The Departed

Why would a partner quit an elite London law firm with decades of history, Rolls-Royce support and a superb client base for the uncertain prospects of the City arm of a US rival?

Money is the obvious answer and in a sector in which laterals regularly increase their compensation by 50-100%, that is obviously a big part of the equation. One Freshfields Bruckhaus Deringer rainmaker is currently reported to be sitting on a $10m a year standing offer.

Notes one high-billing partner who quit Linklaters for a US firm: ‘It’s rubbish when people don’t say it’s about money. There is the longevity of career or the fact that partners are not interested in management, but the main factor is money.’

But the awkward truth for London firms is that it is no longer just about the dollar. After all, a lucrative package for two-to-three years will be followed by a sharp drop in earnings if you fail to produce the goods – which usually means bringing in clients. For the best practitioners, much of the calculation is about ambition, meaning the possibility that they can achieve more at their new shop. For years, the received wisdom was that on this yardstick, US firms were on to a non-starter when recruiting off the Magic Circle. The client bases were too institutionalised, the polish of supporting practices and international networks impossible to challenge and the partners themselves lacked the hunger.

‘There are some who will transfer and be effective,’ says Simon Marchant, London head of corporate at Freshfields. ‘But it’s quite hard to pinpoint somebody who’s moved and had a more successful career than if they had stayed at the Magic Circle.’

In the first ten years of US firms investing in London, with only a handful of exceptions, the Magic Circle easily weathered the occasional loss of talent, even as chasing -pack rivals were decimated. For every Andrew Wilkinson, Mike Francies and Maurice Allen who built successful businesses at US practices, there were ten who transferred with poor or indifferent results.

But the last five years have challenged that assumption in a number of lucrative practice areas – most notably private equity, leveraged finance and funds – where US firms have had huge success in attracting quality partners from the City elite.

The core question is how successful these expensive stars are at their new homes, a point Legal Business sought to address across more than two dozen interviews with senior practitioners at top US and London firms.

‘There used to be a generalisation that Magic Circle partners do not have portable businesses,’ argues SSQ chief executive Nick Shilton. ‘That’s absolute nonsense.’

‘David Walker going to Latham made a big difference. There is broad ambition.’

 

‘We have had some notable successes on both sides of the Atlantic, Asia-Pacific, and continental Europe,’ observes White & Case London head Oliver Brettle. ‘We wouldn’t continue to recruit partners from the Magic Circle if it didn’t work.’

Just how quickly this group of successful imports is expanding will define the pecking order of the City and global legal market for years to come.

Forces of nature

When it comes to the most astute players at top-end partner recruitment, to say there is consensus on the top firm is putting it mildly. Latham & Watkins is universally cited as the most potent operator at recruitment in general but specifically at bringing in partners from the Magic Circle.

While the Los Angeles-bred giant has for years been an aggressive acquirer of City talent, the 2013 recruitment of Clifford Chance (CC) private equity head David Walker is cited by many as one of the most significant City hires of the current decade.

One Freshfields rainmaker who remains largely sceptical of US firms’ recruitment in London concedes: ‘Walker going to Latham did make a big difference to the market. He is team-building and Latham has a broad ambition to build out across Europe.’

The move had all the hallmarks of a successful hire, shipping in a key partner in an area in which the hiring firm had a strong practice (private equity), common clients (notably The Carlyle Group), and being subsequently backed up with wider strategic investment.

Latham turned back to CC to pick up a string of hires, bringing well-regarded partner Kem Ihenacho and rising star Tom Evans in London. The firm also in 2015 brought in CC’s private equity co-head Oliver Felsenstein and partner Burc Hesse in Germany, followed by Linklaters’ German buyout chief Rainer Traugott in 2016.

Since Walker’s arrival, Latham’s grip has tightened on Carlyle, while the firm has built its relationship with CVC Capital Partners and added Hellman & Friedman to its client roster.

