BUSINESS LAW CURRENTS: To start, tell us a little bit about your background.
I spent many of my formative years in Europe as my father held various foreign assignments. The many cultures and intellectual cross-currents I absorbed as a young person fostered many interests in me. I spent more of those years abroad than I did in the U.S. These interests eventually led me to the University of Chicago where I completed an MBA simultaneously with my law degree. At the time I was interested in economics and law and ultimately evolved that interest into what would become a life-long avocation for me - the intersection between economics, finance and law. This is still at the core of my practice today at DLA Piper.
After law school I began my career at Mayer Brown in banking, finance and capital markets. At the time we were in in the early stages of what would turn out to be a massive globalization of the capital markets. Bringing U.S. knowhow to the sector became an export of sorts. It was a world in which I felt quite at home. I literally started my career on the ground floor of that trend.
The language of finance has since globalized to such an extent that financial professionals around the world speak a very similar language and have similar educations. The latter I believe was a contributing factor to a form of “community think” in the years leading up the financial crisis that began in early 2007, and arguably in mid- to late-2006, that had too many, including risk managers, regulators, bankers, etc., taking the same side of the trade for a very long time.
My practice today encompasses representing private investment funds, particularly private equity funds, hedge funds and credit opportunity funds in all aspects of their domestic and international operations in addition to continuing the work representing financial institutions and companies in domestic and global capital markets.BUSINESS LAW CURRENTS: I know you are fluent in German and have lived in Germany during many of your formative years. How has that impacted your practice?
I spent my early elementary school years in the German school system. My parents, at the time, felt that the nearest American school was too far from where we lived. Through this experience I became bilingual and today can move in and out of the language with ease and I get along well in the European cultures. This makes doing business in Europe easy and transparent for me; it is a competitive advantage, no doubt. At my previous firm, I was the only partner who was both a U.S. partner and a European partner and I am building on that at DLA Piper. BUSINESS LAW CURRENTS: I am sure given your background you often get questions about the developing crisis in Europe.
I am frequently asked on both sides of the Atlantic how I view the situation. The Europeans want to know about the U.S. perspective and vice-versa. From my perspective, which is not necessarily either, we started with a micro-crisis in the U.S. (let’s call that the 2007 private sector crisis) with macro impacts inside and outside of our borders since it destabilized the entire global financial system. That crisis is starting to show improvement. There is now layered on a macro-crisis (let’s call that the 2011 public sector crisis) outside of our borders that can’t help but generate impacts here and in Europe that we’ll also have to work through. The private sector, particularly in the US, though as well in Europe, has shown great resilience and played its part in pushing through the 2007 crisis. A struggle to show growth and a potentially very long recovery is better than many possible alternatives. Unfortunately there is little the private sector can do to manage through the public sector crisis, other than get out of the way as best as possible.
Certainly the public sector crisis in Europe and the brinksmanship of elected officials in the U.S. and an uncertain regulatory environment in both places create a level of continued uncertainty for business that acts to slow progress significantly.
In Europe the situation is much worse. In well intentioned, but ill-conceived, efforts to preserve the greater Europe in which so many policy makers (less so their populations) are invested, they have possibly inadvertently created a situation that fundamentally threatens the whole system. Fortunately there is still room to maneuver, though not as much as would be desirable. This is a subject that requires its own full discussion so I’ll stop here. BUSINESS LAW CURRENTS: How much of your time do you spend in Frankfurt?
I am working with DLA Piper’s European-wide capital markets practice. We are a very integrated pan-European team. I tend to be in Europe, especially Frankfurt and London, once or twice a quarter. BUSINESS LAW CURRENTS: Looking at your fund relationships, can you speak to the difference in trends that you are seeing here in the U.S. and in Europe? Both from a funding perspective as well as a regulatory perspective: What are you seeing on the PE side and the VC side on both continents? And how is regulation impacting both opportunities?
There has been a tremendous uptick in interest in investing in funds on both sides of the Atlantic. On the one hand, there are investors who are seeking incremental risk-adjusted returns in the relatively low-return world offered by traditional “safe” instruments. On the other hand, there is a growing desire for more managed portfolios in a marketplace characterized by relatively high volatility.
