In Legal Business’ last Global 100 issue, we reported on a ‘relatively benign’ 2018/19 for the world’s top 100 law firms compared to the tumultuous three years that preceded it. The headwinds caused by increased protectionism in the US and ongoing acrimony between the UK and Europe had subsided somewhat after firms recovered from the initial shock of an infamous 2016. The result was an industry enjoying a sustained period of serious growth and momentum.
2020, however, brought an abrupt end to this period of plenty. If a global health pandemic that plunged the world’s largest economies into self-imposed lockdown was not challenging enough, there was also a drama-laden US presidential election. And buried amid this chaos, it is easy to forget the UK is marking the anniversary of Boris Johnson’s landslide electoral victory of last December, which mandated a potential no-deal exit from the European Union. At the time of writing, chances of a deal appear no better than 50/50.
For many across the Global 100, their last reported financial years were almost entirely free from the economic chaos wrought by Covid-19, which instead will heavily impact their 2020/21 showings. Because of this, the performances these firms posted in their last pandemic-free year are all the more important, as it will be the platform on which they face the worst economic crisis in over a decade.
A handful of the largest players endured quieter years with uncertainty identified as the primary culprit, but the big picture is still one of global growth, as Kirkland & Ellis became the first law firm in the world to hit $4bn, just two years after breaking the $3bn barrier.
‘The outlook post-Covid is impossible to predict. Demand in some practices, regions and sectors has increased, whilst in others it has fallen.’
Gareth Price, Allen & Overy
Across key metrics, the global elite have reasons to be optimistic. The gross revenue figure for the group is also up 5% to $119.72bn, slightly slower than last year’s 9% hike. The 5% increase in average and gross revenue was driven in part by a 6% increase in equity partners across the global elite to 27,058, while total lawyers was up 5% to 154,154. Non-equity partners, meanwhile, saw a drop of 3%.
Concerning, however, will be the dent many saw to their profitability, which will likely only be more adversely impacted in the current financial year. Average profit per equity partner (PEP) at a Global 100 firm retracted 4% to $1.8m across 2019/20 while profit per lawyer (PPL) likewise fell 4%. Revenue per lawyer (RPL), meanwhile, edged forward 3% to $833,000. However, gross profit across the group stood at $46.98bn; an 8% increase on last year’s $43.44bn, but seemingly not enough to offset the 6% increase in equity partners.
The hit to PEP disproportionately impacted the firms in the top 25, where PEP underwent a 9% drop to $1.98m and PPL plunged 10% to $344,000. In the second quarter, the retraction was just 1% for PEP and 2% for PPL. The bottom half of the Global 100, meanwhile, saw PEP grow 4% while PPL increased by 6%.
While DLA Piper joined Latham & Watkins in the $3bn+ revenue club this year (see our part II feature, ‘What’s the deal with DLA?’), the number of firms with turnover greater than $2bn stays at 14, this year with the addition of Gibson, Dunn & Crutcher. However, almost half of the firms making up the Global 100 (49) now turn over in excess of $1m, up from 45 last year.
In profit terms, a fifth of Global 100 firms now have PEP above $3m, with Dechert joining the club on the back of a 10% spike in partner profits. Paul, Weiss, Rifkind, Wharton & Garrison had a slight drop back into the group of seven firms with partner profits above $4m this year.
2020/21 will be the truer indicator of how damaging Covid-19 has been at the top end of the global legal market. But already clear is the economic recovery from the pandemic will be very uneven – across countries, regions, industries and sectors. Says recently-installed Allen & Overy managing partner Gareth Price: ‘The outlook post-Covid is impossible to predict. Demand in some practices, regions and sectors has increased, whilst in others it has fallen. Over the coming months we are expecting to continue helping our clients deal with the challenges and opportunities that the pandemic has brought about.’
Immovable objects?
Increasingly, the progress of those at the top of the pile looks irresistible. Kirkland & Ellis continued its soaring performance of recent years, notching another double-digit revenue hike as turnover hit $4.15bn – the Global 100’s first $4bn firm – constituting a staggering 93% increase since 2015. PEP for the year was up a less remarkable but steady 3% to $5.2m.
Latham had a similarly strong year: revenues grew 11% to $3.76bn while PEP was up 10% to $3.77m. Over five years, the firm has grown 44% – not quite Kirkland but still a striking increase.
‘Business has been strong. It was another great year and the London office performed incredibly well.’
David Walker, Latham & Watkins
‘Business has been strong, particularly in the US but also across the rest of the firm. It was another great year and the London office performed incredibly well’, says Latham M&A veteran David Walker. ‘The year is continuing to go well and the pipeline into next year looks very healthy. We had strong momentum into the start of 2020 from last year. No doubt the pandemic has hit M&A and PE but not nearly as hard as we feared earlier in the year. We are a well-hedged business with capital markets, restructuring and litigation teams, working closely with our M&A and finance teams, that will stand us in good stead.’
