Listen: Masters of Risk | Episode 14: Catherine Kemnitz

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Yashi Yadav

Welcome to Masters of Risk, the podcast where we uncover what is top of mind for business leaders today. I'm Yashi Yadav and I will be your host every month. Let's get started. Hi, everyone, and welcome to another episode of Masters of Risk, a podcast by S&P Global Market Intelligence.

My name is Yashi Yadav, I'll be your host. And joining me today is Catherine Kemnitz. She is the chief strategy and development officer at Axiom as well as the managing director for Axiom Advice & Counsel. Super excited to have you on today, Catherine. How are you?

Catherine Kemnitz

I'm well, thank you. Very happy to be here.

Yashi Yadav

Amazing. So just jumping right into it, to give everybody a little bit of background, do you mind giving us just a little bit of context around what -- your backstory. What brought you to Axiom and then also some of the work that Axiom is doing in the industry that they're in?

Catherine Kemnitz

Absolutely. So I have been in the legal industry for, what, almost three decades at this point. I started my career in a large law firm, Shearman & Sterling, now A&O Shearman, in capital markets and moved then to Thomson Reuters, where I was in charge of a lot of their acquisitions on the business side, looking at legal tech, a lot of players in that industry for the legal division.

And then joined Axiom actually 10 years ago this year to initially open some of the -- an office here in the Twin Cities and then evolved into a number of roles tied to public company readiness, operations, before coming back to the law practice as chief legal officer and now chief strategy officer. It's a very interesting business to be in as a lawyer background just because the lawyers are both the customer. They're also the talent that we work with.

And to give you some background on Axiom, Axiom invented basically the -- what's called the alternative legal provider -- service provider industry about 25 years ago with a vision to reinvent the way legal services are delivered and to provide an alternative, hence the name, to the law firm services that were provided at the time and create something that had more efficiency as well as created career pathing and an ability to practice for lawyers that was completely different from just the binary model of in-house teams or law firms.

And for 25 years, Axiom has been -- from being an inventor, became an innovator in the space. We work with most of the -- majority of the Fortune 100 companies as well as some very interesting and dynamic growth companies backed by VCs and other all the way through the spectrum.

I think a lot of the brands we're all familiar with work with Axiom, and we support their in-house department, providing them really high-quality legal talent to kind of support their projects to expand the skill set that they have to manage sort of overflow of work, a variety of needs. And through that innovation, Axiom has developed additional service lines for recruiting and so on.

We recruit more lawyers a year than I think any other company. We created -- when rules changed, we also then were able to develop law firm services and establish Axiom Advice & Counsel, which is an Arizona law firm that works alongside the Axiom talent and is able now to provide those additional law firm services to our clients.

Yashi Yadav

Got it. That's really interesting. I mean, it sounds like you are all sort of entering a newer space. I mean, given today's market dynamics, I think having sound legal advice and making sure that being compliant with different regulations, all of that being very important and top of mind, how would you say that the legal needs of PE or venture capital-backed companies differ from those of other businesses?

Catherine Kemnitz

Yes. I think a lot of the legal needs in some ways are similar at their core. You're obviously trying to manage the risk of your business. I think where private equity and VC-backed company have an interesting dynamic is, in fact, because they have the support and the backing of their sponsor and investors. And so it is something that creates more discipline, more focus both on value creation and on risk management at the same time.

And so for a legal team that navigates those two sides of the spectrum, it is particularly important in that kind of environment to manage their risk alongside their cost because a lot obviously of the value creation and EBITDA is what those investors are looking to continue to grow and expand. And so they may require – they are metrics focus. They will bring some discipline alongside that. They will make sure that the cost components are well monitored.

And then also that whoever -- whatever the function, and legal is one of them, can contribute to an acceleration of the business to a better way to grow is going to be a contributor to that. And when VC/LP investment companies -- and certainly been the case for Axiom, there is both an analysis of the investment and its potential returns and then the risk profile of the company.

And what we see is when you are a company, a portfolio company, that is backed by these investors, you go through investment cycles all the time. And so there is a great -- there's a huge focus on that due diligence on when investors come in, assessing whether you're putting their capital at risk and how much of that they feel comfortable pushing forward.

