David Stevenson surveys a fast-changing buyout landscape to find US ‘barbarians’ once again pressing in on City leaders
Unfortunately for top City firms looking to defend their position in private equity, it takes more than a five-year freeze in credit markets and a sustained downturn in leveraged buyouts to stop foreign rivals trying to move in on their patch.
Such a dynamic has once again thrown scrutiny on Linklaters’ now decade-long effort to carve a credible position in the private equity market and the position of Clifford Chance (CC), by contrast traditionally established as the market leader in Europe’s buyout scene.
In the former case, the debate continues among peers (and some internally at Silk Street) over the extent to which Linklaters has forged a practice worthy of its much-vaunted general corporate team. In CC’s case, a purple patch in public M&A last year arguably did not extend to private equity, while the firm has had to contend with the resignation in April of global head of private equity David Walker for Latham & Watkins.
In truth, no matter how much Linklaters talks up its efforts in private equity, progress has been modest given the strength of its global deal brand. In the wake of its initial, much-touted recruitment of SJ Berwin partner Graham White in 2001, the practice was painfully slow to bed down in the first two years and was then plagued by reports of cultural tensions and poor relations between White’s team and Linklaters’ finance practice.
As such it was something of a relief when White and fellow partner Raymond McKeeve departed in 2006 for Kirkland & Ellis. The practice soon regrouped around well-regarded younger partners Richard Youle and Ian Bagshaw, the latter recruited in 2007 from CC, where he was one of its most high-profile younger partners.
Yet one of the ironies is that the duo still have stronger reputations individually than Linklaters itself as a private equity player, a contradiction many rivals see as due to the City giant’s ambivalence and lack of support for buyout work.
‘Key ingredients for a first generation private equity practice are energy and drive. It was a clean sheet in 2007, [the team focused on] new money deals, restructuring and new entrants,’ reflects Bagshaw.
While the practice has continued to develop into a respectable mid-market operation, on the back of clients like HgCapital and Montagu Private Equity, many feel it has yet to make enough ground with leading sponsor clients.
‘We are unashamedly proud of our mid-market status, it is the bedrock of the industry,’ responds Bagshaw, who argues with some justification that £100m deals are ‘where the growth comes from’.
Another charge laid against the team is that it is over-reliant on Youle and Bagshaw, lacking experienced partners to support the practice, and that the two partners have not culturally integrated with Linklaters. While claims by rivals should always be taken with a large pinch of salt, it is clear that neither fall into the straight-laced style of the arch-typical Linklaters M&A partner.
Bagshaw responds to the point: ‘A ten-year old view is that the relationship is dependent on the corporate name partner. Our proposition is that the relationship is supported by people across other practices, like [competition partner] Nicole Kar, who are also fundamental.’
Other regulars on private equity work include Alex Woodward, who was made up to partner last year, and Stuart Boyd, who was promoted this year. The firm also cites the work of London-based US finance partner Alexander Naidenov in giving the firm a credible position in the increasingly important high-yield market.
‘We look at clients holistically. We’re the bridge between corporate and finance and we have a joined-up practice,’ says Matthew Elliott, head of the real estate M&A team, which regularly works with Youle and Bagshaw. ‘If you look at our client base we have a preponderance of mid-market clients who are very active.’
Nevertheless, it seems telling that the firm made great play of its appointment two years ago of Freshfields Bruckhaus Deringer finance partner Chris Howard to support its buyout practice, a point Bagshaw stressed again when interviewed earlier this year.
Howard backed up this point telling Legal Business: ‘Ian and I look after clients cradle to grave.’ Several weeks later, Howard surprised his colleagues and peers by quitting to join the London arm of Sullivan & Cromwell.
The harder you fall
The issues facing CC’s private equity practice are very different. While it remains one of the leading broad-service private equity teams in Europe, it doesn’t hold the unchallenged dominance it enjoyed a decade ago.
In corporate it faced the loss of Adam Signy to Simpson Thacher & Bartlett in 2009. In funds the departures have been even heavier, with highly-regarded head Jason Glover following Signy in 2010 to Simpson Thacher and a four-partner team led by Edward Gander quitting for Weil, Gotshal & Manges the following year.
