Defying gravity – Inside the improbable rise of Travers and Macfarlanes

‘If you look at Wall Street, this model is replicated again and again. There is no reason it shouldn’t work in the UK.’ David Patient, now seven months into his second term as Travers Smith’s managing partner, responds philosophically to this Legal Business comment on the performance of his firm and Macfarlanes: ‘If two firms with once-derided models can so comprehensively outpace the wider industry, then even more of the profession’s battered received wisdom should be sceptically revisited.’

Criticism of Travers and Macfarlanes has largely focused on them being old-school, City-centric law firms, barring one tiny European outpost apiece. Yet the pair continue to defy expectations post-Lehman. For Travers, 2017/18 was its ninth consecutive year of growth, yielding an 18% uptick in turnover to £146.9m and a 24% surge in profit per equity partner (PEP) to £1.2m. Meanwhile, Macfarlanes’ reputation for striking profitability has yet to desert it in eight years of sustained revenue and PEP growth (marred only by a shaky 2015/16), with the firm upping revenue by 20% to £201.6m in the last financial year and posting an enviable 27% increase in PEP to £1.74m.

Between 2009 and 2018, Travers grew 128% from a £64.5m business. Macfarlanes has grown 104% from £99m. Both more than doubled their top line in a decade defined by a global financial crisis, without merging or expanding into new geographies. Says Patient: ‘Which decisions have shaped the firm? The decision not to plant flags around the globe is part of our success.’

‘We know that if we team up with Macfarlanes it’s going to be a success.’
Adam Emmerich, Wachtell, Lipton, Rosen & Katz

Clearly, the supposed flaws in their strategies have been defied. But what are the common factors behind the two firms’ achievements and can they extend this record of success?

Open-heart surgery

Two of the oldest unmerged law firms in the City, the biggest test for the pair came with the financial crash a decade ago. Few were as exposed as Travers and Macfarlanes, which had built their fortunes on transactional practices with no geographical hedge. In 2008/09, Macfarlanes saw revenue drop 10% and PEP fall by 23%, while Travers experienced a 20% reduction in turnover with PEP plummeting 38%.

The role of disputes in Travers’ success since 2009 is clear. Making up only 10% of the firm’s revenue a decade ago, it now accounts for a quarter of turnover – growth achieved without a single lateral hire – and a former partner says disputes is the most profitable practice area for the firm. Advisory practices – employment, pensions, commercial, IP and technology, as well as tax – account for another quarter of revenue, with corporate bringing in the remaining half.

For Macfarlanes, the shift in focus coincided with Charles Martin’s term as senior partner. Taking over from the hard-nosed Robert ‘Captain Bob’ Sutton in the midst of the credit crunch in 2008, he would oversee the restructuring of a firm where transactional, advisory and contentious make up a third of revenue each.

The firm had a solid foundation to work with. While many competitors (including Travers) were jettisoning their private client teams in the early nineties, Macfarlanes’ golden generation of trust and estates partners, led by veteran John Rhodes, ensured its transformation. They turned a practice dealing with old money made in the UK into the most international part of the business, assisting the offices of large foreign families, often run as big corporations or funds. ‘This allowed them to charge premium fees and feed work into other parts of the firm,’ notes current practice head Piers Barclay. Today, private clients account for almost a third of Macfarlanes’ turnover.

But arguably the most significant strategic move during Martin’s tenure involved real estate. Accounting for a quarter of the firm’s revenue in the mid-2000s, it was heavily focused on the commoditised, largely unprofitable work that suffered badly during the downturn. Again, while many firms were scaling back their real estate practices, Macfarlanes decided to refocus on it, handling major transactions for the likes of Brookfield and Berkeley Group.

Recalls corporate partner Charles Meek: ‘Charles [Martin] said: “Investment and asset management are core to what goes on in London, and high-end real estate will always be an important asset. There is an opportunity to expand while other firms are shrinking.”’

‘The decision not to plant flags around the globe is part of our success.’
David Patient, Travers Smith

The ‘open-heart surgery’ (as Martin calls it) came through laterals. Former Ashurst partner Ian Nisse joined from Shearman & Sterling in 2011, followed by his ex-colleagues Anthony Burnett-Scott and Gerald Kelly from Ashurst, and Clare Breeze from Shearman, between 2013 and 2015.

