Global London: The Big Long – Inside Sidley’s daring attempt to relaunch as a private equity leader

Summer 2015. Four US lawyers meet at Nobu restaurant in London. Sidley Austin management committee chair Larry Barden and Europe head George Petrow have invited two City-based lifers from long-time Chicago rival Kirkland & Ellis: private equity (PE) partners Erik Dahl and Christian Iwasko. On the table is a plan to shake up Sidley’s loss-making London operation by building a PE practice from scratch. Dahl and Iwasko are sceptical, but their patience with Kirkland has been worn thin by its latest round of top-dollar hires.

A few weeks later, Dahl and Iwasko sneak out of a Kirkland partner conference in Chicago to meet Barden and Petrow again. Doubt is giving way to enthusiasm: Sidley is prepared to invest an eye-catching sum and give the duo free reign. Six months later, the deal is signed. Dahl, Iwasko and four other London partners join Sidley in February 2016.

Three-and-a-half years since that Nobu dinner, Sidley has recruited over 75 lawyers in London and Munich working with PE clients across M&A, finance, restructuring and tax – around 40 of them Kirkland alumni. The long-term ambition? To make Sidley one of the elite PE firms in the world, generating around $200m from sponsor clients in Europe. The investment? North of $40m.

And the return? That is where the story gets complicated. Implanting an M&A-driven business into a firm traditionally known for disputes, regulatory and structured finance was never going to be easy. For context, there is no precedent for a top-100 global law firm attempting to build a world-class leveraged buyout practice from a virtual standing start, let alone with Europe as its foundation.

There is no precedent for a top-100 global law firm attempting to build a world-class leveraged buyout practice from a virtual standing start.

And, so far, the London buyout legal community is unimpressed, citing unrealistic aspirations and a low profile in European deal work. Meanwhile, the jolt to the staid Sidley veterans of such a large group of partners from a firm with a very different culture has provoked much griping and a string of departures from figures unhappy about the new direction. ‘They overpromised and under-delivered’ is just one of the comments Legal Business is told. Six high-profile departures from Sidley in London between July 2018 and February 2019 have done little to sell the image of an emerging power.

To find out whether these are just trenchant comments from a community prone to talk down rivals, or the inevitable tension inherent in a long-term repositioning at one of the world’s largest law firms, we conducted over two dozen interviews to gauge the pay-off of Sidley’s huge bet.

Off the cliff

The financial crisis hit Sidley’s finance-focused London operation hard. Between 2007 and 2009, revenue dropped 21% to £48.8m. The mantra quickly became diversification. Built by veteran Graham Penn to mainly service banks, its 70-strong City finance team was cut by half and refocused on restructuring. Funds and fund formation practices were established. M&A and litigation were expanded.

But the standout performer in the post-crash years was the financial services regulatory practice, which spun off from the wider finance group to establish its own client base, led by veterans John Casanova and Leonard Ng. London revenue returned to growth in 2010, and by 2015 it was back above pre-crisis levels at £64.2m, up 32% on 2009. But despite this the office was loss-making thanks to high remuneration costs. By some margin. Partners speak of eight-figure annual losses. Diversification had to move up a gear.

L-R: James Crooks and Bryan Robson, Sidley Austin

‘We were a very close group. Christian and Erik were key supporters for a number of us being made partner.’
Bryan Robson, Sidley Austin

Meanwhile, in Chicago the 2,060-lawyer firm was going through one of the most significant changes in its recent history. Its two leaders of 15 years, whose clout gave them huge capital with the partnership, were stepping down in the space of a few months of each other. Executive committee (ExComm) chair Thomas Cole was replaced by Supreme Court lawyer Carter Phillips in April 2013, while M&A partner Barden took over from litigator Charles ‘Chuck’ Douglas as management committee chair in 2014.

