The New deal

The private equity dealmakers of the boom years have been shifted off the front pages. As the market shows signs of recovery, the US firms are challenging the established order

As private equity comes blinking into the light after a torrid couple of years, advisers are grappling with a new market, where leverage is a dirty word and once mighty European buyout houses look distinctly off colour.The recession has seen the continued investment by US firms into the London market. Kirkland & Ellis and Simpson Thacher & Bartlett have all made significant moves on the back of the growing dominance of their US clients in Europe, including KKR, The Blackstone Group, Bain Capital and Advent International. Boston firm Ropes & Gray, Bain Capital’s go-to adviser in the US, has also highlighted its intent, launching a London office under finance duo Maurice Allen and Mike Goetz.

Simpson Thacher’s push into the market with the hires of Adam Signy and Jason Glover from Clifford Chance and Kirkland’s recruitment of up-and-coming deal doers Gavin Gordon and David Arnold from Ashurst, mark another step in the evolution of the US firms’ buyout teams. As Weil, Gotshal & Manges’ hire of Marco Compagnoni from Lovells and Kirkland’s poaching of Linklaters’ private equity head Graham White in 2006 showed, the established UK players are vulnerable to ambitious firms with solid platforms and money to spend.

Thanks, in part, to its capture of Compagnoni, Weil has positioned itself as the most successful of the City-based US private equity advisers. Now casting around the market for greater finance capability, the firm has upset the balance among the traditional top-tier UK firms. How the shift in the dynamic plays out though also depends greatly on the changing fortunes of the largest buyout houses.

If there is a notable sense of optimism among most private equity specialists, it can be partly attributed to a sense of relief that there has been an uptick in activity after last year’s moribund deal market. According to mergermarket, 289 buyouts were completed in Europe in the first half of 2009 with a combined total of E8.77bn. In contrast, in the first six months of this year there were 405 European buyouts with a total value of E22.9bn. To put this into context, at the height of the bull market in 2007 there were 1,418 deals worth E222.6bn over a 12-month period. It’s been quite a depression.

Whatever the patchwork quality of the deals around at the moment, a picture is beginning to emerge of a legal market that has changed. The old establishment of private equity advisers, while still intact, faces a very real challenge in not only holding on to key personnel but also to clients.

Stop the press

The long thought of UK private equity establishment is under pressure. CC and Ashurst have what many rivals consider to be succession problems. The Magic Circle firm and City player, who so assiduously courted the nascent private equity market in the 1990s, have seen their more talented buyout specialists promoted away from the deal coalface into management. At CC, Matthew Layton now runs the global corporate practice, while his senior colleague James Baird, a partner since 1985, is coming to the end of his career and Simon Tinkler was recently appointed London corporate head.

For Ashurst, Charlie Geffen’s election as senior partner in 2009 means that he has taken a step back, although he claims to have kept his hand in on some of the firm’s key private equity relationships. Stephen Lloyd, Geffen’s most obvious heir apparent, also now devotes more of his time to management, having been appointed global head of corporate in the summer. Splitting the corporate head role with Simon Beddow should leave Lloyd some leeway to fee-earn.

Ashurst still boasts the likes of Bruce Hanton, and CC can point to partners Kem Ihenacho and Amy Mahon as obvious rising stars, but suddenly their relationships with Apax, Permira, Bridgepoint and Cinven don’t look quite as secure as they once did. ‘Some of the UK firms have formidable challenges, whether that be an ageing partnership, lack of succession planning or a marked drop of profitability, which makes them vulnerable to people leaving,’ Ropes’ London co-head Allen insists.

There’s still a familiarity about the UK market. For all the questions around succession, Ashurst and CC remain formidable practices. At the top of the pile, Freshfields Bruckhaus Deringer has arguably made the greatest progress in London and on the continent. Although it may not enjoy quite the same exposure as its closest rivals, Allen & Overy’s hire four years ago of Derek Baird from Lovells has clearly worked and the firm now boasts strong links with the likes of BC Partners, Towerbrook Capital Partners and Charterhouse Capital Partners.

Linklaters remains a work in progress, with Ian Bagshaw and Richard Youle carving out a mid-market niche for themselves acting for HgCapital, Triton and Montagu Private Equity on a regular basis. In the mid-market, Travers Smith and Macfarlanes remain the two practices most consistently name checked. Travers and Macfarlanes still boast quality few can match – the former in particular had a difficult recession but has used its track record in advising management teams to bounce back, turning up on a number of the recent major buyouts. The stringent domestic focus of both their practices has, strangely, played into their hands, cementing their position in the mid-market. ‘We have always had a deep involvement with private equity deals at every level,’ says Macfarlanes corporate partner Ian Martin. ‘That means that there is plenty to keep us busy as long as there are things going on in the private equity world.’

‘We try to deliver the whole firm to our clients and move away from traditional departmental and geographic silos.’
David Walker, Clifford Chance

Private equity houses have been returning to their core firms after the boom years, when there was so much work to go around that third and fourth tier advisers picked up the odd headline deal. The established firms have clearly benefited from this retrenchment. ‘Law firms have been particularly involved in portfolio management during the recession, which has been a good way of maintaining and even strengthening relationships,’ asserts A&O corporate partner Gordon Milne. ‘If anything, we have increased the number of clients we act for and the number of deals we have been doing for them in the past few years.’