Nice to visit

Strong-willed senior partners are common ground for both when analysing international strategy too. ‘We are definitely looking to strengthen our ties with independent US firms. Charles Martin was ahead of the curve with that and we have been late to the party. But it’s definitely a party we want to be invited to in the future.’ Travers’ head of private equity, Paul Dolman, accepts the consensus view – emerging in dozens of interviews – that Macfarlanes has the edge on US relationships, with Travers’ international strategy more aligned with independent European firms.

It is difficult to overstate how much Vanni Treves – Macfarlanes’ well-connected and charismatic senior partner between 1987 and 1999 – moulded the firm’s international approach. An alliance with Los Angeles-headquartered O’Melveny & Myers, Germany’s Noerr Stiefenhofer Lutz and French firm Siméon & Associés (later absorbed by Hogan Lovells) was in itself forward thinking, incorporating a joint Brussels office. The end of the tie-up in 1993 could have dealt a blow to Macfarlanes’ international ambitions, but what happened next proved seminal.

It is easy to envisage Treves – who subsequently went on to chair Channel 4 and Equitable Life as well as becoming a respected fixer and fundraiser for the NSPCC – embarking on networking campaigns around Wall Street. This ethic has been handed down to subsequent leaders: the no-nonsense Sutton and the loquacious Martin.

This combination of temerity and charm has bred ties in the upper echelons of Wall Street, with the enviable trio of Paul, Weiss, Rifkind, Wharton & Garrison; Cravath, Swaine & Moore; and Wachtell, Lipton, Rosen & Katz the main referrers. Wachtell is notable for referring prestigious M&A mandates. Deals the two firms have worked on together include Vodafone’s $130bn disposal of its 45% stake in Verizon Wireless to Verizon Communications in 2013.

This glowing testimonial from Wachtell corporate partner Adam Emmerich brings things up to date: ‘If we pick up the phone and call Macfarlanes, we can be sure of an immediate response. We know that if we team up with Macfarlanes it’s going to be a success.’

‘International referrals are the icing on the cake – in a good year, the marzipan as well!’
Charles Martin, Macfarlanes

Revenue from international referrals accounts for only a ‘high single-digit’ percentage of overall revenue and is considered ‘the icing on the cake – in a good year, the marzipan as well!’ according to Martin. But Travers has also made more inroads with international firms – including in the US – than market perception suggests.

Patient notes that more than 10% of Travers’ revenue comes from referrals, while 2018 saw 20%-plus come from other firms, although he calls this an exceptional year. Given differences in revenue, this puts Travers, in a normal year, on roughly level pegging with Macfarlanes at about £15m a year from referral work.

Patient and outgoing senior partner Chris Hale also acknowledge the success of the firm’s four-person Paris outpost. Says Patient: ‘I set up Paris, but Chris was the force behind it. We used Paris as a route to doing more English law work on the continent for UK private equity clients and to build a referral network. I speak fluent French and went on secondment to a French law firm in the mid-90s.’

Travers is no novice when it comes to US relationships either, counting Cravath and Paul Weiss among its established ties. Andrew Gillen, a member of the partnership board, is looking to tap into US relationships as a priority. Hale and influential head of corporate Spencer Summerfield are also at the forefront of building US business. Foley & Lardner, Wilson Sonsini Goodrich & Rosati, Holland & Knight and Alston & Bird are among those to pass work Travers’ way.

The $10bn merger of Noble Corporation and Paragon Offshore was a referral from Baker Botts which, while having a London office, was less versed in UK plc takeovers so drafted in Travers. ‘We used to get work from Davis Polk for the same reason, but now they’ve got Will Pearce,’ says one Travers corporate partner, highlighting the downside of US firms establishing their own City teams.

The good news for Macfarlanes is that its most remunerative New York source of referrals, Wachtell, considers the one-office approach a key component of its success. ‘One of the aspects that make us an outlier is that we are still a genuine partnership,’ says Wachtell’s Emmerich. ‘We have one office, there is nobody here that is not practising full-time, we have no business development function or managerial class.’

