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In-house rules: legal versus compliance

by Matthias Plötz 15 May 2023

Life is full of choices. Coffee or tea, private equity or venture capital, legislation or regulation, legal or compliance. PE’s increasing complexity has driven GPs to appoint dedicated personnel for both. Here, we take a closer look at the culture of these different functions.

Every GP we spoke to started at the same point; by bringing on an expert with a legal education and professional background. However, from there, each set off on unique and different journeys.

Legal counsel will be responsible for contractual work, LPAs, term sheets and LP negotiations. Says Jeremy Dennison, general counsel and partner at Livingbridge: “Ideally a general counsel and head of compliance should have a complimentary skillset. What that looks like at any one firm will depend on the individuals and how the firm is structured, but at Livingridge, Lindsay (our head of compliance) is very organised, technical and focused on the detail, whereas I tend to operate at a more strategic level.”

Compliance officers focus on day-to-day operations, monitoring policies and procedures while assisting on particular projects, providing advice on certain investments and handling AML, as well as liaising with the regulator. “While the general counsel will work closely with the head of compliance to set the overall compliance strategy for the firm with reference to its broader strategic objectives, it is up to the head of compliance to ensure the effective implementation and operationalisation of that strategy,” adds Lindsay Hamilton, Livingbridge’s head of compliance. “It requires both of us to be able to think commercially.”

All firms we spoke to mirrored Dennison’s and Hamilton’s sentiment. While legal counsel fulfils an increasingly strategic function with broad oversight, a compliance officer’s remit is up close and operational.

Compliant dealings
With that, GPs are adopting a variety of approaches to support deal-doing with a strong, legally compliant structure. For example, some legal and compliance officers have collaborated on checklists for their investment teams, which every potential deal can be checked against when it reaches the investment committee. Others have co-created the deal processes with the investment and finance teams to embed compliance even deeper into their deal structures. Finally, at some GPs, the head of compliance attends every weekly deal team meeting, including the function and its advice right from the inception of a transaction.

Whatever the structure or processes, accountability tends to sit at the top and sometimes at partner level. “At Livingbridge, we decided that, as with all other controlled functions, the compliance officer function should sit with a partner,” explains Dennison. “On that basis, Lindsay and I work closely together on all matters of risk management, so it makes sense for that partner to be me.”

Regulators require GPs to nominate a compliance officer. While not all firms may go so far as to include this function at the partner level, the cultural sentiment remains the same. For GPs where the head of legal and compliance is not a partner, they appear to still have the same level of influence to ensure compliance is taken seriously, both in signalling and implementation.

“My job is to ensure that all of our investment activities and operations are carried out in accordance with the regulatory framework applicable to us,” says Hamilton. “That doesn’t mean there is only one way of doing things, which is where the importance of commercial thinking comes in again. Having said that, if I ultimately conclude that we cannot do something without risking a compliance breach, I will ensure that that activity does not happen, irrespective of the commercial outcome.”

Crisis response team
Should a breach arise, the courtroom may be lawyers’ natural arena for a disagreement but disputes can take place in-house as well. While a collaborative working culture focused on the same goal will likely resolve any minor conflicts, both functions are key personnel in events of distress.

Conflict in role execution may arise in distressed situations, as legal counsel and compliance officers will have different interests by virtue of their roles. “Lawyers will look to divert liability and damages whereas compliance professionals will be focused on improvements,” explains Machteld Groeneveld, head of legal and compliance at Forbion. “Ultimately, they have the same goal of ensuring the firm undertakes business in a compliant manner but the roads they take to this end can diverge.”

In such cases, a clear chain of command and accountability at the partner level through the formal nomination of the general counsel as head of compliance can help to navigate tumultuous times. But more can be done. Groevenveld shares how Forbion has implemented processes should a dispute arise: “Initially, we mapped out our legal and compliance processes and where they converge with the finance team. Now, we undergo yearly audits from a third party to ensure our risk mitigation processes, in case of a distressing event, are up to the highest standards.”

She points out how this measure not only positions the firm favourably in tough times but also towards its LPs: “Our investors have the assurance that not only are our value creation processes of a high standard but so are our risk mitigation measures; their capital is safe and protected.”

The legal culture in private equity may appear to be split into two different functions but seems to be united in close collaboration. With some members acting increasingly strategically, and others more commercially minded, they share the same goal of protecting their firm. A clear structure of accountability is necessary to ensure the compass provides direction in difficult times – but PE's in-house legal professionals agree that they’re stronger together.

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