Professor Organizes Private Equity Symposium

The University of Pennsylvania Law Review recently hosted Debt Market Complexity: Shadowed Practices and Financial Injustice. Lewis & Clark Law Professor Samir Parikh developed the topic and spearheaded the symposium. When he learned that the Law Review accepted his proposal for the symposium, Parikh was pleasantly surprised. “A top-10 general law review agreeing to host a symposium about esoteric business and bankruptcy issues is not the usual state of affairs,” Parikh said. But this esoteric topic was a massive success. Over 400 academics, practitioners, and journalists attended by zoom or in person. The complete symposium, as well as particular panels, can be viewed on Youtube.

Professor Parikh co-organized the symposium with Vincent Buccola (Wharton), Elisabeth de Fontenay (Duke), Sujeet Indap (Financial Times), and Kate Waldock (Millstein Center at Columbia).

“The idea with the interdisciplinary event was to bring together professionals in the distressed debt market, practitioners who represent them, and academics. Unless you have individuals from all sides of the table, the fear is you build an echo chamber. Academics sit together, and a lot of academics already know similar things. If you have a practitioner, they provide a check to that thinking. Similarly, if you don’t have a judge there, or an investor from that space, you’re not having a meaningful dialogue.” As an area that’s traditionally dominated by males, the organizers also sought to promote gender diversity among the speakers. “I think we were fairly successful, though not as successful as we would have liked to have been. Several prominent female voices in this space participated, and I think that was meaningful.”

The symposium’s topic has been a fairly recent focus of attention. According to Professor Parikh, “Private equity generally operates in the shadows, even though they are very prominent, and profitable. Individuals know the names, like Blackstone or Apollo, but they have no idea what Blackstone and Apollo actually do. They just know that they’re very successful in what they do.” However, last year stories of unorthodox maneuvers started catching people’s attention. Incomplete contracting and other innovations were allowing distressed companies to alter creditor priority schemes outside of bankruptcy. It had never been done before.

Previously, social norms and reputational risk restricted borrower options. But private equity’s rise meant that social norms and reputational risk no longer held the influence they once had. “More specifically, private equity firms don’t care about reputational harm because they basically control access to various investments. Investors have to be nice to them. It’s a good position to be in, they’re not worried about anyone holding a grudge. In fact, it works the other way. These firms keep a blacklist, and they ultimately penalize parties who acted against their interests.”

Large, sophisticated parties are at the center of these controversies, so it can be tempting to dismiss the issue as having little importance on the broader economy. But, these practices can still cause ripples. As Parikh notes, “The fear is that, as you move into a recessionary period, the incentives for these measures become far stronger. If these practices started happening with regularity, there could be a decidedly negative effect on the distressed debt market. Keep in mind that a lot of key players are already working with funds that manage retirement accounts. You could see some disastrous outcomes that ultimately affect non-institutional investors.”

While the symposium explored potential judicial, congressional, and contracting solutions in depth, Parikh remains skeptical of proposed solutions. “I’m not sure if courts are going to intervene, and I can’t imagine Congress is going to do anything. So it really comes down to whether parties can change market expectations in some way to police this behavior, or modify contracts in a meaningful way. But debt instruments with creative loopholes and ambiguities are already out there. The contagion risk is already in the system. So it has to be dealt with one way or another.” While solutions have been elusive, the symposium’s interdisciplinary dialogue has helped conceptualize a path forward.