And so the legal function has actually, I think, a real role to play to make sure that, that is meeting the standards of the sponsors that are pretty high and then also get your company ready for that moment because at the end of the day, you're going to be competing for capital and you want to put your best foot forward.

Yashi Yadav

Right. And I kind of had -- and maybe this is naive an assumption, but my assumption had always been that companies, whether they're larger firms or smaller firms, would have in-house counsel. It sounds to me like you all are -- am I right in assuming that you would be considered outside counsel coming in to advise from a legal standpoint?

Catherine Kemnitz

Yes. Yes. So there's two parts. So Axiom would work typically providing some resource and the talent to the companies who have counsel to support their team in a variety of ways. And then now what we can do, which has been very exciting for Axiom is because we have Axiom Advice & Counsel, which is, in fact, a law firm, we're able to work with clients who do not have in-house counsel.

And where you will typically find that is in your earlier stages VCP-backed companies. And obviously, there's a lot of other type of companies, but that's a segment we know well and so are initially focused on, where you might not have yet made that general counsel, chief legal officer hire. You may not have -- you're in Series A, Series B; you may not yet be in that mode.

And so we have extended with the law firm the ability of Axiom to serve a market where we might have been working with these same private company sponsors with some of their port goods. We do have in-house counsel. We can now expand and kind of work with the full spectrum of their port goods, which is very exciting for us.

It's exciting for the sponsor clients, and it's also really interesting for our lawyers because with the partners of Axiom Advice & Counsel, you can kind of take on that sort of fractional GC role, that interim GC, which a lot of lawyers truly enjoy and I think brings a lot of value. And it makes a difference when you're -- like I mentioned, when you're going to go into the due diligence round or if you are going to look -- to show how organized you are, and how you're managing the risk and you're well protected. It could be for a variety of things.

Having just enough of that legal support in a way that leverages lawyers who have sort of in-house experience and acumen because part of what the challenge is with law firms is they can provide you very sophisticated and very [ important ] legal advice but they will struggle typically to understand how that translates into the in-house role and the judgment calls that in-house teams have to make.

And so having a talent who knows how to do that and say, okay, I have imperfect information. I need to make a risk-based decision, and I have enough knowledge to do that is really the muscle that these companies want when they hire their [ GCs ], they grow their team. Or even in the largest department, really value a talent for it.

Yashi Yadav

Got it. And so my understanding is that these companies that are backed by private equity firms or VC-backed, the goal is obviously for them to eventually scale, grow and kind of stand on their own feet, right? Are there -- are the teams that you're working with a part of that rapid growth process? Like, are you -- and are the needs different in each phase of growth?

Catherine Kemnitz

Yes, they definitely vary. And if you think about the life cycle of a company from its first series and its smaller scale where everybody does a little bit of everything, then you evolve towards a level where you can afford the specialization. Some of them may not – yes, if you start the VC stage, you hire your first CFO even.

And so there's definitely that scaling and what needs to evolve there changes over time all the way to your exit, which sometimes may be a public float. You want to do an IPO. You have gone through those cycles. And if the transition actually went through that where we were initially VC backed, then you move into the private equity world, and you are then engaging into that maturing of all of your functions.

And so there's really a number of things that happen, in particular, for instance, just with the volume of matters that you may be dealing with as you grow. So everybody wants to keep that growth moving fast. but there is a point where you have to scale your operations. So whether the number of contracts evolves or you are now expanding into different product types or geographies.

And your regulatory environment evolves, and now you have to kind of meet all these regulations, whether it's on state or international stage completely differently. So there's a number of things that evolve. You may launch new product; you need more IP protection. You may have discovered -- you know, developed a certain technology or something like that, where you could wing it at the early stage. It gets harder and harder as you go. The point -- what you're also trying to do then at that point is not to get your cost to skyrocket.

