We talk to a lot of private equity firms, and one thing they regularly mention is their concerns regarding legal operation management at their portfolio companies.
The issue doesn't lie in the uniqueness of each portfolio company or its legal needs. (In fact, as we pointed out in a recent masterclass for PE investors, about 90% of all legal processes are essentially the same.) No, the reason is that PE investors give their portfolio companies significant leeway to manage their legal obligations as they like.
In essence, PE firms are treating legal operations as islands to be managed separately, rather than as processes to be integrated, optimised, automated and streamlined. The result is inefficiency and unnecessary cost, lots of wheels being reinvented, a lack of transparency and insight, unknown compliance risks and an often-reactive approach to legal issues. Not good.
7 ways PE investors can benefit from legal-tech and legal outsourcing:
- Avoid portfolio companies reinventing the wheel with unique legal processes
- Concentrate and share legal knowledge across the “hive” of companies
- Always be up to date with the emerging solutions, such as AI-powered contract intelligence
- Ensure insight into contracts and compliance with evolving regulations
- Drive individual and collective value and support each company’s growth
- Boost efficiency by reducing and centralising legal teams
- Be in a position to move fast when a divestment opportunity comes
PE is perfect for alternative legal solutions
It doesn’t have to be this way. Alternative legal services like those provided by Legadex are built on employing outsourcing and legal technology to optimise workflows and service models. To standardise, automate and replicate recurring legal operations like corporate housekeeping or contract management.
The benefits of this approach are already well known among “regular” companies. Less well known is that employing alternative legal solutions offers even greater benefits to PE investors and portfolio companies. To the general benefits mentioned above, we can add centralisation, responsiveness and portfolio-wide transparency. Plus efficiencies of scale, more speed, lower costs and collective risk-mitigation.
The 5 quickest wins for PE today
To get the most benefit fast, PE investors should focus on one, more or all of the following legal disciplines. These are the practices that play to the strengths of current outsourcing models and legal technology: alignment, centralisation, transparency, consistency, speed, flexibility and repeatability.
Entity management
Corporate legal obligations are largely similar across Europe and globally. Think of managing group companies, decision-making, mandatory filings in public registers, meeting corporate compliance and corporate governance requirements. Often, filing involves adhering to fixed standards and following fixed processes.
Outsourcing entity management offers many advantages for PE firms and their portfolio companies. Firstly, there are the cost savings from reducing in-house staff and eliminating costly legal infrastructure. Outsourcing also provides access to specialised expertise, ensuring entities are managed efficiently and in compliance with regulatory standards. And outsourcing reduces red flags during exit transactions by ensuring all the necessary information is available and accurate.
More generally, outsourcing allows companies to focus on their core competencies, supports scalability and flexibility, and enables them to adapt to changing business needs and market conditions.
Contract lifecycle management
PE firms often struggle to gain insight into their portfolio companies due to lack of information or varying systems and procedures for contract management. This leads to inefficiency, wasted efforts, and difficulty in getting insight into key rights and obligations of the portfolio company. Lack of standardisation makes it difficult to compare contracts across the portfolio, with terms, clauses, and templates varying significantly. Many portfolio companies still rely on manual processes, causing errors, delays, and hindrances to scaling and growth.
Outsourcing contract lifecycle management and adopting legal-tech and AI-powered solutions offer a swift and efficient solution for PE investors. This approach centralises and standardises legal operations, enhancing visibility and mitigating risks across portfolio companies. Benefits include creating a central contract repository and utilising data and AI for comprehensive contract analysis and management. AI streamlines categorisation, clause extraction, and risk analysis, ensuring thorough evaluations and simplifying contract generation. The result is uniformity, clarity, and financial benefits for PE firms, enhancing compliance, risk management, and facilitating smoother exit processes.
ESG/ CSRD reporting
CSRD reporting is a new challenge for many companies. For PE firms, it is arguably an even bigger one. They see their various portfolio companies each struggling to find the right approach to ESG, often spending considerable sums on advisory services. This scenario cries out for a common platform solution. One in which PE firms and portfolio companies can consolidate their ESG reporting, simplifying the process, reducing the burden and sharing the costs between them.
There are now several platforms that can deliver this. These feature standard workflows that support data collection and verification at portfolio level, with aggregation to PE investor level. A potential all-for-one solution for PE investors. At Legadex, for example, we work with SDU’s JES! Platform. This enables our project managers to rapidly define a PE firm’s optimal ESG workflows and get it quickly up to speed in terms of ESG reporting. Insights include a comprehensive view of each portfolio company’s ESG performance and opportunities to identify strengths and weaknesses. This in turn supports informed decision-making and strategic enhancements at PE and portfolio levels.
M&A preparation
Exit optimisation is paramount in private equity due to its direct impact on investment returns. A well-executed exit strategy boosts profitability for both the firm and its investors. It aligns with strategic goals like market consolidation or industry leadership, enhancing the firm's reputation in the industry. Successful exits foster a positive reputation, attracting more deal flow, improving access to investments, and fostering better collaboration with stakeholders.
The advent of virtual data rooms and digital due diligence supports a process-oriented approach to exit preparation that can be replicated across companies. Simply having your legal data – housekeeping, contracts, compliance – in order is a big win in the high-pressure context of a sale, merger or acquisition. Couple that to advanced virtual data room solutions, AI-based due diligence and a solid, repeatable process, and you have a solid basis for successful decision-making.
KYC & UBO
Complying with these increasingly tight regulations can take a lot of time, cost a lot of money, and represents a real and growing burden on portfolio companies and PE firms.
Helpfully, there are a number of legal-technology platforms and outsourced KYC services that not only reduce costs but also, and most importantly, reduce the risk of legal non-compliance. And being software-based, these solutions can be run centrally and offered to all PE portfolio companies. Doing boosts operational efficiency for PE firms, streamlining processes and improving internal compliance.
Conclusion
In a legal-tech, legal-outsourcing world, there is no reason for any PE investor to accept the inefficiencies, opacity and high costs that result from sticking to the traditional, arms-length approach to portfolio company legal operations. Optimising the legal disciplines outlined above is just the start of what is possible, especially as machine learning, natural language processing, large language models and Generative AI increasingly automate particular legal tasks and support lawyers’ more complex work needs.
By pushing the adoption of legal-tech solutions, platforms and innovative outsourcing models across their portfolio companies, PE firms can ensure that everyone benefits. The portfolio companies benefit from not having to reinvent the wheel and always being on top of their legal needs. The PE investors benefit from better insight, lower legal costs, better risk management, smoother exits and value enhancement.
Find out more?
To learn more about how Legadex can support your legal needs, please contact us on +31 (0)20 8208396 or at [email protected].