Market turbulence looks likely to only send the private equity bandwagon spinning faster… for those who can get on board
Markets can charge up or down, banking crises come and go, but it seems that it will take more than a little turmoil, uncertainty or even the spectre of Brexit to stop the rising influence of private equity and sponsors in Europe’s deal markets.
With Brexit further loosening monetary policy – ushering in even easier debt terms – and major buyout houses still sitting on large amounts of uncommitted capital, the expectation among deal lawyers is that bargain-hunting sponsors – many of whom are raising money in dollars – will be looking to pick up assets in Europe.
The focus on sponsors has been heightened for advisers by their lack of bureaucracy and willingness to pay for results, a contrast to heavily regulated banking clients increasingly pushing down on rates. One private equity veteran voices a common sentiment: ‘Lev fin now is commoditised. We don’t want to act for banks in leveraged finance; we want to act for sponsors as those are the guys that are going to pay you.’
Unlike public M&A work, still dominated by old-line City outfits, private equity has been the most competitive and fluid sector of the City deal market for over a decade now, thanks to a wave of sustained investment by US law firms. While Weil, Gotshal & Manges was the original US firm to make serious headway, recent years have been dominated by a wider band of American advisers with varying cultures and backgrounds making waves in the sector, most notably Simpson Thacher & Bartlett, White & Case, Latham & Watkins and Kirkland & Ellis.
As New York’s leading brand in private equity, Simpson Thacher has built a lean but highly-profitable City arm, handling high-end work for core clients Kohlberg Kravis Roberts & Co and The Blackstone Group across deals and funds. Simpson Thacher’s City arm roughly doubled its revenues between 2011 and 2015, generating well over £100m out of a 17-partner office.
‘We’ve grown the team. We’ve got the bench strength. That range allows us to work across the whole market.’
David Higgins, Freshfields Bruckhaus Deringer
Latham, meanwhile, continues to turn heads in the City, with its investment across corporate and deal finance reflecting its reputation in the US as the go-to high-yield bond shop.
Kirkland continues to entertain the City with its ever-faster revolving door of partners in both directions, most notably this year with the loss of a six-partner team to Sidley Austin. The firm over the last 18 months has also recruited a group of productive partners from Linklaters, including David Holdsworth, Roger Johnson and Matthew Elliott. Despite the hard-driving firm’s willingness to offer $5m-plus packages to lure key partners, many in the market believe that constant changes in line-up have affected its position.
Notes one of the City’s top private equity partners: ‘Kirkland has a good finance practice, but I don’t really work with it on the corporate side. If its lawyers actually worked together as a team they’d probably be a lot more effective, but that’s never going to happen.’
In contrast, the reboot of White & Case in private equity after the 2013 recruitment of Linklaters duo Ian Bagshaw and Richard Youle has been unexpectedly impactful. Backed by investment, the duo have helped to galvanise a lucrative upper-mid-market practice that has arguably repositioned White & Case’s wider City arm towards the mainstream of transactional work and helped it become the highest-earning US practice in the City.
Bagshaw in particular – who is renowned for relentlessly seeking out new clients – is viewed as helping to drive the firm, even if the duo’s lads-from-the-north patter is not to all tastes and rivals still claim the business is too ghettoised in the mid-market.
Says Bagshaw: ‘This is not an overnight success. It’s been three years in the making; we’ve had laterals, organics and a clear strategy.’
However, Latham remains the firm that many rivals see as the most potent long-term challenger, though by consensus it still requires some polishing of its expensively-assembled team before it makes good on its ambitions.
Says one leading buyout partner at a Magic Circle firm: ‘I wouldn’t want to sound complacent, but Ian and Rich are Ian and Rich. For the last ten years they’ve done mid-market deals. It’s what they do. The firm that stands out on the US side is Latham. What it is doing well is building a team and a platform. It’s on the right track. The question everyone has raised is that it’s grown a lot and will have to trim a bit to make the numbers stack up. But that’s what Latham does and that’s fine.’
Of the City players in private equity, at the top of the market Freshfields Bruckhaus Deringer remains clearly the most cited name, with a brand built on a reputation originally cultivated by Chris Bown (now senior adviser at CVC) for treating sponsor work as core to the business. The firm also has admired operators like David Higgins and Adrian Maguire. As Cinven’s go-to counsel, Maguire often features top of the wishlist for any firm looking to ship in talent.