And legal services can be really expensive. Law firms are expensive, and the rate continue to grow. And so when you're in that mode where you have to sort of accelerate or manage that growth, but equally look at your bottom line and ensure you're protecting the profitability, which is going to be a really critical valuation metric, then legal becomes sometimes this area we're like, well, I have to spend a lot, what am I getting for it?

And this is where our model and the alternative provider model that we invented and continue to hone over two decades provides you with that alternative. Well, hang on, I can actually spend something that is manageable, predictable and yet give myself at least the core legal support that I need to ensure that I am protecting this incredibly valuable enterprise that I've been building.

And we've seen regulation, by the way, only get more complicated. You see data privacy; you see data security. It only gets harder, and I think with all the technology evolution that we're seeing right now, it's not about to get any easier.

Yashi Yadav

Yes. No, I completely agree with you. And kind of while we're sort of on the topic of regulation, are there any specific instances that you can think of where, let's say, a firm didn't -- maybe due to budgetary constraints or whatever else the rationale might be, didn't take on legal advice at the right time?

And what are some pitfalls that companies should be aware of that they can fall to and missteps that can actually cost revenues or almost prevent you from successfully being able to attain -- get to the point of exiting successfully?

Catherine Kemnitz

It's interesting when I started my career as a capital markets, I drafted a lot of disclosure documents for companies that wanted to go public. And there's an interesting section in that, which actually gets a lot of attention and maybe a few pages that will get read. It's called the risk factors.

And whenever I'm -- and it's true in my job today, I think about the company I'm in, I've always got sort of the mental write-up of those risk factors in my head to see what we need to deal with. And there is such a thing as too much risk that you could not raise capital if you had to actually lay it down on the page.

And I've seen many transactions where the financial model works well, where it seems attractive from a return standpoint and all of that. But then when you dig in -- when you -- as an investor, you dug into it, you would -- and even, by the way, as a strategic buyer, it's even -- there's a different element when you buy a strategic where the risk blew up the deal.

And it can be a number of things. It can be that you did not protect your intellectual property enough, and that's actually the core asset that the buyer would be interested in. But if it doesn't feel it's been protected enough, then it will not take the risk of its capital on it. It could be that you are so exposed to data privacy violations that they may not have been enforced on you yet, but you have had no control on that.

And the sponsor has certain standards that they meet about the kind of risk that they're willing to take that they won't move forward on that basis. It could be that you did something in the past completely inadvertently that creates a tax liability that is now hard to quantify. Investors will take a certain level of risk when they can quantify it, but when you can't, that creates a lot of problems.

And what can also happen in the transaction then is your investor is going to protect themselves. And so there may be a number -- a certain amount of the purchase price in investment capital that actually is going to go into escrow into protected space so that should the liability arise, the investors are protected. That money is money that you can't invest in your business or liquidity that you can't count on as the -- your former investors are trying to get out.

So it creates a ton of tension. And every company carries with it a certain number of liabilities and risk. And that's okay. But the legal aspect of it is, have you been able to draw a circle around the exposure that liability represents? Can you articulate to your investor that you're on top of it, that you understand that risk, you've taken it consciously and that it is not sort of a grenade that they don't know when it's going to blow up and that it's going to be on them to then clean up.

So I think it is something that is immensely actionable for companies at every stage of development through that life cycle to say, do I have enough protection and articulation of where my risk components, my liabilities sit to be able to give confidence in a transaction to the investor that I know what I'm doing.

And it is also something that says a lot about the management that's dealing with it. Not just pushing it on the carpet but being as a CEO or whatever the executive is, on top of sort of that side of the ledger is really important in how I think investors look at the confidence in the management team.

Yashi Yadav

And I'd actually like to talk a little bit more about the management side of things. So although your background is from a legal aspect, you are a lawyer, and that's the type of counsel that you're providing, it sounds like you have a pretty thorough understanding of the financials and that aspect of it.

Now how closely -- or I should say, how important do you think it is for legal counsel to be working in collaboration with the CFO and the rest of the executive team? And what are the risks of not doing so?

