Recasting finance at Freshfields: high ambition married with gently lowered expectations

Victoria Young and Madeleine Farman analyse the changes in Freshfields’ finance practice

‘I could have spent another ten years punching the clock but I wanted to build a business, and do more than just be another Freshfields [Bruckhaus Deringer] banking partner,’ reflects one former hand at the Magic Circle firm. It’s a refrain that strikes a chord among the sizeable group of notable finance practitioners who have plied their trade at Fleet Street over the years.

Freshfields has long had a question hanging over its finance practice. Having moved to build the team in the 1990s, the firm ultimately turned away from a Linklaters-style tilt at the Clifford Chance (CC)/Allen & Overy (A&O) duopoly to settle for a smaller, less central debt practice focused in a handful of solid niches such as structured and asset finance. But the issue was less the shape of the team and more the fact that finance toiled in the shadow of Freshfields’ M&A practice with corporate retaining the clout and many of the key client relationships. A classy, Rolls-Royce support practice certainly, but a support practice nonetheless.

This was abundantly clear in the firm’s 2006 partnership restructuring but Freshfields’ watchers will remember a series of existential shuffles in finance stretching back even further, including the McKinsey review of the practice in 2003, which led to little to justify the bluechip consultant’s hefty bill.

After the boom years, Freshfields semi-regularly leaked productive banking lawyers, among them David Ereira, Brian Gray, Chris Howard, Presley Warner and Michael Steele, leaving the firm long on solid company men and short on the restless business drivers and seasoned tacticians to turn client heads (the misfiring 2008 hire of Maurice Allen and Mike Goetz from White & Case being a case of mutually mismatched expectations).

The latest shuffling came this year when Freshfields went through a ‘recalibration’ of its practice, which saw leveraged finance split into its own team, giving the department four groups (see box). This is a significant move, which due to office politics, Freshfields partners articulate a little unclearly.

The shake-up also led to a modest narrowing of the practice, reflecting Freshfields’ struggle to get finance to hit its target City margins outside of deal finance and restructuring (The 75-partner practice still generates approaching 20% of Freshfields’ revenue.)

Co-managing partner Chris Pugh, who led the recent rejig, chooses his words carefully when asked whether the practice as a whole is struggling with profitability.

‘We are not so narrow in our outlook with many of our teams operating across practices. Over time some parts of the practice are obviously more profitable than others.’ Pugh concedes areas such as sovereign debt work are not as profitable as they were in the past, and that has been addressed in the recent reorganisation.

The process has coincided with the firm putting some finance partners on its second tier lockstep, a model brought in more than two years ago. Those partners from Freshfields’ finance practice now join partners in Japan and Germany, and practices such as IP and employment on the second ladder, which runs from 10-30 points and sits alongside the traditional 17.5-50-point ladder.

Global finance head Simon Johnson (pictured) won’t say how many partners have been relegated to the second lockstep, beyond noting that ‘it is used very sparingly’. Legal Business understands in the finance practice the second lockstep has been used for both current partners and associates being made up to partner. Still, it is striking to see a Magic Circle firm have any London finance partners on a lower lockstep.

The team has also seen a change in the leadership with Johnson this month taking over from David Trott, a fellow real estate finance lawyer.

With leverage moving into its own team, the rest of banking and treasury has moved into the corporate finance team now headed by Martin Hutchings, while former Shearman & Sterling partner Tim Pick leads the energy, transport and infrastructure team.

The firm’s well-regarded restructuring group, which has led on notable mandates such as Stemcor Holdings’ $2.8bn debt ‘haircut’ in 2015, and advised airline Monarch on its restructuring programme and acquisition by Greybull Capital, is now headed by Richard Tett.

Under Johnson the role of London finance head, which had been held by restructuring heavyweight Ken Baird since 2012 has been phased out.

Johnson’s promotion gets a solid reception internally and among peers, with Johnson viewed as an energetic partner and described as a ‘freethinker’ but also a ‘true Freshfields veteran’. He is charged with the difficult task of keeping central management and his fellow finance partners happy.

As one former partner puts it: ‘For a long time [Trott] tried to maintain finance’s position as much as he could. I don’t think he felt there was a need for change as much as it was forced upon him. There is a series of big egos who are hard to placate so it is always going to be a very delicate task to move things around.’

The shake-up appears to have rationed resources in areas like structured and infrastructure finance, while positioning lending work in a more supporting role.

As Pugh says: ‘When I looked at our finance department and the history of how it evolved, we were doing ourselves a slight injustice – we were not making enough of the exceptional teams we have put together.’