‘Only recently have we focused on the fact this is a business. There has been an injection of professionalism.’
Paul Dolman, Travers Smith

‘Not bound by formality’

A key factor behind Travers’ and Macfarlanes’ success is the shared ability to make strategic moves without causing major rifts within the partnership.

While partner laterals are rare, especially at Travers, both focus on hiring at associate level, helped by a young promotion age and building partnerships that ‘grew up together’. Associates are promoted to partner at eight years PQE on average, with Travers in some cases promoting as early as six years post-qualification.

At Macfarlanes, all lawyers become salaried partners first and get a shot at the equity normally after three years, although the firm retains the flexibility of promoting later depending on business need. At the end of 2018, 28 of the firm’s 84 partners were salaried.

Travers has one of the youngest partnerships among the top 100 UK firms and has its 83 partners divided into two tiers within its lockstep model. Junior equity partners are reviewed after four years of being promoted before making it onto the firm’s senior equity ladder, with remuneration ranging between £700,000 and £1.4m.

Travers’ image as a happy ship is repeated throughout dozens of interviews. Current and former partners point to the possibility of a work-life balance as key to the firm’s ability to recruit talented senior associates from the Magic Circle, while shared office space means junior hands are exposed to what senior partners are doing.

Head of litigation Rob Fell and corporate finance partner Richard Spedding were associates at Freshfields Bruckhaus Deringer, before joining in 2007 and 1999 respectively. Head of pensions Daniel Gerring started out at Allen & Overy, while head of financial services and markets Tim Lewis started at Slaughter and May before becoming a partner in 2007.

One ex-partner says: ‘The thing that keeps Travers successful is persuading people that there’s more to life than money. You get good work and you are treated well.’ The firm doesn’t just inspire loyalty in partners. Travers mitigated the loss of private equity rainmakers Philip Sanderson and Helen Croke to Ropes & Gray in 2014 and 2016, thanks to clients, including Bridgepoint, proving loyal to the firm (see box, ‘PE class’, below).

‘Julian Howard is a very honourable man and that alone gives him the power to do what he does.’

Meanwhile, Travers’ management duo gets credit for codifying some of its procedures without creeping into bureaucracy. Says Dolman: ‘Only relatively recently have we focused on the fact that this is a business. We had been overlooking various fundamentals. There has been an injection of professionalism.’ Hale reshaped the management structure after he took over from Chris Carroll in 2013. All major decisions are now taken by its partnership board, whose members are elected by the whole partnership for a maximum of two three-year terms (see box, ‘Taking the lead’, below). Hale chairs the committee and Patient is a member.

When he took over from Andrew Lilley in 2015, Patient developed the firm’s business services roles and pushed their involvement in the firm’s decision making. ‘We have introduced more rigour,’ says HR director Moira Slape. ‘But David has always said: “Don’t have a lot of bureaucracy – keep things simple.”’

Summerfield sums up the firm’s ethos: ‘The secret of our success? What we choose to do, we try to do really well. We are decent to deal with.’

This conflicts somewhat with the view of a private equity partner at a rival firm, who has encountered Travers acting on the management side: ‘I don’t see them making huge friends with sponsors. They dream up all the points that might be difficult, but don’t come up with the solutions. They could do with becoming a bit more like Slaughters – culturally re-orient to become more solutions focused.’

By contrast, Macfarlanes’ reputation is as a place of sharper elbows. Veteran corporate partner Ian Martin concedes: ‘This is a tough place: we have high expectations, everyone is encouraged to be a disproportionate contributor, there is a high sense of responsibility we all feel to each other as partners.’

The firm’s ruthlessness towards underperformers, which some say increased during Martin’s tenure, is described as the reason behind a number of departures in recent years. While it is true that the firm has lost more partners than Travers, it has never come close to a mass walkout. And in place of the cuddliness, partners insist success is down to a desire to avoid politics.

‘Kathleen Russ is not the obvious choice for front-of-house, but maybe she and David Patient are a good combo.’

Macfarlanes’ partnership never votes. After taking over a decade ago, Martin moved to increase the power of the firm’s eight-strong policy committee – essentially its management board – in taking all the key decisions (see box, ‘Taking the lead’, below).