Catherine Kemnitz

Yes, it's a great question. I love that question. I do think taking the part about working with the rest of management team, there's -- I've been in -- I've reported in many functions. I've reported in finance, I've reported in strategy, I've been in legal. And there's a bit of a tendency in the legal function and vertical to feel quite unique and special. And it does handle something such as risk that is quite unique in some ways.

But I think there is so much to learn from having operated in other functions. And the reason is, at the end of the day, yes, the risk hits the legal function, but the more you understand the incentives, the drive and the priorities of the other functions, the more you can anticipate some of the risks that are going to come. And I can't state enough how important it is to have sort of that insight knowledge of what makes the company take of its blood flow.

And the blood flow often honestly follow the financials, and you'll see where it all leads so that you cannot prevent actually what people want to do in most instances. In my experience, it's about how do you do it right and how do you do it not with crazy risk, but with calculated risk. And to that point, you asked about the CFO specifically, that, to me, has been one of the most important and rich discussion and relationship as chief legal officer when I was that.

And it remains so as in strategy, really understanding how what we want to do translates into financials and into how the company will be valued and evaluated is so important. And then you can tackle all the risk there and say, how is that whole story shaping up? How is it all going to come together when we are either reporting to our Board on an ongoing basis or reporting to the market or looking to raise capital or exit in one way or the other.

And I think you can't look at one without the other one, and I think that ignoring some of the risk component of the legal function looks at and not being to be able to articulate it in sort of layman's term for the finance audience is a big miss because it will be a bit of a war in the fruit if you don't do that.

Yashi Yadav

Yes. I mean I'm assuming especially kind of what you were saying as companies scale and get larger, there needs to be more unity amongst the executive team in terms of how they're communicating and having just universal knowledge in terms of the direction that they're going in. So talking a little bit more about exit strategies, right? Depending on if a company is going to IPO or get acquired, how does the type of exit strategy impact the legal priorities?

Catherine Kemnitz

Yes, it's interesting. When you look at -- so IPO versus an acquisition, and it -- you're going to go to a different type of investors. And interestingly, in Axiom’s story, five years ago when Permira invested in Axiom, we had started on the path of going public. And a lot of the work I did before that was that public company readiness and making sure that we would meet the standards of operating in the public market.

You have all your disclosure requirements. You have a lot of controls that need to be in place, financial reporting, regulatory compliance. Remember that risk factor aspect, can you disclose all your risk in a way that will make a company want to invest. And in the U.S., certainly, the model there is a disclosure base, so you need to be able to explain everything that you've done.

You're also going to have to get ready to report to the market on a different cadence. So your quarterly results, all of that, are going -- it's going to put a very different kind of pressure on the company to meet these shorter-term goals and everything that is tied to being public.

On the other hand, when your exit is looking at a financial sponsor, then they will come at this with their sort of process and their approach to investing. And the way they will ongoing be interventionist or less so in the company really depends on the sponsor and what they're seeking to do.

But in that sense, they will look more to make changes. You know, look at the management team, look at their belief about efficiencies that they can create, growth acceleration, what is the white space you haven't yet explored as a company. And so looking at all of that, even if you tie it back to risk, it's just a different mindset.

And then the third one I would add is the strategic buyer. Now, having done some of those as well in my career, when you're a strategic buyer, it's not just about the company you're buying, it’s what you're going to integrate it into. So it's as much about what the buyer can bring as what the target will bring.

And that marriage of the two is so important. How you quantify your synergies, how you believe they are actionable, the kind of risk that those synergies may create is incredibly important as well because sometimes where you want one plus one equals three, you might end up with one plus one equals 1.5.

And you need to be very careful about that value destruction. And a lot of that comes back with just having a very clear view, not just of all the potential of the transaction and the path you're setting yourself in, but also of the risk that could undermine it because that is the opportunity to mitigate. And that's what's really interesting with legal. There is so much risk out there that can be mitigated with best practice and certain specific actions.

You just need to have a very sort of candid view of it and not be afraid of staring risk in the face and then making an evaluation. To your point earlier, work with the executive team, work with the sponsor of the buyer to really manage those risks one by one in an effective way.

