Five Questions With…

Kevin J. Lavin, Partner, Arnold & Porter LLP

1 You live in Washington D.C. Any recent beltway issues impacting dealmaking?

From a pure M&A perspective, the Dubai Ports [controversy] struck me as incredible. First of all, these weren’t direct government contractors and they weren’t dealing with classified or sensitive data. The people who need to provide security are the NSA [National Security Agency], the Coast Guard and others who would still have full, unfettered access to all the data they requested. It struck me as having no impact whatsoever on the security of the country. This whole thing got spun out of control. It’s disturbing for folks doing cross border M&A, particularly in the defense space. These are global markets, where efficient movement of capital across borders is the name of the game. If we are going to remain competitive as a country, we need to be part of the global M&A market, as both a buyer and seller. If we stand in the way of that, in this case to an ally [United Arab Emirates], it’s going to have ramifications.

2 So how does Dubai Ports hurt private equity?
I think people are going to be very hesitant now to do transactions that require any kind of CIFUS [Committee for Financial Investment in the United States] control. I think it’s going to stop, slow down or make people hesitant to do that kind of cross-border M&A. Anything that has national security components, if it’s under enhanced security, it’s going to increase transaction costs. Most private equity funds do not want to be part of a major national political battle as part of transaction. On the outbound M&A, I do worry about retaliation. I think that is a real risk.

3 Do you think our government is interested in slowing PE capital flowing out of the US?

An interesting challenge to us is the [investment] opportunity in a country like India, where high end jobs are being outsourced. It’s not just basic coding anymore, and it’s not just software development. Private equity firms are taking advantage of these things. Take a hard look at where [Texas Pacific Group] and [The Carlyle Group] are setting up their new funds. But I don’t think we’re going to legislate that to a stop. I think the government should largely leave private equity folks alone to deploy capital where they determine it is best deployed, not in pursuit of some legislative or political goal. I don’t think politicians have anywhere near the idea that the commercial sector does on how capital should be deployed.

4 Switching subjects a bit, you work a lot in the middle market—what issues are facing funds there?

It’s extra hard to raise a first time fund. Out of every ten middle market funds that try to get raised, I bet you no more than one or two gets raised. That’s anecdotal, but I think there are a lot of people who believe they have a team and story and just don’t get it done. What you find is people scaling way back, or doing a pledge fund that they’ll end up calling “Fund I” just to get a track record.

5 Finally, what book are you reading?
This is weird. I’m reading a book called Misquoting Jesus. It’s a book by the head of the theological department at Duke, Bart Ehrman. I heard him on NPR and thought he was very interesting. I picked up the book and found it fascinating. It’s an analysis of how the Bible we’re all reading today reflects the actual writings of the original people who told the stories. People look at the Bible as literal truth – the infallible word of God. It points out all the human intervention.