The agenda is set during an early-bird meeting every Monday at 7.30am by Martin and managing partner Julian Howard. But each of the policy committee members is assigned a constituency – a group of about ten partners – they are tasked to discuss every major decision with before reporting to the committee. This includes two of the key moments in the firm’s life. One is the review of the remuneration of equity partners, taking place every two years in the so-called ‘duennium’. Sitting between eight and 20 equity points, or around £900,000 and £2.25m, equity partners in each constituency are consulted on everyone else’s remuneration.

The entire partnership is also consulted when it comes to laterals, with the firm making a point of ensuring prospective hires visit its offices several times to meet everyone. Having the majority of partners on one site means the thorough process can be done quickly. Dubbed ‘the largest merger the firm never did’, the 2016 hire of a 15-strong competition team from what was once SJ Berwin was carried out in less than three weeks.

The lack of visibility on how the policy committee takes into account partners’ views led some former partners to describe the firm as a ‘clubby’ place run by a small group of veterans. The strongest counter-argument to this came at the time of the most consequential move in Macfarlanes’ recent history: the appointment last year of private client partner Sebastian Prichard Jones as Martin’s successor – two years before he is due to take over in 2020. As a former veteran partner recalls, both Martin and his predecessor Sutton were ‘born to do the role. There was no need for a process’.

This time it was different. The committee had years ago started lining up litigation veteran Dan Lavender as Martin’s ‘natural’ heir. ‘You would have put your money on him two years ago,’ says a former partner. ‘He was Charles’ right-hand man.’ But when Martin officially announced he was stepping down, it became clear that two other of the firm’s veterans were up for the role: Prichard Jones and private equity head Stephen Drewitt. Martin says partners were consulted on the route to take: ‘“Do you want an election, manifestos, votes..?” The overwhelming response was: “No! Don’t give us that!”’

Ultimately the firm went down the path of consulting before the policy committee made its choice. Against previous expectations, the decision fell on Prichard Jones after he received the ‘overwhelming’ support of the partners. ‘One of the strengths of Macfarlanes is that the firm is not bound by formality,’ says a former partner. ‘It’s a genuine partnership and always has been. Everyone can say what they think.’

Unusual suspects

The succession to senior partner of Kathleen Russ at Travers in July this year and Prichard Jones at Macfarlanes in April 2020 are major considerations, given the regard with which Hale and Martin are held among peers.

The new senior partners are, in contrast to their predecessors, relatively obscure. Hale, whose accolades include fostering relationships with US firms, being exceptionally client-focused and leading a lucrative management advisory group, is handing the reigns to Russ, who has been a tax partner at the firm since 2001 and headed that department for a decade until January 2017. Not everyone can see the rationale, including one partner at a US firm in London: ‘Kathleen Russ is a pernickety tax lawyer. Not the obvious choice for front-of-house, but maybe she and David Patient are a good combo. What is the big strategic idea?’

‘A lot of this is “steady as we go”,’ says Russ of her plans to pick up Hale’s prioritising of diversity where he leaves off. ‘The best people will be from a whole mix of different backgrounds. They will be split between men, women, white, BAME – I want to focus on this a lot in my term.’ Russ adds that her track record in developing gender balance is evident in that six of nine tax partners are women. Indeed, Travers has a better reputation than some when it comes to gender diversity at least, with 23% of the firm’s partnership being made up of women. This compares with 15% at Macfarlanes. However, Travers was on the wrong end of a rare discrimination claim in 2013 after denying a trainee a place at the firm after she became pregnant.

But Dolman is sanguine: ‘Kathleen is incredibly highly regarded in the private equity world – it is helpful for our brand. She is a very strong and driven individual who will want to put her own stamp on the role.’ Meanwhile, Prichard Jones is not as well known as the transaction-focused Russ in the world of private equity tax. But he is recognised as the highest time-recording partner at the firm, with an impressive roster of international clients feeding work into other practices, according to two former partners. ‘He is very much a Rob Sutton type – a high-flying partner, well known in his area, a force to be reckoned with – that’s why he was the obvious candidate, ’ says one ex-partner.