Large amounts of capital are flowing into the PE space - almost the same funding levels that we saw pre-crisis. The question is, “are there sufficient opportunities to put money to work in a way that justifies the risk investors are taking?” From what I’m seeing, I would say the answer is currently yes. Because of the sizable available moneys funds have at their disposal for investment, however, pricing isn’t as favorable as one might expect given that the capital allocation process has not returned to normal levels. That is one aspect of it, and I think it really exists across both continents and is particularly true for Europe where the diversity of economies and the general perception of a looming European crisis means a lot of opportunity for fund investments.
The story is not the same for VC funds however. New VC funds are more difficult to raise and existing VC managers are seeing slower inflows than PE funds. I think this is cyclical and merely reflects the difficult operating environment the relatively less mature companies in their portfolios face.BUSINESS LAW CURRENTS: This naturally segues into Dodd-Frank: What trends do you see in the U.S. and how do they impact your practice?
Well, you have to keep in mind that despite Dodd-Frank and all the other post-crisis initiatives we still have, I believe, one of the more liberal regulatory environments in the developed World. Post-crisis initiatives are unavoidable. What we have to work toward are initiatives that enhance our values and our economic system’s ability to adjust. It is clear to me that rule making after the Enron debacle, particularly the advent of mark-to-market accounting, added fuel to the fire of the 2007 crisis. On a macro-level, these sorts of questions must be debated so there is not a repeat.
From a practice perspective we have taken Dodd-Frank in stride both on the funds side and on the financial transactions side. In essence we have incorporated Dodd-Frank related advice to clients in building funds, in funds compliance and in our transactional work. I suspect other firms are doing so as well. As you know there is still much rule-making coming down the road until the law is fully-implemented. Perhaps not all of it will be. We’ve also discussed with some clients whether there are steps that can be taken that could lead to strategic advantages.BUSINESS LAW CURRENTS: How does that impact entrepreneurship?
This is an important topic for me. Before I leave Dodd-Frank, I’d like to touch on an entrepreneurship issue that I last spoke about during a web-cast some months ago – and that is the needless change to the definition of “accredited investor”. This change significantly affects how much angel money is available for starting new companies and should be reversed.
Some have said we should feel “lucky” that some of the other proposed changes to that definition weren’t ultimately included. Of course that is true, but it doesn’t justify yet another road block to business formation in the US.
Prior to Dodd-Frank investors could count the value of their homes in the minimum net worth determination necessary for determining who is an accredited investor. Aside from the fact that this change discriminates against investors who choose to prudently store some of their wealth in their homes, especially older investors, it also significantly restricts the number of individual investors who qualify to make angel investments. In the current environment this has magnified negative effects on businesses being started because there are so few avenues for them to find capital. Yes sexy businesses in hot sectors will still find capital, but those are not going to generate the job growth we need by themselves.
Despite the challenges, I am optimistic that they can and will be overcome. As an example, I am currently working with Park Fifth Capital Management, a new funds group that is in the process of launching its first funds. They have a potentially important role to play in the capital formation process for early stage and growing high potential businesses. The funds have a unique approach and display the kind of innovation that points the way to the future.BUSINESS LAW CURRENTS: What do you see on the cap markets side on the horizon here in the U.S.?
I am still concerned with the general availability of the banking and capital markets to US business. The arguments surrounding this are varied. Some claim that banks and capital markets simply are not lending or making capital available; some say they are lending and available but there just isn’t enough demand. Or the standards for lending have changed dramatically, or, if they haven’t, corporate borrowers and issuers are now less qualified. The truth is that from the smallest to the largest borrowers and issuers, we are not seeing a smooth return to efficiently functioning capital markets, the lack of which is painful and very expensive and it gets in the way of rebuilding our economy. Access to capital is gradually improving coming out of the 2007 crisis, but the longer-term impact of the 2011 crisis in Europe is not yet ascertainable. BUSINESS LAW CURRENTS: In the PE world, there is a lot of pent up demand. Investors are putting pressure to get returns and get their capital working again, to take a little more risk, in order to get some ROI? Is that what you are seeing?