Both Barden and current ExComm chair Michael Schmidtberger, who replaced Phillips in 2018, maintain that the firm is led by its committees rather than the two leaders. ‘The strategy of the firm doesn’t shift dramatically with the change in management,’ states Schmidtberger. ‘Where the firm is going is not the particular vision of Larry or myself.’

Acting as the equivalent of the C-suite and board respectively, the 11-member management committee and the 45-strong ExComm take all major decisions on hires, investment and compensation (see box, ‘In camera’, below). The remaining 617 partners have unusually little means to hold management to account. Sidley operates a black-box system, which means that, traditionally, discussions over compensation have been supposedly taboo among partners. Most rank-and-file partners do not know what peers are earning.

This means two things. There is less risk of partners griping about remuneration and the firm can hire high-flying regulatory lawyers at what would look like peanuts for a big-name transactional lawyer – partners speak of top-of-equity being more than 15 times the entry-level partner compensation, but there is no fixed policy. It also means partners have little visibility of how much of the firm’s money is invested where.

The system works as long as the partnership trusts its leaders, but it is at risk of discord if that trust falters. So, while Barden insists that the vision to expand into PE pre-dates his term and had the backing of ExComm, partners are in no doubt whose credibility was at stake when the firm hired the Kirkland team: Barden and fellow management committee member Petrow – the only representative from Europe in the firm’s senior management – have their names forever attached to the plan.

‘The PE team has been incredibly helpful in rebalancing the finance practice away from bank securitisation into a much broader client base.’
Rupert Wall, Sidley Austin

A clean slate

The firm had already started building some embryonic leveraged buyout capability in the US when Barden and Petrow sat down with Dahl and Iwasko, with small teams in offices including Chicago and Dallas. But the attempts were sporadic and focused more on mid-market local clients than the marquee international houses.

Even after the hire of Simpson Thacher & Bartlett Los Angeles managing partner Dan Clivner in May 2015, few would have associated the Sidley brand with leveraged buyouts, which is precisely what made the firm so appealing to the two Kirkland veterans. Ever since the $8m hire of Stephen Lucas from Weil, Gotshal & Manges in 2014, Kirkland had turned the spotlight away from them, pushing its London sponsor work away from the mid-market. Several former Kirkland partners speak of a relentless drive from chair Jeffrey Hammes to direct work and client relationships towards the new hires to help with initial integration – or make them look busy even if they were not.

Sidley offered the old guard a new beginning. Says Iwasko: ‘Sidley represented the last opportunity to build a new European private equity brand from scratch at a blue-chip American firm. [It] was still a clean slate where we could create something special with the right culture and business ethics.’

One of the transferring partners sums up the scale of vision, which would involve recasting a storied, gentlemanly institution as an entrepreneurial outfit increasingly focused on sponsors. ‘I want to look back and say: we were not just lawyers, we built something – a team, a place where our children can work – we are leaving something behind and this was the last chance to do it.’

However, discussions may have gone on longer if things had not taken an unexpected turn at Kirkland. At the beginning of 2016, the team received news that it was changing the partnership agreement to double the notice period from two to four months for equity partners and introducing a 30-day notice for junior partners. The team had to decide quickly and decided to jump ship. Four salary partners and ten associates followed Dahl and Iwasko to Sidley. Says finance partner Bryan Robson: ‘We were a very close group. Christian and Erik were key supporters for a number of us being made partner.’

In a sign that Barden and Petrow meant business, Dahl was appointed to ExComm. Iwasko’s key client TowerBrook provided an early validation of the move, following him to the new firm in a rare blow to Kirkland’s core business. The following 18 months saw a raft of other hires that made the previously media-shy Sidley a regular feature in press headlines (see ‘Growing Sidley’, below).

Another coup came in November 2016, when Dahl managed to hire highly-rated restructuring and leveraged finance partner Yen Sum from Linklaters. (So vital was she to raising the firm’s profile with sponsors that Sum was hired when she was eight months pregnant.) A few months later, Dahl made another notable advance, once again at the expense of his former shop. As one of the key promoters of Kirkland’s launch in Munich back in 2005, Germany had been on Dahl’s radar since he joined Sidley, but the firm had pulled out of the country in 2014, shutting its structured finance-focused Frankfurt base.

