equity industry?
Kevin Evanich:
I came to Kirkland & Ellis in 1983 and was immediately conscripted to work on private equity transactions by Jack Levin. He was then the leader of our very small private equity group. At that time, the words - œprivate equity-  hadn't yet been coined. We were called the Venture Capital Group at Kirkland & Ellis.

IVCA: From my understanding, things were a little more freewheeling at that time and there was not as settled a process as applies to private equity transactions today. Is that so?
Back then, the venture capital business was more or less like the Wild West. It was a lot of fun because the rules hadn't yet been written for how deals were to be done.

There weren't standardized ways of resolving most issues the way there seem to be today. Therefore, it was a fairly exciting time for a young lawyer. You could structure creatively and could actually negotiate most of your documents since they weren't forms like they are today.

IVCA: As the industry matured, it became less like the Wild West. What are the things you miss the most?
Well, I should say first that private equity is still a great place for a lawyer to practice. It's still filled with the best and the brightest clients. The deals are the most complicated and interesting that you can find in the world of M&A.

That said, I do miss the ability from the early days to do things that hadn't been done before. We were writing on a completely blank slate at that time. If a new legal issue arose, it was up to the lawyers to figure out a creative answer. After 25 years, there are now a lot more set answers out there.

IVCA: One relatively new aspect of the business is the migration of private equity attorneys - “ like your former colleague, Mark Tresnowski - “ from firms to in-house positions at the funds. Please talk about how a relationship with the firm evolves once they have in-house counsel (particularly where there is already a relationship in place).
Let's talk about how the need for general counsels arose at private equity funds. As the industry has grown and matured, the individual private equity houses have grown in a variety of ways. First, if they ran an LBO fund, their funds have probably gotten much larger.

They've likely gone from tens or hundreds of millions in capital under management in a single fund to billions in each fund. That means more deals and more legal oversight responsibility for the private equity fund.

The second way in which the industry has changed is that a lot of private equity houses have become multi-product businesses. They have moved from just doing LBOs or venture capital investing to running hedge funds, real estate funds and all sorts of other vehicles. Multiple products make it a much larger task for the private equity house to manage its legal affairs.

As a result of the growth in fund size and the addition of new products, it made a lot of sense for private equity investors to go out and hire good lawyers to manage their legal affairs in house the same way that corporate clients have had in-house staffs for a long time.

In our case, we are fortunate to have a longstanding relationship with Madison Dearborn Partners and Mark Tresnowski. Mark was one of the best lawyers at Kirkland & Ellis. We didn't want to see him leave the firm, but if he was going to leave the firm, it was great to see him go to Madison Dearborn Partners. Working with Mark is a blessing because he is just like us.

As he was trained at Kirkland & Ellis, he thinks about deals the way we do while also bringing a greater level of familiarity with the processes and desires of Madison Dearborn Partners than we could ever bring. It's a perfect marriage to have a client like Mark who sees the world the way we do. It helps us to produce a better product by being much more familiar with his institution's needs.

IVCA: To say the least, today's economy is volatile. What are the opportunities and challenges for the private equity sector amid the current economic environment?
In the last 25 years, I've seen four or five somewhat predictable cycles in the private equity business. They typically run something like this: There is a period of irrational exuberance where deals get done at exorbitant prices and with too much leverage.

Then there's a fairly predictable fallout. When there's even a small downturn in the economy, those companies that are too highly levered will begin to falter and you will then have a series of bankruptcies.

You'll work through those bankruptcies, the economy will begin to inch out of the recession and deal activity will pick up because private equity investors (being very smart people) quickly reenter the market to try to get deals done at the bottom of the economic cycle.

This economic cycle, though, feels different. While I'm not foolish or crazy enough to think I really have the answer to how the economy's going to play out, the commentators I am listening to now are calling this something different.

It's something potentially deeper and longer than any of us have seen in our business lives. Though I hope they're wrong, I don't have any information now that tells me they're wrong.

While we can't predict when all of this is going to wash out, though, it will wash out at some point. There will be an end to this downturn. My guess is that private equity investors (being smarter, faster and more nimble than most other investors) will be the first to take advantage of it. The industry will be back and will go gangbusters at that time.

In the meantime, some deals are still getting done. We at Kirkland & Ellis focus heavily on the middle market. The middle-market clients are still out there figuring out how to do deals. It's very tough to get a multibillion-dollar deal financed now because the credit markets are in a shambles.

If you've got a deal for several hundred million dollars, though, there are individual banks or small syndicates of banks out there that can get a deal done. We're seeing that sort of activity.

IVCA: Please describe how you have seen the Chicago- and Illinois-based private equity communities evolve in recent years. Also, what role do you see the IVCA having in the process?
Chicago and Illinois have always been blessed with a private equity industry that was a bit ahead of its time.

One of the reasons that we at Kirkland & Ellis have such an enormous market share in private equity is that those of us who were in this business early as lawyers had access to an strong private equity community in Chicago. There was a large pool of capital here that was willing to invest in leveraged transactions.

It started with Stan Golder at First National Bank. Others who followed included Carl Thoma, Bryan Cressey, John Canning and all the others at Madison Dearborn Partners, GTCR and all other prominent firms. Individuals left their old firms and founded new firms while others entered the business and the pie continued to grow.

The IVCA has been a very important part of that continuing industry growth because it helped to organize the local private equity industry. As the industry became bigger and more important to the economy, it was almost certain that it was going to face government scrutiny of some sort.

It needed an organization to provide a coherent response to regulatory and other issues. The IVCA stepped in nicely a number of years ago to become the voice for Illinois venture capital to make sure its concerns were heard.

By the way, when I spoke about the early Chicago private equity pioneers, I mentioned Stan Golder. It is particularly meaningful for me to receive the Stan Golder Medal because Stan was in part responsible for my career success.

As Stan told the story to me, he and Jack Levin used to exchange opinions on the young people who worked at each of their firms.

Stan said: - œWhen I first worked with you, I called Jack and I said: - ˜I like that guy. I'd like him to remain with us.'-  That gave me some of my first opportunities in private equity. I genuinely attribute the chance I had to succeed to Stan's belief in me. For that, I am deeply grateful to receive a medal in Stan's name.