So far, so very familiar. However, there is a shake up happening in the market, driven not only by the changing faces at the firms themselves but also by the fortunes of the private equity houses. As the recent decline of one of Candover’s funds and that of mid-market player Advantage Capital shows, some of the UK houses are finding the going particularly tough.

The prevailing winds in the market appear to favour some of the US players. ‘There is a changing dynamic in terms of US funds in Europe; they’re becoming more dominant,’ says Linklaters partner Bagshaw. ‘UK firms are going to have to react to the fact that the market is changing and decide whether they will be more aggressive in winning new clients than they have been in the past. We are seeing an irreversible shift in the marketplace that has US funds using US firms more and more and only a couple of the larger Euro funds will survive.’ He predicts that the next few years will see a handful of powerful multi-faceted buyout houses emerge in the mould of KKR or Blackstone, the bulk of which will be US based.

Freshfields private equity head Chris Bown agrees but thinks that European houses could be just as powerful. ‘We will see increasing stratification between multi-product private market investors and pure private equity houses – that could be either US or European. The competition for deals and advisory mandates will concentrate.’

If this is the case then only a handful of firms are currently in a position to advise one house across the globe – CC and Freshfields could feasibly do it but even they don’t have quality across the board, as could Latham & Watkins and to a lesser extent Skadden, Arps, Slate, Meagher & Flom, Kirkland, Simpson Thacher and Weil. All is still very much to play for.

Shifting sands

While US firms continue to struggle to make serious headway in public M&A in London, private equity has been a notable growth area for a selection of practices. ‘US firms have become much more mainstream in recent years in the London market,’ Compagnoni insists. ‘Houses do not see us as a US firm any more, we’re very much part of the establishment. We’re instructed because people recognise that we’re good at what we do.’

Weil has certainly built up a formidable practice in the City, counting Advent, Providence Equity Partners and Lion Capital as regular clients. The team has also picked up new entrants to the market, such as Ontario Teachers’ Pension Plan and OMERS Private Equity, and ranks third by value among European buyout advisers so far this year according to mergermarket, behind Freshfields and Latham.

Weil’s 2006 hire of Compagnoni and Jonathan Wood has clearly paid off for them. Few would argue that Kirkland’s own 2006 hires, White and Raymond McKeeve from Linklaters, have been such a success. McKeeve left the US practice in 2008 for client Robert Tchenguiz before joining Berwin Leighton Paisner in 2009. It’s notable that Kirkland’s latest buyout hires, Gordon and Arnold, are two younger partners who had growing profiles in Ashurst’s buyout business. The duo boast close relationships with Cinven and Blackstone but the market is keen to see just how much work they take with them.

‘Some of the UK firms have formidable challenges, which makes them vulnerable to people leaving.’
Maurice Allen, Ropes & Gray

Kirkland’s US rival Latham, has steadily grown its buyout practice to nine partners, last adding Graeme Ward from Ashurst, but it would be the first to admit that it lacks the profile of Weil and has had more success growing its practice on the continent.

Jim Learner, Kirkland’s London head, thinks that, with the US being one of the largest private equity markets, US firms have a competitive advantage over their UK rivals whereas that advantage isn’t so clear cut in Europe. ‘The UK firms have not yet successfully penetrated the US legal market in the private equity space,’ he says. ‘In Europe, the US firms have established a legitimate foothold in the private equity space, notwithstanding the fact that the US firms have smaller offices than their UK competitors.’

As prescient as Signy’s hire may prove to be for the firm, it is the funds capability that comes with Glover that gives Simpson Thacher a rounded and potent private equity offering in the City. Simpson Thacher’s classy banking and finance capability built up around Tony Keal, who is now a consultant, and partners Euan Gorrie and Stephen Short has always been a strong point. Now with the fundraising and transactional side running alongside banking, the firm has as close to a full-service offering as it’s likely to get.

Simpson Thacher partners have made no bones that they would like one more UK transactional partner in the City but after that there is no appetite to become another full-service firm in the UK. And the chances of it opening in Frankfurt or Milan are slim – in fact the more likely market for the firm to focus more investment on is Asia.

‘Houses do not see us as a US firm any more, we’re very much part of the establishment.’
Marco Compagnoni, Weil, Gotshal & Manges

Another obvious advantage for US firms in London is their grip on the high-yield market. A&O’s hire of Kevin Muzilla from Milbank, Tweed, Hadley & McCloy, Freshfields’ more recent hire of Simpson Thacher counsel Gil Strauss who joined the UK firm as a partner, CC’s rehire of Michael Dakin from a client and Linklaters’ appointment of counsel Mark Hageman from Cravath, Swaine & Moore show that UK firms are getting their act in gear but they are still lagging behind the US.

Not surprisingly, partners at US firms insist that the market plays into their hands. ‘A lot of the European houses are now saying that they may have to instruct US firms because they can provide the whole package from high yield to M&A and banking all in one place. And that’s where we are looking to position ourselves,’ says Allen.