This pair of American pace-setters were among the 23 firms in the group to record double-digit revenue increases for the year, down from 35 in our 2019 report. The standout performer among the pacesetters was Chinese law firm Yingke, which saw its revenue increase 22% to $762.9m. King & Wood Mallesons was another, with revenues up 19% for the year to $1.1bn.
Debevoise & Plimpton was another large outfit to record an impressive year, being among the fastest growers for the year in both revenue and PEP terms. Turnover at the firm was up a strong 13% to $1.04bn while PEP increased 11% to a healthy $3.6m. Fried, Frank, Harris, Shriver & Jacobson also featured among the fastest growers for revenue and PEP, upping both by 13% and 15% respectively.
Other US players which have routinely performed well in recent years saw steadier increases. Milbank consolidated rather than improved on last year’s double-digit increase, growing 3% to $1.069bn in 2019 while PEP was up 2% to $3.87m.
‘When the pandemic started the restructuring practice, an already busy practice, took off in an unprecedented way,’ says Milbank chair Scott Edelman. The firm is good at moving to where the demand is. We are going to have a record year in terms of revenue and profit. Revenues are going to be up double digits. We are looking good for the rest of the year and the pipeline is looking good for next year.’
Paul Hastings – which over 2018 increased revenues 9% – saw its 2019 turnover rise a slower 4% to $1.27bn. The firm also bucked the trend of tumbling profit figures seen across many firms to up its PEP 5% to $3.42m.
According to the firm’s London chair, Arun Birla, this has positioned the firm strongly for an inevitably tougher 2020 and beyond: ‘The start of this year has been pretty sound in terms of cash collections and that strong balance sheet means we can keep hiring. We don’t want to rest on our laurels, we could end up like a lot of firms I see just frozen in fear. But this has been a once-in-a-generation disruptive period. Some deals were put on hold, obviously March was when we went into lockdown but weirdly we had a crazily busy May. Some weeks are busier than others, but we are getting deals done. There wasn’t a period where corporate fell off a cliff or anything like that.’
Californian firm Wilson Sonsini Goodrich & Rosati also remained in rude health. The firm saw revenues increase 12% to $961m while PEP was up 3% to $2.4m. The firm recently leveraged its strong performance to lure chief operating officer of Checkout.com and GC Powerlister Joshua Kaplan to its London office, bolstering its ability to advise in the global fintech space. The firm’s local rival, Cooley, similarly had another good year consistent with its striking decade-long advance (see box, ‘Ten-year view’): revenue at the firm in 2019 rose 8% to $1.3bn while PEP was up 6% to $2.5m.
National US firm Polsinelli, meanwhile, was one of the standout performers. Profits at the firm rocketed 29% to $950,000 while revenue jumped 13% $580.4m. Almost as impressive was New York firm Fragomen’s PEP increase of 25% to $2.3m, which was accompanied by a double-digit revenue increase to $701.8m.
Waiting for the hit
The standout performances produced by a few should not warp perceptions of success. Though Covid-19 only affected the tail end of the 2019/20 financial year for some (and for many the impact will not be felt for many until the 2020 financial results are available), it was still a major crisis to navigate at a crucial moment. For those firms, seeing only modest retractions across key metrics will be welcomed. For others who avoided the economic turbulence of Covid-19 in their last recorded financial years, poor performances will likely be compounded in 2020/21.
Fortunately, no-one across the group recorded a double-digit plunge in their material output. The year’s largest fall was recorded by Cleary Gottlieb Steen & Hamilton, which saw revenues down by 5% to $1.2bn while PEP saw a 3% setback to $3m. National US firm Nixon Peabody also had a trying year, with revenues dropping 5% to $505.5m. The firm’s PEP figure fared marginally better, dropping 4%.
Meanwhile, Paul Weiss dropped out of the top 25 after a challenging year by its standards, which saw turnover drop 4% to $1.39bn. PEP also suffered, falling 6% to $4.7m following an increase of eight equity partners to 153. The firm’s overall lawyer number declined by three, however, to stand at 1,020. However, Paul Weiss is the only Manhattan-based firm to sit comfortably in the top ten highest-performing firms by revenue since the global financial crisis (see box, ‘After the crash – the G100 ten-year view’) and with PEP close to $5m, nobody will be putting out an industry-wide appeal to ‘save’ the firm.
‘The start of this year has been pretty sound in terms of cash collections and that strong balance sheet means we can keep hiring. We don’t want to rest on our laurels, we could end up like a lot of firms I see just frozen in fear.’