Walker notes the huge draw of an Anglo-American platform for his move – particularly Latham’s commanding high-yield and leveraged finance practice – and argues that it was a smooth transition: ‘Clients bought into it very quickly and the culture of the firm is not dissimilar from CC. Latham is a very entrepreneurial, ambitious, successful firm. It was these qualities that first drew me to CC.’

Walker is overseeing roughly $10m-12m client work a year, according to one recruiter. ‘Where there is a clear, sensible strategy it works,’ notes Weil, Gotshal & Manges corporate veteran Francies. Comments one corporate partner at a leading London rival: ‘The hire of David, Kem and Tom has been very successful because they’ve also had a commitment in Europe to grow.’

The other fully-established figure most cited is Simpson Thacher & Bartlett’s London head Jason Glover, who joined the firm in 2010 after quitting as head of funds at CC, where he was one of the City firm’s top billers.

For the speed of rapidly building a business, Glover is certainly one of the most successful laterals ever in the Square Mile, in part reflecting the personality-driven dynamic of the funds market.

Glover initially moved with the support of core clients EQT and BC Partners but then expanded the practice, quickly picking up substantive work for Apax, CVC and Bridgepoint. The practice, which barely existed in 2010, is now estimated by peers to be bringing in well over $30m a year.

As with Latham and Walker, Glover was able to leverage off the rising US influence in Europe’s leveraged buyout sector and a superb pedigree, with Simpson’s core clients including Kohlberg Kravis Roberts & Co (KKR) and The Blackstone Group, two of the most iconic names in the sector.

‘The main reason I left was that I had taken the practice at CC as far as I could.’
Jason Glover, Simpson Thacher & Bartlett

 

Unlike Latham, the conservative Simpson Thacher – a rare lockstep firm on Wall Street – is notoriously wary of growth, leaving Glover to make the case for tactically expanding its business.

Glover says his move reflected his belief that the funds sector was swiftly tilting in favour of US advisers. He cites a major client tender in 2009 as confirming his mind, when six firms were asked to pitch for a major sponsor, including three US firms with no substantive London presence in private equity. Notes Glover: ‘The main reason I left was that I felt that I had taken the practice at CC as far as I could.’

The third name standing out is all the more impressive for having built his reputation with little external fanfare: Matthew Elliott, the private equity real estate specialist who quit Linklaters in 2015 for Kirkland & Ellis.

While Magic Circle firms have lost plenty of partners with more established names to US rivals – Elliott is already acknowledged as one of the most productive partners in a fast-growing City office packed with high billers and certainly one of the most effective deal names in the City’s buyout sector of any vintage.

‘To me, Matt Elliott may be the most successful hire ever for a US law firm,’ notes one recruiter. ‘These kinds of people are successful because they have built up their own practices and the clients are loyal to him. He works unbelievably hard and is a down-to-earth guy.’ One Magic Circle partner notes: ‘Matt’s a good guy, has done very well.’ Another senior deal partner at a US firm puts Elliott alongside Glover as the most successful transfer to a US firm.

Major clients Elliott has worked for at Kirkland include Oaktree Capital Management, GIC, Brookfield, PIMCO and Ares Management, as well as new client Indigo Capital. Key matters include acting for GIC on its €2.4bn acquisition of P3 Logistic Parks and Oaktree on the carve-out and sale of its UK student housing business.

Ironically, Elliott is regarded by some peers as being mishandled by Linklaters as he was initially promoted in real estate, rather than private equity.

The recruitment also reinforced Kirkland in one of the hottest current niches in the deal market, the intersection between private equity and real estate. Elliott is accountable for an estimated $15m-20m worth of business, according to one external estimate. At the end of last year the firm brought in well-regarded Freshfields finance partner Jonathan Birks partly to help support Elliott’s practice.

