Private fairness’s subsequent huge conquest | USAEMALL.com

One scoop to start: OpenAI has slashed the time and resources it spends on testing the safety of its powerful artificial intelligence models, raising concerns that its technology is being rushed out without sufficient safeguards.

In today’s newsletter:

• Arizona changes the legal game

• Byju’s creditors sue founders

• UBS chair criticises proposed capital rules

Is Big Law private equity’s next roll-up trade?

The rise of the $4tn private equity industry has been a decades-long gold mine for law firms, which have lived richly off the industry’s thousands of deals annually.

Then there’s the follow-on work that comes from the lifecycle of PE deals — debt financings and add-on acquisitions, canny tax structuring, litigation, and sometimes bankruptcy work or so-called “liability management exercises” to pare down overleveraged balance sheets.

Now, the next frontier for private equity’s ever-expanding reach is monetising Big Law.

PE’s legal gambit relies on arcane legal changes in US states. It hopes to employ canny tactics dealmakers have used to roll up emergency rooms, dental clinics and accountancies.

Arizona will be the test case. It’s the first US state to undo a ban of non-lawyers sharing in the fees or profits from legal work. Other states including Texas, Utah and Washington are considering similar changes.

Smaller private equity groups such as Charlesbank Capital Partners have begun to take advantage of the change.

Last year, it acquired a majority stake in Aprio, an Atlanta-based accounting and consulting firm, which it’s now combining with an Arizona legal practice called Radix Law.

It will allow the consultancy to sell legal services under an “alternative business structure” programme. Potentially, this is the foundation of PE’s next great roll-up trade.

Other PE groups are testing an even more potent model. AlpineX — through its Briefly portfolio company — has acquired the back-office assets of three law firms and now charges fees to the firms for those services.

It’s a similar structure to accounting deals, in which more than one-third of America’s largest firms have sold to private equity.

Typically these deals leave the audit practice under the control of the partners, but allows the private equity owners to extract most of the value under a “service agreement” that charges the practice for technology and other support services.

Buyout groups have used the structure to buy vet clinics and emergency rooms. It theoretically could be applied to elite law firms.

“You can realise the private equity dream of being able to monetise the business that you’ve built,” said Seth Deutsch, founder of advisory group Samson Partners. “The legal industry is the only one that has not enabled this to happen at scale, and that is going to profoundly change.”

The innovation’s in its early stages and DD’s curious who will tame this new frontier.

Please send the Big Read’s authors [email protected] and [email protected] any thoughts — or tips.

Byju’s creditors go for the jugular

Creditors to India’s former star start-up Byju’s have gone for the jugular: they’re suing the edtech company’s founders in the US.

At its 2022 pinnacle Byju’s was valued at $22bn. It drew investment from the likes of BlackRock, Tiger Global and the Qatar Investment Authority, spurring the company on an acquisition spree.

But once the faucet of cheap money was turned off as central banks tightened interest rates following the coronavirus pandemic, investors wrote off stakes worth hundreds of millions of dollars.

Court-side recriminations began years ago, and they were bizarre. Initially fights were over proceeds from a $1.2bn term loan that had been spirited away by an unheard of Florida fund registered to an American pancake chain.

But referencing previous reporting by the FT, the lender group has now accused the leader of the fallen edtech company, Byju Raveendran, along with his wife Divya Gokulnath and strategy chief Anita Kishore, of orchestrating an “ongoing illegal scheme to take and then conceal” $533mn of loan proceeds. to conceal and steal $533mn of loan proceeds”.

The co-founding couple of Byju’s, which used to sponsor India’s national cricket team and sold tutoring to millions of families, hit back.

The lawsuit was “completely baseless and untrue” and “part of their conspiracy to wrestle control of Byju’s through all possible nefarious means”, they said. A request for comment sent to Kishore’s Byju’s email account bounced back.

Whether there’s anything left to claw back from the couple, who are ensconced in Dubai, is unknown. Raveendran told the FT last year that all the loan money had been spent.

The creditor’s lawyers in court filings themselves have also previously said the cost of recovering the funds could make “finding the money nothing more than a Pyrrhic victory”.

Switzerland’s ‘extreme’ proposed capital rules

UBS’s leadership and Swiss regulators are at loggerheads.

The bank’s chair Colm Kelleher lashed out at proposed reforms to capital rules in the country, which he calls “extreme” and argues would require the lender to hold 50 per cent more capital.

“Finma and the Swiss National Bank stipulate additional capital requirements, which would lead to a 50 per cent increase in capital requirements as compared to today,” Kelleher told UBS’s annual general meeting on Thursday.

It was only a couple of years ago that UBS was forced to rescue its rival Credit Suisse, and regulators are likely trying to ensure that a failure of that scale doesn’t happen again.

But to compete on the world stage, UBS says the new rules would be overly burdensome and that it already complies with “some of the most stringent capital requirements in the world”.

Officials want UBS to fully back its foreign subsidiaries, which would increase its capital requirements by up to $25bn. The new rules would only affect the Swiss bank because it is the only remaining lender in the country with systemic importance.

With memories of Credit Suisse’s collapse so fresh, Switzerland’s going against the grain of global regulation.

Other countries such as the US are looking to roll back bank reforms, while the UK has said it’ll postpone new bank capital rules by a year.

Lawmakers are set to present the new rules for UBS by June, so the bank’s top brass has a lobbying and PR blitz under way to counter them.

“Let me be crystal clear on this point: overregulation in Switzerland is a very big risk to the long-term success of UBS,” Kelleher said.

Job moves

• HSBC has named Richard Blackburn group chief risk and compliance officer. He’s been with the bank for more than two decades.

• Bayview Asset Management has hired Michael Timms and Colin Doherty to launch a fund finance investment business. Timms joins from 17Capital and Doherty previously worked for JPMorgan Chase.

Smart reads

Wild ride Violent gyrations in equity markets are not just a matter of concern for New York billionaires, the FT reports. The tariff rollercoaster has reached Main Street.

Under attack American businesses such as Big Law firms need to stand up to the president’s assault on the rule of law, Harvard Law School professor John Coates writes for the FT. The attacks threaten the very basis of sound investment.

Risky banking When a software company called Synapse failed, some users lost access to money in FDIC-insured accounts, Bloomberg reports. How’s that possible?

News round-up

EY fined £4.9mn over Thomas Cook audits before 2019 collapse (FT)

BlackRock backs $750mn Adani private bond issue (FT)

Barclays joins other lenders to cut mortgage rate below 4% (FT)

Abu Dhabi steps up US gas investment over hopes of industry boom (FT)

Tesco warns of dip in profit as price competition heats up (FT)

Government offers to buy coal for British Steel as negotiations continue (FT)