Arun Birla, Paul Hastings
Magic Circle firm Linklaters was another in the group of slowest performers by revenue, with currency weaknesses (see box) meaning that revenue dropped 4% on last year to $2.09bn, while PEP dropped 9% to just over $2m. The result is an understandable softening on last year’s 7% revenue jump, according to managing partner Gideon Moore: ‘Covid-19 came at the tail end of what was a strong year for us. Notwithstanding the change in circumstances arising as a result of Covid-19, we have been able to continue to support our people and our clients. Our long-term strategy remains unchanged: investing in our globally diverse talent base and growing our practices sustainably to best serve our clients.’
Other big names in the group of slowest performers tells us size is not a bulwark against global uncertainty. Herbert Smith Freehills (HSF), Skadden, Arps, Slate, Meagher, & Flom, Clyde & Co, and Cravath, Swaine & Moore all saw their respective turnover decline by 2%.
While revenues among the group have been protected from serious damage, it is profitability that has endured the brunt of Covid-19’s economic assault. Ominously for the Magic Circle, three of the group’s internationalist contingent are among the Global 100’s worst PEP performers. Linklaters saw its PEP tumble 9% while Allen & Overy and Freshfields Bruckhaus Deringer saw their average partner profits fall 6% to just over $2m and $2.3m respectively. Of the big four international firms, only Clifford Chance (CC) saw a marked improvement on last year. Revenue at CC was up 2% to $2.3bn, though PEP was flat at $2.16m.
Things were worse at HSF, where partner profits plunged 14%. However, senior partner James Palmer remains sanguine about the firm’s prospects moving forward: ‘March/April was when things froze most. All crises have commonalities and things unique to them, and all markets have been affected differently. China still has fast underlying growth. Markets in western economies are high, there is a high availability of liquidity, that was not the case in 2008. Asia and China will accelerate in the next five years faster than Europe or the US. The firm is as strongly placed as it has ever been, and our geographic spread is part of that.’
At Ashurst profits fell 11%, but even this was above budget according to managing partner Paul Jenkins. ‘We have been performing well notwithstanding coronavirus, with double -digit revenue growth in Hong Kong and Singapore and double digit revenue growth on the Continent and US offices,’ he said.
Pinsent Masons was another to receive a hefty blow to its partner profits, with the figure dropping by 15% (The caveat is that the firm has been deliberating holding back partner profits in recent years for the purpose of future investment in the business.) The worst PEP performer, however, was Los Angeles-based Sheppard, Mullin, Richter & Hampton, which saw its partner profits dive 19% to $1.37m. The bronze medal for fastest profit growth over the year goes to Baker & Hostetler, which upped its PEP figure 22% to $1.27m, while turnover at the firm was up 10% to $732.5m.
Roll up your sleeves
It is safe to say firms across the Global 100 have, for the most part, shown willing and fortitude across a uniquely challenging period while others created strong positions for themselves to face their first ‘Covid year’.
2008 provided something of a playbook, but also serves as a warning. Many lawyers will tell you that it was not 2008 or 2009 that proved to be the real challenge, but 2010 and 2011. Once the initial firefighting is done, deal markets can go into rigor mortis.
‘The pandemic is happening in phases,’ says Akin Gump Strauss Hauer & Feld chair Kim Koopersmith. ‘There was an initial period of shock when people asked how it would all pan out. Then crisis management, working remotely and understanding what clients need. We have pivoted well and maintained relationships with clients in the most challenging of times. Everyone has stepped up; work is getting done. People have immersed themselves in connecting with clients.’
‘We have pivoted well and maintained relationships with clients in the most challenging of times. Everyone has stepped up; work is getting done. People have immersed themselves in connecting with clients.’
Kim Koopersmith, Akin Gump Strauss Hauer & Feld
The longer-term picture remains difficult to predict. The UK economy is projected to retract 11.5% across 2020, the second-largest reduction in GDP across Europe (Spain holds the unwanted first place, with its economy set to shrink by 12%). Moreover, the UK’s economic recovery is set to be among the slowest in the world, according to the Organisation for Economic Co-operation and Development (OECD). Global GDP is expected to have returned to its late 2019 level by the end of 2021, but by this time the UK will remain more than 6% smaller.
The same report by the OECD suggests the US will have recovered fully by the end of 2021, with the country’s economy set to retract 3.5% across 2020. And, while the economy under the Trump administration was hardly suffering, there is little fear in the US legal market that the incoming Biden presidency will result in future economic volatility.
A crucial difference between now and 2008 is western markets are high with liquidity. Governments have pumped huge amounts of stimuli into the system. This money will find its way to lenders who will keep companies afloat and ensure deal markets remain active. Crucially, the news on vaccines – the surest way out of social and economic impositions – has been positive. Just a few months ago such a development was entirely uncertain given that no vaccine for a coronavirus had ever been developed.