Yes, that is what we are seeing. Investors need more returns, but the assumptions they are often working from (particularly in the pension space) have built in a lower level of risk than is now necessary to take to reach those returns. It is not a great place to be and the temptation is to reach for yield. BUSINESS LAW CURRENTS: Focusing a little more on your own practice, can you give us some highlights of your early experience with TARP and TALF?
In June or July of 2007, I was engaged to help a very large financial institution in the mortgage sector sort through what they thought were some developing issues in regards to funding and capital markets. This was at the very outset of the crisis, before most realized a crisis was developing. They had funding facilities in excess of $100 billion at the time which we were brought in to help stabilize. This was also well before TARP. We assisted them in developing a sophisticated triage plan that helped stabilize the business initially. After that it became a complicated dance, facility by facility, with the various counterparties, rating agencies and regulators.
By the time TARP came around, you could see the air coming out of the financial system beyond the mortgage industry to which it was initially contained. In essence it became a run on the banks. That was especially evident the weekend Bear Stearns melted down. We’d been working around the clock since the Friday afternoon before on behalf of a large financial institution with significant exposure to Bear Stearns. Lehman is more complicated and I won’t go into that here except to say that it was the final straw that caused TARP. Once TARP was in place, its primary value was the positive psychological impact from the Fed and Treasury perceived to be standing behind our financial institutions in containing that run and permitting orderly bank liquidations and take-overs where warranted. Many institutions participated because they were asked to and not because they particularly felt they needed to.
Of course one might ask what caused this run on the banks in the first place? The answer, I think, is the same phenomenon that caused the run on Continental Bank in 1984 which co-incidentally I had written on and studied extensively as a young MBA student. In my view it was counterparty driven then and now. Most of the action tends to be in the market where banks deal with each other. An institution’s willingness to do business with other institutions to an important degree depends on its confidence in the counterparty’s stability. If a crisis of confidence in an institution develops, its counterparties may become reluctant to do business with it. That reluctance creates a liquidity squeeze that usually ends badly. In 2008 no bank seemed to trust in the soundness of any other bank. TARP effectively ended the soundness worry.
It should be said that in 2011 Europe is slowly working toward its own similar solution. If it were not for the European Central Bank and the individual country central banks, the already high level of worry in the European banking sector relating to the quality of assets underlying loans and exposures to various countries at many banks, the situation there would be more serious already.
TALF was a different story. There a lifeline was thrown to companies issuing bonds backed by qualified assets. One client in particular stands out in my mind. Great financial business, high quality operations, not in the mortgage industry, fifteen year history of very low loan losses, employed thousands of people directly and indirectly and yet could not place its bonds prior to TALF. We assisted this client in qualifying for TALF and using TALF to issue several bonds. The business came through the crisis in great shape and is now back to funding itself directly.Michael Macaluso
is a partner in DLA Piper
’s global Corporate Finance, Capital Markets and Investment Funds practices. He has a long track record for successfully managing large, innovative and complex matters for some of the world’s leading institutions. Experience includes several hundred billion dollars of completed transactions. He has served as outside treasury counsel and outside general counsel for both financial institutions and funds.
Mr. Macaluso has broad experience in representing financial institutions in domestic and cross-border financial and capital markets transactions. In addition, he works closely with private equity, credit opportunity, and hedge funds in establishing new funds, joint ventures, acquisitions, and recaps. He regularly advises clients in the establishment and ongoing management of various programs and strategies and has significant cross-border experience, particularly with respect to Europe. Mr. Macaluso has been deeply involved in assisting clients through the capital markets liquidity crises in 1998, 2001 and 2007-9.
Mr. Macaluso received his J.D. from the University of Chicago Law School
and his M.B.A. from the University of Chicago Booth School of Business
Mr. Macaluso is currently an active member of Thomson Reuters' Partner Advisory Board
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