It’s a challenging time for law firms, who are hunting for growth opportunities as demand softens in transactional markets and competition for legal work is fiercer than ever. One promising area lies with a firm’s venture capital and private equity clients.
These clients spend, on average, $35 million on outside counsel for fund- and deal-related work each year. For a law firm, the question becomes how and where to get more wallet share from such clients.
The answer: Digitalizing the fund formation process with the client’s investors, making it a more efficient, accurate, and lower-risk process.
Fund formation presents a big-ticket, high-value opportunity for law firms. And one appealing hook is that a client may have much of an improved solution already in place if they’re using products such as HighQ.
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New areas of strategic growth
So far in 2023, despite the slump in a longtime driver of business in the legal sector , private investments remain relatively healthy. The drying up of traditional bank financing in the wake of the SVB crisis is further clearing the field for private equity funds, who have their pick of opportunities. “If you have some confidence that in the next 12-18 months the financing market will improve and interest rates will come down, it’s still a great time to transact now,” Daniel Wolf, a partner at Kirkland & Ellis, told Reuters in March.
Here’s where a law firm can add substantial value. It can offer its VC/PE clients an end-to-end legal solution to make the complexity of onboarding investors as smooth as possible, while also reducing its risk potential.
Let’s say that a law firm’s client is a financial asset manager seeking investors for a solar panel farm under development. The first step for a law firm is to help the manager devise a prospectus for the project. Lawyers vet the prospectus to ensure its language is accurate and that nothing in it can be construed as misleading.
Investor onboarding: far from a menial task
Even bigger innovations, however, come in the investor onboarding process. Consider how many PE funds currently assemble their funds. They may have a standard Excel form which they send to all prospective investors. Considerable time is taken to fill out the form and send it back, the fund’s lawyers and staff vet them, and, upon approval, the firm initiates another round of paperwork to enroll the new investor.
This process can be lengthy. It can be inefficient, and it can contain pitfalls, particularly concerning:
The risk of missing the larger risk picture
VC managers may consider the methods of investor onboarding to be a ground-level decision with little to no effect on the fund’s overall prospects. But if their onboarding function fails to detect an investor who turns out to be on an international sanctions list, there’s substantial reputational value at stake and possible regulatory responses.
Regulatory compliance is becoming more complex, and more crucial
Keeping abreast of new regulatory requirements is essential for any private equity player, particularly if they’re courting investors from multiple regions, each with its own specific regulatory compliance obligations.
There’s an increasingly complex and changing regulatory landscape for law firms to operate in. The UK Financial Conduct Authority, for example, has been issuing consultation letters around compliance at the fund formation stage, as to how fund investment management firms should be operating.
Onboarding delays can cost business
One telling figure: Not In Good Order (NIGO) error rates are estimated at being roughly 80% in some areas of the securities industry. This means a great majority of investors who apply to join a fund have some sort of error or omission in their initial submission. If so, this kicks off a lengthy sequence: the fund and its lawyers have to catch and document the error, the investor needs to fill out the application form again and do further document scans, and the fund has to process more paperwork.
And if high NIGO rates are prevalent for an investment fund, there could be substantial delays in fund formation. Onboarding errors and challenges take up time and generate expenses.
How fund formation services can improve via technology
Say that a private equity fund manager wants to bring in new investors to an early-stage biotech venture. Each prospective investor, instead of being emailed an Excel file to fill out, now logs into the fund’s customized portal where the investor is guided throughout the onboarding process to fill out the investor profile and necessary documents in a single place. The investor questionnaire is based on a Practical Law template and can be changed to fit the investor’s specifications (region, type, size of investment, etc.).
After the investor profile is completed, their information is securely transferred to HighQ, through which the fund manager and its lawyers quickly research and verify all the prospective investor’s information, including the Know Your Client approval process. If the approval process hits a snag, the investor gets pinged and can log into the portal to see what information is requested or missing.
Upon approval, a subscription agreement gets automatically generated via the intake process. The investor can e-sign all the necessary documents, which are then incorporated back into HighQ.
The result: a quick, end-to-end, seamless process that gets an investor signed up at a fraction of the time that it used to take.
And even better: if a law firm is already using HighQ.
“A lot of law firms already have HighQ, but they commonly use it for data rooms, client portals, or litigation management,” says Sebastiaan Bos, Director of Product Management (Customer Solutions) for Thomson Reuters. “To use it for investor onboarding, all they need to do is load the template from the Thomson Reuters Marketplace and get assistance from Thomson Reuters with the final configuration. You don’t have to invest in other technology—because you already have it.”
Getting their share
“More than ever, law firms need to demonstrate their critical strategic value to clients in the private equity and venture capital worlds. From deal sourcing, execution and exit, the role of next-generation technology for fund formation is one compelling way to do that.”