Yashi Yadav

Yes, definitely. And I mean, all of this being said, I think that there's an incredible amount of value that Axiom can add to prevent sort of the different points that you touched upon, decreasing the value or missing key regulatory compliance pieces. But another large challenge that we lightly touched upon was budgetary constraints, right?

I guess advice that I would love to hear is at what stage would you say -- we know when a firm first gets VC backing. Should they start to incorporate legal advice into sort of their day-to-day processes? And how can they really balance sort of the legal priorities, and the legal support needed with those constraints?

Catherine Kemnitz

Yes. I think it's probably sooner than people think because one big way to manage legal cost is to anticipate legal risk versus letting it become a crisis. It's very hard to cheaply defend when something has really gone wrong, whether you're stuck in litigation, whether someone is really disputing your most valuable intellectual property, whether you've been stuck with the regulatory investigation. It's hard at that point, and it's something that we help with.

But what I would say is if you start earlier, you can probably anticipate a lot of that. And whenever you think about a provider like Axiom, it's sort of if you're going to go to a law firm, ask yourself whether you really are seeking sort of that acute bet the company type of moment support that warrants the premium you're going to pay or are you, in fact, instead trying to put yourself in a best practice mode, managing your day-to-day and ensuring that your growth is protected and that you build that discipline over time.

Any time you go there, I think you should ask yourself what the right resourcing is. And I would argue that the cost equation with the value you get from a model like Axiom where you have really talented lawyers who have that in-house acumen and that in-house experience is probably the best place to start because it will be relatively -- relative to law firms at a much smaller cost.

Now, when you're a very big company, equally, you are budget concerned. I mean, today, all legal departments, no matter what the size, we see it in the largest companies in the world are under cost pressure and have to create those efficiencies and have to decide where they are going to spend their money.

And again, looking at your budget and there is, in my mind, no law department where you can't take 10% or 20% of what you are spending today on outside counsel and say there is a better way to do that. If you move that budget to an Axiom, you save probably almost 50% on that spend, which for large departments, we're talking tens and hundreds of millions sometimes in a way that either creates savings to do other things or preserves your dry powder for when you do have an acute crisis.

And having worked with a lot of law firm, there is a place for them and there is a moment when it is absolutely warranted to work with them. But they are very expensive, and the rates keep going up, so you need to preserve that ability to invest -- sorry, to involve the right kind of support that you need. And I think increasingly, as you -- like in any function, as you manage your risk, it's about what's in your toolkit and how you activate against the need that you have.

And that's what we do a lot with our clients. It sort of advice around where is it that we come and are best for what you have to do? Where is it that you should continue? And we can sometimes work alongside the law firms to make sure you have the kind of service or expertise that they uniquely are positioned to give you with the kind of air cover that you need.

And I think as an investor, looking at businesses who have that kind of fiscal responsibility on their legal spend and can articulate all the initiatives they have is also a great narrative to bring to that conversation.

Yashi Yadav

Right. I mean, completely agree with you. I think my biggest takeaway from that is when we are thinking about decisions around how to spend, when to spend, how much to spend, it's always sort of what's a nice to have versus a need to have.

And I think just chatting with you today and kind of you highlighting all the different areas of risk that can arise by not defining legal counsel as a need to have, it's just good knowledge to know and just highlights how critical it is to really start thinking about the legal process and the risks involved as early as possible because it can ultimately help add to your opportunity down the road.

So thank you so much, Catherine, for your time and for chatting with us today. I definitely really enjoyed this conversation sort of touching on an area of risk that is not super familiar to me. It's definitely a little bit foreign, but it's always good to sort of expand your knowledge base in terms of all the different elements of risk and how they go beyond just the financials and how integrated they really are when thinking about it critically.

Catherine Kemnitz

Thank you so much for having me, I really enjoy it. And I love your podcast and how that connection to the rest -- like you said, the financial world is so important, so I really appreciate the opportunity to, maybe establish -- connect a couple of dots that are not always seen, but highly valuable.

Yashi Yadav

Yes, completely agree. Thank you so much, and I hope to speak to you soon.

Catherine Kemnitz

Sounds good. Thank you.