He adds: ‘This has not been a restructuring but a repositioning of the practice so we organise ourselves in international teams that are relevant to our clients.’

Pugh says there were areas of the finance practice which were less profitable than others and the firm needed to refocus. While this did not mean cuts, retiring partners and departing staff are not necessarily being replaced.

 

Sponsored

The most interesting aspect of the shake-up and development in recent years revolves around Freshfields’ ambitions for leverage finance.

Buoyed by a strong European private equity team, Freshfields hit the headlines last year with the eye-catching hire of Kirkland & Ellis partner Ward McKimm, one of the leading names in the City in the high-yield sector.

It is striking to see a Magic Circle firm have any London finance partners on a lower lockstep.

With famously lockstep-centric Freshfields going well off its core ladder to recruit McKimm, reputedly offering him around $6m a year, it was a powerful statement of Freshfields’ determination to move with the Americanisation of Europe’s leveraged finance market. The hard-driving Canadian lawyer is now leading the leverage team alongside Alex Mitchell, himself a consistent performer.

Freshfields followed up swiftly with the hire of another high-yield specialist, Andrew Hagan, from Kirkland again in February 2016. With London-based partner Denise Ryan providing coverage in US products like term loan B financing and its New York securities practice bolstered two years ago with a three-partner team from Fried, Frank, Harris, Shriver & Jacobson, Freshfields can claim to have made the most credible show of building an integrated US/UK platform among the Magic Circle.

While it is unfortunate that McKimm’s arrival coincided with a lull in the volatile junk-bond market, few question the logic of building a bank/bond platform given the long-term shifts in Europe’s credit markets. Late last year McKimm acted on Worldpay Group’s inaugural €500m bond offering, allowing Bain Capital and Advent International to reduce their holdings in the payments operator.

Johnson says: ‘We now have an integrated banking and high-yield bond team, which is unique in London and a powerful product for clients. Ward is a banner name. Hiring Ward and Andy has taken our leveraged finance practice to the next level.’

He adds: ‘Our cross-Atlantic leveraged finance offering across both loans and high yield enables us to deliver to our clients a holistic service. That’s the direction of travel for the market.’

Freshfields’ fashioning of a sponsor-driven leveraged finance team appears also to be the clearest indication of the firm’s general tendency in recent years to favour the leaner, partner-driven approach of Wall Street rivals.

Elsewhere, fortunes have looked more mixed. Structured finance, historically an unsung strength, has seen several departures, as Jonathan Shann and John Jakeways both retired from the London office, while Bernhard Kaiser has moved to a consultant status, while still in charge of structured finance in Frankfurt. However, the firm has made up structured finance specialist Ryan Suda in New York. Prolific real estate finance partner Jeffrey Rubinoff moving to White & Case in July is a notable loss, but with Trott returning to practice, there are no plans to recruit laterally to replace him. Head of Islamic finance Tarek El-Assra, who was of counsel, quit for Morgan, Lewis & Bockius in September 2015, but Freshfields promoted Haris Meyer Hanif in May this year to take over the role.

Johnson comments: ‘I am wholeheartedly behind the strategy. We want to be the pre-eminent firm in the market for sponsor and issuer clients; there is no other firm better positioned than we are to occupy this space. We’ve seen firms like Simpson Thacher [& Bartlett] make progress in that area. We want to do so on a more international basis. It doesn’t mean we are turning away from the financial institutions; we are just picking our spots on that side.’

Trott picks up the point: ‘We will never build the size and scale for commoditised work that A&O and CC have. We will choose our spots. That is the strategy – to really focus on corporates and sponsors, continue where it makes sense with our FIG [financial institutions groups] relationships and, support, critically, the FIG relationships of the rest of the firm.’

Partners still bristle at claims that much of Freshfields’ finance team functions as a supporting player. Tett says: ‘The reason I push back when people ask if we or another practice group is a support department is that what people can be saying is one group dances to the other’s tune. That’s not how it is, it’s a teamwork approach – a single Freshfields team working to provide one complete service to the client.’

Freshfields surely protests too much. General banking work is plagued by commoditisation and soft pricing and its corporate team has strong enough lender links of its own. The last thing the City needs is another all-things-to-all-banks shop. Reinventing its finance team with a heavy sponsor slant and the ambition to be a top US/UK leveraged group looks a workable plan after years of fudge. Freshfields should not be shy of saying that.

victoria.young@legalease.co.uk, madeleine.farman@legalease.co.uk