In this context, this year’s departure of Walker for Latham is a considerable blow, depriving CC of its contact partner for US private equity giant The Carlyle Group – already one of Latham’s key global clients. Walker also managed other relationships like Equistone Partners Europe, which he advised last year on a €1bn sale of travel services firm Global Blue.
The expectation is that Walker will take a considerable chunk of Carlyle’s work with him, though it would be a harsh blow for the US buyout firm to stop using CC altogether given that larger houses typically maintain one or two conflict counsel (Carlyle has not infrequently instructed Linklaters).
CC’s senior ranks have also been hit by the move of Matthew Layton – still its top name in private equity – into senior management as head of corporate and the retirement in 2011 of James Baird.
While the firm maintains a considerable range of partners with substantial private equity experience – notably London head of corporate Simon Tinkler, David Pearson, Jonny Myers, Kem Ihenacho and Frankfurt-based Oliver Felsenstein – there just isn’t the huge gap between the firm and rivals that was evident five years ago. Indeed, some even question whether the firm has been overly focused on key client Permira to the exclusion of refreshing its client portfolio.
Shifting ground
Layton and Baird famously came within a whisker of joining Weil Gotshal in 2004 only to be persuaded to keep the faith at the last minute. Since then the market dynamics in legal private equity have changed beyond recognition, largely at the expense of City firms and in favour of US advisers.
Weil Gotshal has substantially strengthened its position, also in the last two years bolstering its deal finance bench with names like Stephen Lucas from Linklaters and Gil Strauss from Freshfields Bruckhaus Deringer. Elsewhere, Kirkland has become a genuine force with range to its practice and Simpson Thacher has forged a lean practice that has proved able to handle major work for top-line clients like Kohlberg Kravis Roberts & Co and The Blackstone Group while Latham has steadily developed in both M&A and leveraged finance. Even late entrants like Ropes & Gray and Proskauer Rose have had more traction than many would have predicted.
‘If you look at the league tables from ten years ago compared to now, you’ll see that US firms have come up. US funds that have come over here prefer US-style lawyering,’ says Will Rosen, a private equity partner at Ropes & Gray.
In comparison, CC, Ashurst and Macfarlanes have all lost ground in relative terms, in part because European buyout houses have generally been harder hit by the downturn than their US equivalents.
The worrying reality for City advisers is that private equity is in danger of becoming a strategically potent and lucrative practice line increasingly dominated by foreign law firms. This is not the kind of territory you want to cede right on your back door.
The notable hold-out in terms of standing up against US rivals has been Freshfields, whose understated move into private equity in the late 1990s has often generated more results than headlines.
The firm has built up a range of clients, including Cinven, CVC Capital Partners and Warburg Pincus, with a team including veterans Chris Bown, David Higgins, David Sonter, Adrian Maguire and head of corporate Edward Braham. A relative lack of US clients and mid-market European houses has arguably seen the firm be a little less prominent of late, but it remains a confident, classy performer by any yardstick.
Equally impressive has been Travers Smith, which has managed to carve out a distinct and focused position in the quality end of the mid-market.
As competitive as ever
The jostling in private equity comes amid what remains a challenging market, even if many are expecting a gradual revival of European buyouts following the announcement earlier this year of the $20bn-plus takeovers of Virgin Media and Dell – both leveraged deals driven in the more upbeat US market.
Freshfields’ Bown comments: ‘When the US pushes on with LBOs, it catches on in the UK. This is what historically happens.’
‘There’s a bit more activity. The European market is variable, not back to the highs of 2006-07 but there is credit available in Europe,’ says Gavin Gordon, a partner at Kirkland. Gordon advised GTCR on its acquisition of Premium Credit, a deal worth £900m last year. He also advised Vista Equity Partners on the $2bn take-private of software company Misys in June last year.
But whatever turns the market takes, six years on since the credit crunch first began choking off cheap debt, it is abundantly clear that US practices’ collective ambitions in European private equity have only grown. City players without a demonstrable firm-wide commitment to the sector now look increasingly vulnerable.