The Exchanges

Q Why don't we start with your background? Take me through your background to your current seat where you are today.

A Sure. Well, certainly was not the most conventional path to becoming a private equity mergers acquisitions attorney. I was a Soviet studies major. It was a very hot topic in the mid to late eighties. Actually, it was very sad to see Gorbachev pass away. Didn't know what I really wanted to go into. I was thinking a lot about academics. Ended up getting into Harvard Law School, and my grandfather basically said to me, if you don't go, I will kill you. So I went to law school. Thought I'd probably go into the government or some policy side of things. But through a summer internship, I fell into enjoying transactional law. I ended up taking a job with Sidley in Austin, which was at the time the largest corporate blue chip firm in Chicago, which I was originally from, and went to Sidley in the early nineties. I was doing big law, typical everything kind of stuff. I was the end of my first year. I got staffed on a deal. It was a large public deal. It was a two billion dollar deal, which was quite big back in 1995. And I was a junior kid before internet, before email. So I'm making hotel reservations. I'm making sure the FedEx packages get out and the fax machine stuff's all done. They sold the business and they had a great young CEO who took a liking to me and I really enjoyed working with him. His family controlled the company despite it was a public company. So they ended up with a…

AI assessment note: “was not the most conventional path to becoming a private equity mergers acquisitions attorney”

Q So once you've brought these people on the team that do fit, you mentioned you have to compensate them, and you're in a competitive industry. How have you thought about compensation relative to the other alternatives that someone on your team would have?

A We are religiously merit-based with our compensation. Many in your audience might be scratching their head and say, no blank, Sherlock, of course you're merit-based. How else would you compensate people? But the truth is, the legal industry for many years compensated people based on seniority. It's called lockstep, which was how many years you were a partner depended on how many partnership units you had, and that was what your compensation was based upon. Kirkland has never done it that way, and we are religiously the opposite. As we say, we call balls and strikes, it's pure business, it's not personal, but we compensate the people who we feel contribute the most to the institution, and that's how we divide up the so-called pie. One of the difficult things with compensation at a law firm is that the more senior people get, they often stay around, and we're very careful about how Ensuring that our younger superstars are compensated properly, the way to do that is we don't have a lot of people in their sixties, let alone seventies, stay around our firm, particularly on the private equity side. Litigation can be a little different, but certainly in the private equity, private capital side. That's fairly atypical for law firms, but we think it is the only way to recycle those opportunities and the related compensation To the younger people coming up. And honestly, that's how we at…

AI assessment note: “We are religiously merit-based with our compensation... the legal industry for many years compensated based on seniority.”

Q where someone is at the stage of their career and producing and getting paid. There's another when you get into areas of expertise. So you mentioned earlier restructuring. Okay, there hasn't been a lot of restructuring. How do you think about compensating the people that that year, their particular area of expertise that you want on the team for the long term, there just isn't that much happening that year?

A Great question. So let me take a step back. We are not a commission-based system, or a, sometimes people describe an eat-what-you-kill system. We all share from one trough, and we all have partnership points. Those points are reallocated every two years. We don't have bonuses. We don't have cash compensation. Everyone just gets distribution on their partnership units, and obviously, while we are religious to merit-based, we also don't gyrate up and down in people's lives and things like that. So we take long views on these things. If there's a down market in restructuring, for example, it's not like the restructuring business doesn't get paid well that year. If we believe in that business, which we do in spades, by the way, and it actually is for better or worse, depending on which lens you're looking at it, coming back quite significantly right now in many ways with higher interest rates and people worried about lower growth recessionary environment. We really try to take long-term views. And look, when you're younger, it's often how you're investing in people and potential, might say it that way. When you're older, and particularly the higher compensation levels, that gets into more focused economic contributions. We have tax people, who in a traditional sense, you might say, generate no business. They help on deals, but they're some of our highest paid people. Why? Because w…

AI assessment note: “We all share from one trough, and we all have partnership points.”

Q The last piece I'm curious to ask you about is regulation. The SEC touches on the public side and increasingly on the private side. There's tax issues, there's carried interest issues, there's all kinds of things that come up. How have you participated in that discussion as a firm?

A We're not a lobbying organization. We don't lobby Washington to do X or to do Y. Of course, many of the law firms often participate in white papers and will come together in expressing a particular view about why regulations are needed or why, as written, this seems to apply to X and that doesn't seem to make sense. Our biggest participation in counseling our clients is how to navigate when these regulations come to bear. The focus on regulation in the private capital space is increasing. It's particularly increasing in the latest administration. My own view, not the view of our institution, some of it you can understand when retail investors, particularly people that are not as sophisticated in investing in these kinds of investments, you can understand why there should be regulation to make sure people really understand what they're getting into with these products. With institutions that hire law firms like Kirkland and Ellis and large financial advisors, does a large sovereign wealth fund need ultra protection to negotiate against a private equity institution? They know what they're doing, and they can hire people to understand what they are and sort of to impose regulation and private contractual ability where one party really doesn't need the protection. That seems a little inefficient in my mind.

AI assessment note: “Our biggest participation in counseling our clients is how to navigate when these regulations come”

Q With this significant growth in the private capital markets, what you're seeing on the impact of both fund terms and deal terms. So why don't we start with fund terms? What have you seen in the evolution of fund terms say over that last 10 years of rapid growth?