Undoubtedly, there is more optimism now than there was in spring. As Goodwin Procter chair Rob Insolia summarises: ‘As long as we get global stimulus and the vaccine is rolled out in the first or second quarter of next year, I think, from an economic standpoint, the recovery will continue. Clients are finding a lot of value today. There’s no question that life sciences is going to continue to be at the fore. It was already and it has picked up dramatically as a result of the pandemic. And technology will continue to fuel our ability to function and connect.’
White & Case executive committee member Oliver Brettle echoes: ‘So far, economically the impact has been much less dramatic than we feared. We had strong performance in the final six months of 2019 which continued into 2020. Some transactional has slowed down but there has been an uptick in financial restructuring. London has benefited from investment in disputes. Global footprint in countercyclical practices, antitrust and financial restructuring. The firm adapted quickly to working remotely.’
But such optimism is tempered by agonising facts: any stimulus has to be paid for and demand will eventually decline. But a small dent to profits aside, the global elite has demonstrated surprisingly robust revenue growth and adapted faster than many jaded onlookers would have expected – particularly in the area of technology adoption.
Meanwhile, in the short term, the momentum remains with the leading US players, with the Magic Circle postings resilient rather than threatening financial performances over 2019/20. However, City firms have better hedged practices than they did in 2008 and a client base that continually provides a pipeline of lucrative work. For them, this crisis could yet turn into an opportunity if they demonstrate imaginative and assertive leadership.
But for now, firms across the Global 100 have rolled up their sleeves and, varying performances aside, none should be written off just yet. LB
nathalie.tidman@legalease.co.uk
Legal Business would like to thank SSQ for its sponsorship of the Global 100.
After the crash: The G100 ten-year view
Our 2010 Global 100 report was – in much the same way that we anticipate our 2021 G100 to be – an apocalyptic year for the highest-billing law firms in the world as many recorded significant losses in revenue in the wake of the global financial crisis. And while the early part of the past decade was about rebuilding, the resilience of the top tiers of the legal profession is clear for all to see. Of the 71 firms that were in the 2010 G100 and remain today in largely the same form as they were then (removing any firms that went through transformative mergers in that period), all but one (K&L Gates) have recorded revenue growth over that decade. The mean average revenue growth for ten years for these firms is 62%.
The outliers among these firms are of little surprise in the main: the meteoric rise of Quinn Emanuel, Kirkland & Ellis, Cooley and Ropes & Gray over the past decade have been well documented. Less is known about Baker & Hostetler outside the US, but the firm has grown significantly to 16 national offices beyond its native Ohio, particularly in recent years. Ironically, the nearly $1bn in fees it has generated since the last financial crash from acting as trustee of funds recovered for victims of Bernard Madoff’s massive Ponzi scheme has played a telling part.
A ten-year analysis again makes uneasy reading for the UK firms in the Global 100 – particularly Freshfields Bruckhaus Deringer and Linklaters – and he currency effect has played an inevitable role over the decade (back in our 2010 report, £1=$1.5661 compared to £1=$1.2768 this year), meaning that the growth rates of the UK elite appear far worse in dollar terms. All five of the UK Magic Circle appear in the bottom third of those 71 firms for ten-year growth, with below average performance. However, the number of New York firms that also make up the lower reaches is noteworthy, including Skadden (27% growth, less than Allen & Overy’s 31%); Cleary Gottlieb (25%); Weil Gotshal (23%) and Shearman (21%). Also notable is the absence of New York firms in the top five, demonstrating the strength of thrusting ambition from other parts of the US (particularly California) over the patrician-like behaviour of the Wall Street elite. Paul, Weiss, Rifkind, Wharton & Garrison is the only Manhattan resident among the ten best-performing firms of the past decade (116% growth).
Global 100 averages
The Ins and Outs
Best and worst: Global 100 growth 2015-20
Global 100 headcounts
The currency effect
The dominance of the US dollar continues to affect the ranking of Global 100 firms that report in sterling and 2019 saw the pound slump further against the dollar, compounding the effect for firms that were either flat or achieved marginal growth in their home currency. In the 2019 report, the exchange rate was £1=$1.3363. This year, the exchange rate used was £1=$1.2768, meaning the majority of firms posted underwhelming results in dollar terms compared to US firms. The table below shows the actual year-on-year growth in home currency for these firms.
Global 100 total gross profits and revenues
Partnership growth
In total 68 firms in the Global 100 reported making partner hires at an average of 23 – down from 25 last year. However, partner promotions are up on average – the 69 firms that reported promoting partners averaged 24 each, compared to 22 in 2018/19.