‘Sidley represented the last opportunity to build a European private equity brand from scratch at a blue-chip American firm. It was a clean slate where we could create something special.’
Christian Iwasko, Sidley Austin

The story of Kirkland’s Munich branch somewhat mirrors London, with a clash between the veterans and new recruits after the firm brought in a new group of big names amid its push upmarket: Latham heavyweight Jörg Kirchner and Hengeler Mueller’s Achim Herfs. Sidley was once again poised to take advantage. Former Clifford Chance partner Volker Kullmann, who had built a successful mid-market PE operation, quit Kirkland after 12 years to launch Sidley’s Munich office in June 2017. Six partners and four associates followed him, as did his main clients. All they had to do was move a few blocks down the road in Maximilianstrasse, change the name on their business cards and keep billing.

At what cost

Led by Dahl, Sidley’s Munich operation is widely considered a success. It has put Sidley on the map in the German buyout market and quickly expanded from 11 to 27 lawyers, including the hire of well-regarded restructuring partner Kolja von Bismarck from Linklaters (a descendant of Germany’s first chancellor Otto von Bismarck). The firm will not comment on its turnover, beyond pointing to a similar revenue per lawyer to London – suggesting current revenues of around $25m.

The situation proved more complicated in the UK. According to several accounts, the new team fell substantially short of highly-ambitious forecasts in the first year, a claim Dahl and Iwasko deny. By consensus, however, it did not help that the main client the London team was able to move from Kirkland, TowerBrook, has been relatively inactive over the last three years, meaning much of the client base had to be built from scratch.

Some claim the Kirkland hires tried to usher in a different tone to key aspects of the firm’s culture. The office had in some respects operated as a set of chambers, with little communication between different partners and teams. The Kirkland hires pushed to build a more cohesive team of people ‘all sharing credit’, with Dahl reviewing the entire group rather than individual partner billings when discussing remuneration within ExComm. Regular meetings open to the whole office were introduced to discuss performance.

The move from Kirkland to Sidley brought scrutiny of partnership decisions. While Kirkland’s fast-track promotion model means a salary partnership for swathes of associates at year six, Sidley has a two-tier partnership to which associates are generally promoted around nine years post-qualification at non-equity level. According to one account, non-equity partners, who make up around half of its partnership, can earn up to $1.5m in a mixture of equity units and guarantees. Although global promotion rounds have become larger since the team joined (from 16 at the end of 2016 to 30 last year), Europe has hardly been the focus: just two new partners were announced in the City in the last three rounds – although some lawyers made partner when they joined the firm. While Dahl and Iwasko deny pushing for the introduction of a Kirkland-style rapid partnership, the team has been asking for more flexibility on promotion to allow top performers to make partner earlier. In the meantime, senior associates are being treated as partners in all but name.

A balanced assessment is that Sidley is going through a transformation, involving pain, no small amount of risk, and one that will continue for several years to come.

Tensions were also stoked by chatter in the partnership about the price that Sidley paid for the team: the numbers associated with Dahl and Iwasko were almost unheard of for City laterals, and all this in a hush-hush ‘blackbox’ remuneration structure. In truth, Sidley’s blackbox has never been as good at containing information as similar closed-comp models at Jones Day or Greenberg Traurig, both US peers with far more concentrated leadership teams.

Several close to Sidley, including one current partner, claim that Dahl became one of the firm’s top-paid partners with Iwasko not far behind – although this is something that both deny.

Sidley also hiked its associate salaries to ensure recruits would get the same compensation as if they had stayed at Kirkland, and has since adopted Cravath, Swaine & Moore’s market-setting rates of between $190,000 and $340,000. In total, the investment of the firm into the hires in London and Munich was around $40m, with some former partners suggesting the final figure was considerably north of that.