As with Walker at Latham, this has come alongside a string of significant other hires from top London firms, notably Roger Johnson, David Holdsworth and Stuart Boyd, all former corporate and private equity partners at Linklaters. Also significant is the recruitment of Linklaters’ London competition head Paula Riedel, who has already handled substantive matters for CapVest, Huntsman and Oaktree.

The hard-driving Kirkland remains a controversial name in the City, splitting peers between admirers of its energy and hustle and detractors noting an aggressive culture and frequent changes of personnel. However, such views are shifting, with many interviewed for this article citing progress by these transferring partners as providing a material breakthrough for Kirkland in M&A.

Also significant has been the hire of finance partner Michael Steele, who moved from Freshfields in 2015. Steele has helped bolster Kirkland’s ties with Blackstone, advising on the financing in this year’s £600m acquisition of Clarion Events and the sale of its student accommodation business to CPP Investment Board as well as handling major deals for Brookfield and GIC. Blackstone has since become one of Kirkland’s largest clients in London. ‘Steele has had an impact,’ notes one recruiter. ‘He is a real force of nature.’ The appointment this year of Freshfields restructuring partner Sean Lacey is also highly tipped.

Swings and roundabouts

If the trio of Walker, Glover and Elliott are universally-lauded, White & Case’s 2013 recruitment of Linklaters’ Ian Bagshaw and Richard Youle still splits opinion. The pair joined White & Case thanks to an increasingly tense relationship with Linklaters and felt their practice was not core at the City firm.

The move led to a dramatic expansion in White & Case’s City deal practice, handling a string of work for 3i and HgCapital, a key client of Youle. Other clients to use the pair at White & Case included Mid Europa Partners, Global Infrastructure Partners, Triton Partners, Novator Partners, CVC, Rhône Capital, Bridgepoint and Arle, while the firm now has 50 lawyers covering private equity, including eight partners in London. The team was bolstered in 2015 with CC partner Caroline Sherrell and Debevoise & Plimpton’s Kenneth Barry.

‘People say: “Why don’t you come and run our business in Europe?” I’ll say: “Yeah, if you give me five-to-ten years and $100m to invest.” Because that’s what you’re talking about, right?’
A partner at Freshfields Bruckhaus Deringer

Nevertheless, Youle quit this year for Skadden, Arps, Slate, Meagher & Flom after relations soured with White & Case and his old colleague Bagshaw.

Critics of the pair argue that the practice they built remains mid-market with indifferent profitability despite dramatic increases in revenue, though both Youle and Bagshaw retain many admirers. The recent success of White & Case in dramatically expanding its London practice also speaks for itself, with the firm now generating $290m out of its City arm. Some question how Youle’s forthright style will mesh at Skadden, which despite its commanding reputation in high-end M&A has a chequered record in Europe’s buyout market.

But looking at the high-profile departures from the Magic Circle in recent years, it is clear that the batting average of transferring partners has considerably improved on the 2000s.

For example, while Kirkland’s 2006 recruitment of Linklaters partners Graham White and Raymond McKeeve was ultimately viewed as having mixed results, the firm has gained more momentum with more recent imports.

The consensus is that US firms have in general become more effective at recruitment and more likely to conduct thorough due diligence on their recruits.

As one recruiter tells Legal Business: ‘Whether it is US firms or indeed UK firms – hiring firms are more sophisticated than they were a decade ago. In all honesty though, most firms still have some way to go.’

SSQ’s Shilton adds: ‘There are serial lateral partners. You have to make a judgement on whether someone is moving upstream, or downstream.’

Where transferring partners are regarded to have had much less impact is when they have joined firms with conservative growth plans unable to support the kind of platform Magic Circle deal partners require. Cited in this context is Davis Polk & Wardwell’s move into English law with the 2012 recruitment of Freshfields’ equity capital markets specialist Simon Witty. True, Weil Gotshal’s 2011’s recruitment of a four-partner funds team from CC was also expected by many to have had a more dramatic impact. But there are not a lot of examples in recent years of obvious misfires in Magic Circle partners transferring to leading US firms.