The 2015 recruitment of Kirkland’s junk bond guru Ward McKimm, well above the top of Freshfields’ lockstep, was also seen as a highly symbolic backing of the practice. At the junior partner end, Charles Hayes – client contact for CVC along with Tim Wilmot – gets particularly strong recommendations, while other names to watch include Victoria Sigeti and Alison Smith.
By consensus, Freshfields has been effective at building a cohesive team that achieves the delicate balance of operating with a clear focus while retaining enough crossover with general corporate to avoid silos and excessive office politics (though McKimm’s arrival ruffled a few feathers).
Comments Higgins: ‘We’ve grown the team. We’ve got the bench strength. We’ve got ten dedicated PE partners in my team in London. We’ve had continuity because they’ve all been internal, and that range gives us the ability to work across the whole market and do multiple deals at once.’
‘US firms are gaining market share in London and the rest of the world. Individual relationships will not buck that trend.’
Charlie Geffen, Gibson, Dunn & Crutcher
In Freshfields’ buyout practice all the talk currently is of building on its high-profile US investments in the last two years across M&A, lev fin and capital markets teams to drive the private equity practice forward.
With Clifford Chance (CC) – the original brand name in the sector – having suffered a series of departures in recent years, most notably to Latham, the firm is widely regarded to have lost some ground, despite what remains a very sizeable practice with a number of significant clients on the books. Judged on the mandates and client base, some of the CC critique is overdone. Of the firm’s junior partners, Chris Sullivan is already gaining strong notices among rivals.
Allen & Overy, meanwhile, appears to finally be shrugging off its perennial tag of a private equity also-ran (or more accurately couldn’t-be-bothered), under the team of Stephen Lloyd, Karan Dinamani, Robin Harvey and Gordon Milne (the former two shipped in from Ashurst). The four have handled a stream of headline work over the last 12 months, including substantive work for Apollo Global Management, Blackstone, OMERS Private Equity and Carlyle Investment Management, and even the doubters are taking note (sniffs one rival at a US law firm: ‘A&O has had a good run, but it takes time for the ground to shift.’).
Despite the series of partner departures that have dogged Linklaters’ crack at the buyout market for the last ten years, many rivals concede the firm has held up better than expected, largely thanks to an energetic showing from young team leader Alex Woodward and the well-liked Will Aitken-Davies. The question remains whether beyond Woodward the team has the range, technical polish and finance support to excel on its own terms rather than relying on Linklaters’ brand.
Elsewhere, Ashurst’s decline in private equity has continued, in sharp contrast to Travers Smith, which has strengthened its grip on the upper reaches of the middle market, handling work for clients such as Bridgepoint, Hellman & Friedman and 3i Group.
Travers’ team head Paul Dolman remains in a bullish mood: ‘Private equity houses still have a huge amount of money to spend and banks are still lending. That is one of the key differentiating factors with [the banking crisis]. My worry about next year is that we will activate article 50 and inevitably there will be a pause as dealmakers try to ponder what the new landscape looks like. But right now people are making hay while the sun shines and we’re delighted to be assisting.’
Despite the Brexit fears, in many regards the evolution of the market over recent years – most notably the advances of US sponsors and investors – suggests that the City will be hard to dislodge as Europe’s private equity capital.
That means continued competition for the best partners and a lengthening array of firms operating in the sector. The record-breaking packages being offered for buyout partners reflect the flux in the market and the reality that sponsors have been more likely to move with their partners to a new firm than plcs.
But some note that the private equity industry is changing as the market re-forms around larger multi-product-line outfits.
For Charlie Geffen, London corporate chair at Gibson, Dunn & Crutcher, who argues that the market will coalesce around Freshfields and a group of US law firms, the dynamics are changing. ‘Private equity firms have increasingly institutionalised their law firm relationships, which are less personal than in the past. The US firms are clearly gaining market share both in London and in the rest of the world. Individual relationships will not buck that trend.’
The battle rages on. LB
alex.novarese@legalease.co.uk
madeleine.farman@legalease.co.uk
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