There was also an element of culture shock. As the union of an old-money Chicago firm that traces its roots back to 1866 and long-established New York securities firm Brown & Wood in 2001, Sidley Austin was regarded as patrician to the point of laidback.

But the new management was being influenced by the business mix and thrusting style of Kirkland. How could it not? Kirkland had comprehensively outperformed its Illinois neighbour over the last decade on every financial metric. And a Sidley that remained overly focused on volume transactional work for increasingly cost-conscious banking clients risked falling further behind key peers. The incoming Kirkland team would soon push Sidley even further out of its comfort zone, including pressing for a more aggressive and performance-driven style.

‘We can tell clients we can give them all the advice they need.’
Fatema Orjela, Sidley Austin

The second half of 2018 saw a particularly high concentration of departures from the London office, including some of the key faces of the pre-Kirkland era (see box, ‘Growing pains’, below). The biggest reverse came when Sum decamped to Latham with her team over the summer, less than 18 months after joining. Other significant departures the same year included veteran litigator Dorothy Cory-Wright, who left for Dechert, and London finance co-head and former City managing partner Matthew Dening, who joined Baker McKenzie.

This then leads to the biggest sticking point – what return on its investment has Sidley seen so far? For a 75-strong team spread between London and Munich, Sidley’s has gone strikingly unnoticed among the City’s PE legal community. The private equity team now accounts for more than a third of the firm’s City headcount – around 50 out of 145 at the end of 2018.

Dahl, Iwasko and Sava Savov certainly have good reputations, but rivals claim the team has been low profile on major deals.

Iwasko and Dahl respond that their 75-lawyer European team is approaching a $100m business annually and they plan to double that figure over the next few years. Iwasko says the client base they moved from Kirkland only accounts for about a third of the team’s current book of business. He points to mandates for brand-name clients including KKR, Apollo Global Management, The Blackstone Group, Mid Europa, Oaktree Capital Management, HIG Capital, and TPG (see box, ‘Major European PE deals’, below). They insist the reason few London PE lawyers have seen them on deals is that they primarily work in continental Europe and some of their key clients would sell their business to corporates rather than PE houses. The team’s client list speaks for itself. But the lack of profile on £500m-plus deals is a clear indicator of how far the practice will have to progress to get anywhere near the top echelons of private equity, while Sidley’s current earnings from the sector are dwarfed by established peers, with Kirkland, for example, generating well over a $1bn annually from sponsors.

Notably, Sidley still does not rank in Mergermarket’s top ten deal rank for private equity globally or in Europe for 2018, or place its top 20 for European M&A in value or volume terms for the same period.

Globally the 325 lawyers in the firm’s M&A and PE group generated half a billion dollars last year, up 30% since 2016. In total, the firm’s transactional practices (including M&A, finance, capital markets, real estate, tax, insurance and funds) billed $1.2bn, over half of the firm’s $2.2bn turnover. Litigation and investigations brought in $800m and regulatory just over $200m. Europe finance head Rupert Wall says the PE team has been ‘incredibly helpful in rebalancing the practice away from bank securitisation into a much broader client base’, with alternative capital providers now accounting for the majority of the practice’s European client base.

The former Kirkland team, for its part, praises Sidley’s regulatory expertise and sector specialisation, including insurance and life sciences. Comments Fatema Orjela: ‘We can tell clients we can give them all the transactional and portfolio advice they need from a sector perspective, which they would have either not got or needed to outsource to another firm.’

The contentious point is the current performance of the London office, where the vast majority of the new hires are based. Dahl and Iwasko concede that the $100m figure for PE work does not equate to the annual billing in Europe but also includes deals originated by the team that might have been billed in any part of the world. London has grown its revenue at a much faster pace since the team came across: while in 2015 it was 32% up on six years before at £64.2m, in the following three years to 2018 it grew 52% to £97.5m. That performance in London equated to an annual increase last year of £11.8m (around $15.8m and a 14% hike).