The $100m question

As the above moves demonstrate, much of the success of US firms in London recruitment has come by abandoning initial attempts to break into general M&A and banking in favour of private equity and related financing.

As plcs and regulated banks become more likely to implement bureaucratic panels and push down on costs, buyout houses and sponsors have proved the ideal clients to support US firms’ tactical advance into Europe. The advantage has only been reinforced by the boom in US-style financing and the enthusiasm for tapping stateside investors.

‘If you’ve never let a client down, they’ll give you a go if you’ve moved to a credible platform.’
Ian Bagshaw, White & Case

 

In many cases this dynamic is leading to more than the occasional successful transfer. Aside from Glover, Simpson Thacher has managed a string of productive laterals from the Magic Circe, including Euan Gorrie, Tony Keal and Derek Baird (leveraged finance and private equity, Allen & Overy (A&O)); and Adam Signy (corporate, CC).

Latham has likewise recruited more than ten partners from the Magic Circle in London and Germany since 2013, the majority of whom have been productive.

As yet, beyond leverage finance, progress is far more modest, though broader banking work has begun to open up to US advisers, notably Latham and White & Case.

Latham’s 2016 recruitment of Slaughter and May structured finance partner Sanjev Warna-kula-suriya is understood to have come after pressure from his clients to move to a firm with a stronger global platform. The bulk of his client list, which had previously included Deutsche Bank, Och-Ziff, Nordea Bank, Apollo Global Management and Fortress Investment Group, has moved.

Likewise, Latham’s 2016 recruitment of A&O banking veteran Stephen Kensell is viewed as an effective means of widening the Latham mainstream banking appeal. ‘You can transfer in banking much more than people give credit for,’ argues Latham partner Chris Kandel.

There has been much less success in general litigation and plc corporate work and even top US advisers are still a way off mounting a frontal challenge for public M&A work.

One former Magic Circle corporate partner who recently moved to a leading US firm comments: ‘If you want to do M&A for a UK-listed plc, I still personally think it’s quite tough for those guys to move to a US house. I’m not sure that it’s very portable, if I’m honest.’

One leading M&A partner at Freshfields picks up the theme: ‘People will come to me and say: “Why don’t you come and run our business in Europe?” I’ll say: “Yeah, if you give me five-to-ten years and $100m to invest.” Because that’s what we’re talking about, right? You have to invest consistently year-after-year and then you can play at the top table. Latham, because they have invested, are starting to see the benefits.’

But there is no doubt that a select band of US firms are beginning to make steady inroads in general M&A, as reflected in a string of recruits in the last 18 months.

‘The US and Magic Circle firms are covering broadly the same clients in the London and EMEA market,’ notes Bagshaw. ‘Once those clients converge, the ability to take a lateral from a Magic Circle firm who will be successful in a US firm will be much higher.’

The most significant mainstream deal hires are White & Case’s recruitment of Patrick Sarch to co-head both its financial institutions global industry group and the corporate practice in London, and Latham’s 2016 recruitment of Edward Barnett from A&O. Simpson Thacher also last year recruited Freshfields corporate partner Ben Spiers. On current trends, four or five US-bred advisers are on course to be significant players in high-end M&A in Europe within five years.

On a practice perspective, the next key tactical skirmish will likely come in the global investigations/regulatory sphere, where American firms are looking to invest in Europe and believe they can leverage the huge clout of US regulatory agencies.

Push and pull

While partners quit Magic Circle firms for a variety of reasons, it is widely acknowledged that few leave without some disenchantment.

Latham vice chair Richard Trobman says: ‘There’s a push-and-pull factor to entice these people to make that move. They have to believe their current institution isn’t going in the right direction, or, even more importantly for us, that they really like what we’re trying to achieve.’

In some cases, these are straight personality clashes – deal lawyers being notoriously highly-strung individuals with considerable egos – but US firms have become better at weeding out the malcontents during the recruitment stage.

