How Private Credit’s Surge Shook Up Big Law’s Money Machine

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how the rise of private credit has changed one of Big Law’s most important practices. Sign up to receive this column in your Inbox on Thursday mornings.

When Daniel Seale joined Latham & Watkins in 2003, he got a taste of what then was a rare type of financing deal known as direct lending. The law firm worked with GE Capital, a non-bank trailblazer that made high-yield loans to mid-market companies.

A handful of partners at Latham viewed the market as a possible growth area coming out of the Great Recession, competing with traditional banks hamstrung by stricter lending rules. Safe to say, they didn’t expect private credit to become one of the buzziest markets on Wall Street.

An alternative to bank financing, private credit surged in 2022 and 2023 when financial institutions struggled with high interest rates and excessive debt from a slumping deals market. It has become a $1.7 trillion industry.

Latham now has “a team built around all the top players in the market,” said Seale, who chairs the firm’s global banking practice. The firm advised on 20 “jumbo” private credit loans last year, topping Debtwire’s law firm rankings. It’s advised the lenders in some of the largest private credit financings to date, including Blue Owl’s $6.2 billion refinancing of Integrity Marketing in August.

While Seale and his partners were early to the game, the private credit boom has forced some of the biggest law firms to augment their banking and finance practices, one of the most profitable parts of their businesses.

Direct-lending funds, one of the most popular ways to tap private credit, crossed the $500 billion mark by the end of 2023—a nine-fold increase in 10 years, according to PitchBook data.

Early in the boom, some law firms were quick to snatch up lawyers with expertise in the area.

Davis Polk & Wardwell, a longtime leader advising on syndicated bank loans, in early 2021 hired Nicholas Palumbo, the head of White & Case’s Americas private credit and direct lending practice.

“Direct lending has become a key source of financing for many transactions,” the firm’s chair and managing partner, Neil Barr, said at the time of the hire.

The competition for talent remains fierce, even as some warn the private credit market could take a downturn. JPMorgan Chief Executive Jamie Dimon recently expressed skepticism, and the market experienced something akin to the aggressive liability management exercises Bloomberg reported insiders didn’t expect in the private credit business.

Paul Hastings last week hired an 11-partner private credit and restructuring group from King & Spalding. Jennifer Daly, a lawyer making the move, noted the importance of being able to represent both banks and private credit providers.

Paul Hastings has been building in the space for roughly two years, and one of the firm’s newest hires told me the market is beginning to face its first cycle of distress.

Dual Tracks

Banks for decades ran the leveraged finance market, packaging up loans they then sold off through syndication. The law firm business advising those banks was hugely profitable and relatively straightforward.

The firms’ strong relationships with the likes of JP Morgan, Bank of America and Goldman Sachs helped propel them to “elite Wall Street” status—and to the top of profitability rankings.

Those relationships are still at least half the strategy for lender-side law firms, which remain highly profitable. But today, private capital providers are in direct competition on many deals with investment banks. Major banks are even looking to build out their own private capital offerings.

This has led to a dual-track bidding process, where banks and private capital providers compete to offer the best terms. Law firms best known for advising on syndicated bank loans now must have lawyers with expertise and relationships advising direct lenders.

Firms hired in deals that include both private credit funds and banks need partners to run separate, walled-off teams advising each lender’s bid. In deal speak, those teams are known as “trees.” The introduction of a new set of competitors means more trees.

That makes building a lender-side finance practice more expensive and difficult today than it was years ago, said Jeffrey Ross, chair of the finance group at Debevoise & Plimpton.

“It’s tough to break into that world because in order to be credible you need to have at least eight partners to run trees,” Ross said. “And then you need all the associates underneath each of them that are all separate. It’s a big investment.”

Latham’s Hybrid

Latham has continued hiring to what’s already a premiere practice in the private credit space.

The firm late last year brought on two partners in London from Akin Gump. It also added Tracey Zaccone in April from Simpson Thacher & Bartlett. Zaccone now co-chairs the firm’s global “hybrid capital” practice, industry-speak for more novel finance products.

With more options for financing, Latham’s Seale said the firm’s lawyers are starting to play more of an advisory role for clients, spelling out the pros and cons of the various choices.

“We view ourselves as the ones in the middle that see all these options and are able to strategically advise and address the needs of our client in any market,” Seale said.

Stelios Saffos, a global chair of Latham’s hybrid capital practice, said representing private capital funds requires different skills compared with the syndicated loan market.

Lawyers for private credit providers serve as a strategic adviser across a portfolio of long-term investments, supplying advice not only on financing but regulatory, tax, and eventually restructuring issues.

“That’s exactly what I think the evolving role of a true top-tier law firm is,” Saffos said.

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That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.