Many insiders argue that Prichard Jones’ election is a shrewd move, given the direction of travel for Macfarlanes in building out its tax practice. ‘It represents the future of Macfarlanes: a very high level, tax-driven transactional practice. That focus will become even more distinct,’ notes one ex-partner. For his part, Barclay notes: ‘People think: he’s a private client partner, he must be one of those people who have dogs and go shooting. That could not be further from the truth. He is commercial and driven.’

Same but different

Observers are quick to jump on the perceived threat to UK-centric firms amid Britain’s exit from the EU. But partners at Travers and Macfarlanes are unruffled. Says Hale: ‘Our emphasis on disputes will stand us in good stead. There is still a way to go for our disputes practice and our advisory practices are likely to pick up once there is something concrete to advise on post-Brexit.’

Chris Hale moved to reshape management after election as senior partner.

Fell is confident. ‘2019 is going to be red hot as far as our team is concerned.’ Given recent blockbuster mandates (see box, below), this optimism appears justified. Dolman says the increased focus on disputes is not at the expense of private equity, but it is a natural hedge against swings in the deal market. ‘We had a bad year in 2009 because we were too reliant on our transactional practices.’

But there is every reason to stay devoted to private equity as the engine room of the firm. At the halfway mark for 2018/19, revenue for the practice is up 15% on last year. Travers has also last year promoted three homegrown M&A lawyers to partner.

More pressing than Brexit are succession issues that both firms are experiencing. The early retirement in his mid-40s of Graham Gibb is often cited as a severe blow to Macfarlanes. Gibb – who joined the firm from Slaughter and May in 2003 and made partner in 2006 – took a sabbatical last year and decided not to return. He was one of its highest billers, but also regarded by many as a future leader. Much has been made of his strong relationships with Wall Street firms. Notes Wachtell’s Emmerich: ‘We had the highest regard for Graham Gibb; we are sorry to see him go. But he was certainly not the only person involved in the relationship.’ He points to M&A partner Harry Coghill, also ex-Slaughters and chair of the international committee, as another key relationship. On 1 February, Macfarlanes hired Ashurst veteran Robert Ogilvy Watson to fill Gibb’s role.

Veteran rainmakers Ian Martin, Charles Meek and Stephen Drewitt also have strong reputations. But with Meek about to hit retirement age, it is noted that the firm lacks high-profile younger partners beyond Coghill. Partners point to Luke Powell and Howard Corney, who took over from Ian Martin as co-heads of M&A in May last year, as well as dealmaker Jessica Adam for her role with key client Exponent.

And while Travers has been relatively unmoved by departures to date – particularly Sanderson and Croke – one partner at a US firm in London argues that some future exits could be more painful. ‘If profit starts to fall post-Brexit, what do you do with Paul Dolman? If Paul left, it would be a killer blow. He is talismanic.’

Succession is likely to be the defining issue of the next phase in Macfarlanes’ and Travers’ history. Replicating last year’s striking financial results in years to come will not be easy (although both firms are confident that they are on track at the half-year 2018/19 stage).

But there are three strong factors that give substance to their optimism about being fit to face future challenges: they have a healthy balance across practice areas, a track record of adapting to changing market conditions and robust quality control through their lawyer base. The issue for both firms is ensuring the next generation of leaders, litigators and deal makers is as strong as the current incumbents.

While there is much that makes the two City stalwarts distinct, they share a lot of common ground when providing a lesson for the modern legal profession: their successes can be traced back to several conscious decisions that go against the grain. That is most apparent when it comes to their choice not to go international. In keeping most of their partnerships on one site, they have succeeded in achieving the complex balancing act of a partnership that is able to make swift decisions while remaining broadly collegiate.

Martin sums both firms up when he says of Macfarlanes: ‘A genuine and profound commitment to lawyering; a lack of rigid procedures for doing things; our dislike for following trends simply for the sake of following trends – these are three things that some people might describe as old fashioned, but they are a very important part of the differentiation that has a direct impact on what we do for clients.’ LB

marco.cillario@legalease.co.uk
nathalie.tidman@legalease.co.uk