The most obvious issue that is continually raised by transferring City partners is the need for a credible US platform and there is no doubt that pressure is growing in some key practice lines. Says one finance partner who quit a Magic Circle firm two years ago: ‘None of my clients have gone back. My clients were the ones behind the move – they told me I was on the wrong platform.’

But the most threatening issue for City firms is the notion gaining currency that American advisers are simply better homes for the most driven and ambitious practitioners.

Matthew Elliott, Kirkland & Ellis:
‘He may be the most successful hire for a US firm.’

 

‘The Magic Circle is run by older people for older people,’ argues one partner who made the jump. ‘These are very old firms clinging on to older partners and that’s not a fantastically interesting environment. Here, one of our firm philosophies is to empower the young – it’s an enthusiastic, fun, energetic place. There, there are a bunch of people who aren’t prepared to work that hard. They live in the country and don’t take their BlackBerries home.’

Much of US firms’ recent success has come from building models that appeal to ambitious, high-achievers rigorously focused on client work, rather than time served and the inevitable management demands City firms hand to older partners.

‘It is not just about the money: it is about fairness and I think the Magic Circle is trying to address that,’ says one Latham partner. ‘Not everyone’s contribution is the same and therefore not everyone can be paid exactly the same.’

But while all the top London firms with the exception of Slaughters have over the last three years been increasingly modifying their pay structures, they retain relatively flat pay models for the majority of partners. For many, such changes are too little too late, given the current gulf in profitability between US and UK firms. Latham’s average partner profits now top $3m, a figure that passes $4m at Kirkland. Top performers can, of course, also do far better at US firms, with top of equity at Kirkland now breaking $10m. For key City hires – $3m-plus deals barely turn heads any more.

Many interviewed for this piece also highlight the basic attraction of moving to confident firms in expansion mode at a time when City firms are retrenching or struggling to hold their position.

Judged in terms of the individual successes the claim that Magic Circle partners cannot prosper or move clients to US firms is an increasingly outdated myth.

The formula for successfully recruiting partners in the City is simple, even if only a few US rivals have the ability to put it into practice. Pick business lines in which firms have a strong client base and clients are relatively portable; be prepared to back up star signings with wider, long-term investment; focus on areas in which a US platform gives you a clear edge over London rivals; and recruit driven candidates who rank career fulfilment over a short-term pay day. When applied, it works.

‘We recruit individuals, we do not recruit balance sheets,’ notes Trobman. ‘What we’re looking for is people who buy into our institution, we spend a lot of time educating them on who we are and our strategy. If you can’t be happy for your partner when he or she has done something well this probably isn’t the place for you. We don’t go through an analysis of trying to crunch numbers and then coming out with a yes or no.’

Many still argue that top London firms will handle such pressure, even as their closest UK rivals succumb. ‘Remember, these are really good, well-run law firms in London,’ says Brettle. ‘What you have seen in London is the marginalisation of the Silver Circle and mid-tier firms. That’s what’s really declined. The Magic Circle will change, it will mutate, but it will thrive.’

But a growing band are less sanguine, noting that the existential challenge of US coverage looms ever more ominously over the London elite. ‘I don’t think any of the Magic Circle have sufficiently dealt with the compensation differential, and I don’t think any of them yet have a compelling answer to the US question,’ concludes Shilton. ‘Until they can crack one and ideally both of those conundra they will continue to lose a decent percentage of their best talent.’

While the Magic Circle have repeatedly failed to attract and retain good US partners, judged in terms of the individual successes the claim that Magic Circle partners cannot prosper or move clients is an increasingly outdated myth. Over the last five years, the successes outweigh the failures by some margin. And when the most successful individuals are having such a dramatic impact at their new firms, the legal game is fundamentally changing. The sooner London’s legal elite accept that the better. LB

Additional reporting by Madeleine Farman.