Re-imagining deal delivery in the financial services sector
The global financial crisis that began in 2008 changed the landscape of financial services forever. Restructuring and deleveraging became the order of the day, resulting in the sale of large portfolios of loans to some of the world’s largest equity and hedge funds, and investment banks.
Working with one opportunity fund, international law firm revolutionised how bids for those assets are transacted in a series of multibillion dollar deals.
Deals on this scale are traditionally highly resource intensive, particularly in terms of conducting due diligence on the thousands of underlying assets covered within the loan book. In each case the purchaser needs to understand the risk attached to the asset, but has an extremely strict timetable in which to complete the due diligence process (typically around 4-6 weeks) and submit a bid.
Due diligence of loan assets is typically outsourced to a law firm which, in turn, throws huge teams of lawyers at the project to get the work completed within the timeframe, manually. The result? Lengthy, inconsistently compiled due diligence at significant cost to the client – often lacking any real or useful analysis of risk, let alone commercial insight.
Pinsent Masons took a different approach. The firm developed a solution which incorporated elements of automation and disaggregation into the process and tailored it to the needs of the client.
We believed there was a better way to deliver due diligence – one that fundamentally moved away from the traditional ‘throw bodies at it’ approach.
The Pinsent Masons team sat down with the client at the outset of the transaction to understand what risks it truly cared about. This meant taking the time to understand the underlying business plan for the assets.
The Pinsent Masons team was then able to take this insight and engineer an online questionnaire completed via a cloud-based portal that would enable a consistent assessment of risk – and red flag matters of material concern to the client. A team of lawyers around the firm’s 2500-strong network were then set to work on reviewing loan documentation in order to complete the questionnaire.
To give a sense of the scale of the exercise, this process involved a review of over 3000 documents between 26 December and 9 January (or just two weeks, amid peak vacation season for most law firms).
That assessment would be pointless if it was not accessible. In a transaction of this scale, a due diligence report of hundreds (sometimes thousands) of pages – generally comprising extracts from the underlying documentation – is typically provided to the client with an exhortation to review it.
We took a different approach. Pinsent Masons delivered a series of concise (sub-20 page) thematic ‘Significant Risk’ reports. This red-flagged areas of material risk and was produced in a way that it could be easily digested. The client got concise and usable data about only the risks it truly cared about
Following the successful bid relevant information could also be shared with the client’s funders.
Further, Pinsent Masons worked with LPO provider Exigent to develop a coordinated management process which ensured that the legal and beneficial title from all of the underlying assets in the loan book – across some 20 legal jurisdictions – were properly transferred.
This was a major project management exercise which culminated in a week-long closing process including thousands of documents. Taken together, the bid process and subsequent completion represented cutting-edge and supremely efficient project management.
Client benefit and market impact
The impact of this approach to due diligence cannot be underestimated.
First and foremost, its legal team was able to spend less time wading through due diligence and considering spurious legal risk, and more time focusing on issues that speak to pricing in the transaction.
Second, all of the data collated during the due diligence process which is relevant to the successful execution of the business plan now sits on a client extranet – meaning asset managers, lawyers and other professional advisers have on-going access to a bank of information for better management of the investment.
Third, the client got all this for significantly less than it might normally have expected. For transactions of this scale typically Magic Circle firms are instructed with commensurate rates. Through a mixture of automation and near-shoring, Pinsent Masons was able to save the client money and provide a better, more relevant end product.