Ropes became the latest major private equity player with an impressive US private equity pedigree to enter the London market earlier this year, having built a reputation as one of the go-to firms on the recent cycle of mega-buyouts. Their close US relationship with Bain is being carefully watched and, as and when they bring in a UK private equity partner, the tussle for the work between them and Kirkland will be intriguing. Learner certainly has done well at tying down Bain’s European work – for instance, the firm advised Bain on its recent E2bn sell off of RBS WorldPay alongside Advent.

‘There is a changing dynamic in terms of US funds in Europe; they’re becoming more dominant.’
Ian Bagshaw, Linklaters

Having made its opening gambit in finance with Allen and Goetz, all eyes are now on who they will hire in private equity. Reports are that the firm hopes to have at least two partners in situ by the end of the year, while it has it on good authority that, if it builds a strong enough team, work should start to come its way from TPG Capital, Bain and Silver Lake.

Allen realises that Ropes will not be the number one adviser to the main houses but, in the US, the firm has made a very good name for itself advising consortiums and the firm hopes to replicate that expertise in Europe. The question it faces is to what extent it is too late to the party.

One firm to rule them all

Developing institutional cross-border relationships with private equity clients continues to challenge most firms. The sector remains built on close personal relationships between individual dealmaker and lawyer and few see that changing, despite some firms’ best efforts. Even when firms have strong local teams, like Latham and Milbank, Tweed, Hadley & McCloy in Germany or Weil in Paris, transferring relationships between offices is rarely straightforward.

‘Personally, I’m not convinced that it’s possible truly and securely to “institutionalise” most private equity clients. The likes of Blackstone and KKR are perhaps atypical of buyout houses,’ believes Weil corporate partner Mark Soundy. ‘It is not so much about institutionalising relationships but more about how much money you might be leaving behind on the table if you fail to widen the relationship across the firm.’

CC, which has had some success forming an institutional relationship with Permira, believes that offering a client the whole firm inevitably leads to broader, firmwide relationships. ‘We put a greater emphasis on trying to deliver the whole firm to our clients and move away from traditional departmental and geographic silos,’ Clifford Chance’s David Walker says. ‘We are already seeing this approach pay off.’

The approach though is only applicable to a certain type of house, which is not only based in a number of jurisdictions but is also sophisticated enough to share information across deal teams – Advent, KKR, Blackstone and CVC Capital Partners, for example.

At a time when many firms are throwing a lot of resources at building and maintaining exclusive relationships with blue chip clients, it is less attractive to waste time and money on trying to secure work with a house that a firm knows it will not be regularly instructed by. ‘Being an exclusive adviser is superficially attractive,’ says Ashurst private equity head Hanton. ‘But if that means agreeing that you will not take instructions from elsewhere on any situation where the preferred client may have an interest, it becomes less so and impracticable.’

If, as predicted, the top end of the buyout market becomes dominated by a privileged few, personal relationships could become less important as a generation of dealmakers at houses move on and senior legal names retire, giving way to a new breed of commercial relationships.

Grasping the nettle

There is then a genuine opportunity to be had by US firms and not just from Weil and Kirkland’s point of view. The buzz from headhunters and partners in the market is once again that most US firms want to make a splash in London private equity.

Cleary Gottlieb Steen & Hamilton, close adviser to TPG Capital, lacks the same kind of platform as its rivals. Debevoise & Plimpton, which counts Clayton, Dubilier & Rice in its client base, has finally landed the lateral it has been after for years taking David Innes from Travers Smith.

The prospect of what Simpson Thacher will do next in London is a compelling one. The arrival of Signy and Glover, means that it has slowly built a corporate team to complement its banking capability. It clearly has a lock on the KKR and Blackstone relationships but it lacks the European networks of a Freshfields or CC and shows little inclination to develop them.

Wherever it ends up, it is most likely to happen through a gradual evolution. Despite its glistening track record, one rival partner at a US firm welcomes the added competition: ‘I hope Simpson Thacher become a player in the market – they really are quality and it would be good to have them at full strength here.’

The establishment of UK advisers faces a very real challenge from ambitious, cash-rich US rivals who don’t care a jot for the perceived hegemony of the 1990s and early 2000s. While their stars may have faded somewhat, the UK firms do still hold a trump card in the people they have and the European funds they have access to. While there may be some truth in the criticisms levelled at them in terms of succession and ageing partnerships, the quality is undoubtedly still there. It is what they do with these advantages that will prove key to the future success of their respective practices – the UK firms should embrace the competition, which in turn should shape them into more aggressive, savvy practitioners who are less reliant on the largesse of the past.

After a two-year hiatus private equity is making its gradual comeback; it may be a slightly less bombastic sector than four years ago but the stage is set for more firms to battle it out for a smaller slice of the pie. As some of the original buyout specialists become less active, the older generation of private equity partners who drove the market during the debt bubble are playing a less active role. A new generation of deal doers is emerging to help shape the gradually recovering market. Get ready for a new cast of headline writers, including some with a distinctly transatlantic twang. LB