Yet the office is still loss-making by around $10m, although Iwasko says he expects it to turn a profit this year as investments pay off. The question on the minds of many peers is if this programme is enough for Sidley to be patient, given the Kirkland team’s promises.

Miles to go

While Petrow is on his way to retirement this year, for Barden there is still much at stake. ‘The investment is paying off well,’ he says. ‘The client base has expanded significantly. What’s really encouraging to us is not just the opportunities the lateral group has brought, but the additional opportunities coming from the legacy platform. It’s an exciting time for us in London and Europe.’

Describing the project as a success would be too generous, but contrary to the claims of some of the London PE community, it is also too early to dismiss it as a failure. A balanced assessment is that Sidley is going through a transformation, involving pain, no small amount of risk, and one that will continue for several years to come.

Firm-wide revenues were up 9% for the 2018 year, coming after a solid growth track in the previous five years, while profits per equity partner were up 13% to $2.55m. In this context, it is easier to see the case for Sidley’s willingness to stomach long-term investment.

London head Thomas Thesing observes: ‘A partnership in which people have different points of view is what makes our firm so dynamic and strong. Finance, private equity, restructuring, life sciences, capital markets, energy/infrastructure and disputes will be a prominent part of the firm’s future. Three years since the arrival of the private equity group, it is only really the beginning of the story.’

However, Dahl’s and Iwasko’s dream of creating one of the top two PE brands in the world alongside Kirkland will require a decisive breakthrough in the big-money centres and sustained inroads with high-end buyouts. That will need more hires to grow its 70-strong US PE team on which Dahl, Clivner and Chicago-based co-head of M&A Brian Fahrney are currently working. The firm has added ten US-based PE partners in the last three years, but in New York still only has ten lawyers working on PE.

Iwasko says Sidley is on course to achieve his vision, noting that the European buyout team has now exceeded its target of driving revenues per lawyer past $1m. ‘We have over-delivered. We have built something much bigger than we promised we were going to build. We had a business plan coming over here and we have significantly exceeded all the targets they had for us. The business is now three to four times bigger than it was when we left Kirkland.’

Concludes Dahl: ‘We don’t want a cult of personality at Sidley. We are about trying to create something institutional, so when I walk away from this place they are not going to miss me.’

Further expansion of the European footprint is also said to be brewing, although Dahl denies any timetable for opening in Paris. Further headcount growth is expected for the 145-lawyer London office, with the firm next year moving into new premises in the new 70 St Mary Axe development dubbed the Can of Ham, which can host up to 220 lawyers.

But the experiment has pushed Sidley’s culture to its limit. Its black-box system looks singularly ill-suited to a major push into arguably the most money-obsessed and individualistic practice line in global law. And if this is just the beginning of the story, the firm will have to invest a lot more to gain the momentum to deliver its startling ambitions.

If Sidley is to avoid a more serious fissure opening up between its legacy business and the newly-established PE practice, it has to become more open about the level of investment needed and its ultimate goal. It is hard to refute the critics of the Kirkland experiment who claim there is no point pretending you can achieve a Premier League-topping performance on what amounts to a mid-table budget.

Remaking Sidley may have become a necessity if the firm is to retain a place up the upper reaches of the Global 100 but if it is to be ultimately successful it will also have to be more honest with its partners regarding the implications of that process and need to renew its culture. Sidley veteran Penn strikes a resolute note on the need to recast its business: ‘I sit on ExComm, which originally considered this strategic expansion. I believed in the strategy at the time and still believe in [the Kirkland hires]. It is still relatively early days, but I am absolutely convinced it will be successful. This is a firm that is increasingly focused on alternative credit and capital providers.’

As part of a fundamental rethink of Sidley’s business, the Kirkland experiment makes a kind of audacious long-term sense. Judged in more limited terms, as merely a large opportunistic bolt-on, the case is much more marginal. Either way, its London practice will have to start improving returns in the next two years if patience is not to run out. LB

marco.cillario@legalease.co.uk

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