A First of all, I grew up as an M&A attorney, not a funds attorney. So this will be a bit of a 2080, but I'll say it this way. As more and more capital has chased More and more private capital firms. The private capital firms have garnered more leverage, so they've been able to drive terms a bit more than the limited partners have over time. Now again, everything's relative, but the general partners have had a bit more leverage. On the M&A side, it's been fascinating to see. There's a couple of huge differences getting back to when I really got into this business and versus where it is today. The biggest one I'd say is with respect to debt financing. So when you do a leveraged buyout, the L of the LBO is borrowing money. Until 2005, the way deals worked is that the private equity sponsor would say, I'd love to buy your business for a hundred dollars, but I'm borrowing 50 dollars, and if I can't get my mortgage, I've got a mortgage contingency in my contract, and there was a debt financing condition, and if I couldn't get my money, I'd walk away. No one liked to do that. It was reputational issues, but there was no financial aspect to it. In 2005, that heyday, then the huge deals like SunGuard and HCA, big club deals, multi-billion dollar deals, that shifted. And what happened is that the sellers, the targets said, no, no, no, I'm not signing up for this with a debt financing cond…

AI assessment note: “The private capital firms have garnered more leverage, so they've been able to drive terms”

Q So typically, I'd conceive of the professional services model of the law firm as that pyramid structure. People work their way up to partner, and then you have different layers below them. You see that in management consulting and a bunch of different fields. How does the model change when you're making more and more lateral hires to address these opportunities?

A Not tremendously. At the end of the day, law firms are a talent-driven business. It's like a sports team in many ways, so while not a certainty, usually the best players in the field win. They certainly have a really big advantage if they're the more talented group. To be a successful law firm, and I imagine other professional service firms, you got to attract talent, you got to be able to retain the talent, and you got to get the most out of your talent. We try to attract people that fit what we do. The private equity side of things, you have incredibly smart people, incredibly motivated people, incredibly hard-working people, people that are willing to make a call. I don't want to say take risk, that may be not the right way to say it, but they're willing to make a call and go with it. And that isn't always lawyers' mindsets. Lawyers' mindsets are often, well, I'll just give you the advice, it's your decision to make. It's one of the reasons I really enjoyed Private equity more than you might say representing the fortune 500, because when you represent the fortune 500, your clients are lawyers. When you represent private equity teams, your clients are investment professionals, oftentimes very young investment professionals, and they're looking for you to make the call. Tell me what I should do. That is a different way of practicing law, so we try to attract people that are wi…

AI assessment note: “Not tremendously. At the end of the day, law firms are a talent-driven business.”

Q When you have 3000 attorneys around the world, that person isn't necessarily right down the hole. So how do you know who the right person at the firm is?

A It's a great question. One of the things about our growth is how do we put in systems, processes, procedures that fit a 3000 attorney organization, 6500 personnel, which is different by the way than a thousand lawyer organization. But not lose that entrepreneurial crazy spirit that got us to where we're at. The way I often say it in our meetings is, we played aggressively, we played proverbially with reckless abandon on the field, we took chances, we weren't afraid to lose. That's what got us up 20 points in the fourth quarter. Now, we have to do certain things, but you don't want to start playing conservatively. It is something I think about a lot with the job I have now, is how do we put things in place, and that's one of them. How do we disseminate information? Whether it's information about who's done what, as well as information substantively. What's going on? One of the things we do, we've always done it fairly well, but we've really amped it up over the last five, seven years as our growth has accelerated, is reinvesting in the way we operate. We now have 25 partners whose sole job is to make the revenue generating partners better. Those 25 partners are not client facing. They facilitate revenue generating. They're just not client facing. They make all of our jobs easier. They create best of class forms of documentation. So we know exactly what deal terms are being used.…

AI assessment note: “How do we disseminate information? Whether it's information about who's done what”

Q The other thing you mentioned in managing this organization is the willingness to yield a stick when warranted. How have you learned to do that in such a way that you can continue to motivate people, keep them on the path, and keep the culture intact?

A Well, compensation is a real factor in this one. I mentioned earlier how we reward the right behavior. Give you a little vignette. We had an opportunity, a client of ours was growing like a weed, going into many different strategies, partner there who was outstanding, who, by the way, was in the prime of his career, late forties, working night and day, and I just saw the numbers go up and up, the revenue, and also how hard this person was working, and his team was working, and I said, you need to bring in someone else. Oh, no, I got a bunch of these younger people. I said, no, no, no, you need to bring someone else, at least your senior, maybe more senior. We're going to miss this opportunity. And you could see what's going on in the person's mind, like, how is this going to impact me? And of course, I told him it wouldn't. That business grew from X to 1.5 X for us, grew really nicely. But now, in theory, it was divided among two people instead of one person. That person who brought in the other person, his compensation went up significantly. And I talked about it at our partner meeting. And I talked about how this is the kind of behavior that we reward, because that's what takes the business from X to 1.5 X. And yes, is there some capital investment, prepayment, if you will, associated with that? Yes. We try to reward the kind of behavior that has the team win, and the team wi…

AI assessment note: “I mentioned earlier how we reward the right behavior.”

Q I want to touch on each of those. So on attracting that kind of talent and finding those people that are willing to make the call, how do you tease that out in the interview process?

A Well, it's a lot easier with a lateral who's been practicing for five, six, seven, eight years, or 15 or 20 years than it is. My kids who are in college hate when I say kids, and particularly when they're kids in law school, but at my age I'll say kids. 23, 24 year old, it's a lot more difficult to figure it out. That said, there is a vibe of someone who is willing to get their hands dirty, not be afraid to make mistakes. People that have scrapped their way Scrappy is a theme that I talk a lot about within our institution. Scrappy works for us, as opposed to ivory tower. During the interview process, you can tease out. I always say to people when I interview them, we're not better or worse than the other outstanding places you're looking at, but we are different. And you always try to find, does your key fit our keyhole? It's often difficult to do in an interview But it's not impossible, and it certainly narrows your chances of getting it right.

AI assessment note: “there is a vibe of someone who is willing to get their hands dirty”