The annual torrent of financial results has swept the market once more, with all eyes as usual on how the Magic Circle firms fared against City peers.
Freshfields Bruckhaus Deringer and Allen & Overy (A&O) both racked up 10% revenue growth, with Clifford Chance (CC)’s turnover growing 8%, and Linklaters’ increasing by 7%. In absolute terms, CC recorded the largest fee income of £1.97bn, narrowly ahead of A&O’s £1.94bn. Linklaters and Freshfields followed with £1.78bn and £1.7bn respectively.
Whatever internal competition between the four firms exists, each will be content with an uptick in performance compared to last year. CC will be particularly happy with its improved fortunes, having inched forward by just 1% in 2020/21, as will Linklaters, which more than tripled its 2% revenue growth of last year. A&O and Freshfields were both able to double their growth rates, having seen 5% increases to their top lines 12 months ago.
Freshfields is now aiming for its seventh consecutive year of revenue growth for the financial year 2022/23. ‘Top of the management agenda is to keep the ship steady and smooth sailing in what is going to be choppier waters,’ said managing partner Rick van Aerssen. ‘Growth in the US continues to be front and centre for us, but other than that I don’t foresee significant changes ahead.’
‘Top of the management agenda is to keep the ship steady and smooth sailing in what is going to be choppier waters.’ Rick van Aerssen, Freshfields
Freshfields led the way on profit per equity partner (PEP), with an increase of 8% to £2.07m. CC also broke the £2m barrier for the first time, having seen a 10% rise to £2.04m. A&O and Linklaters stayed below the £2m line after the former hit £1.95m after a modest 3% increase, while the latter lagged slightly behind on £1.87m after a 5% rise.
In contrast to revenue, two of the quartet saw their PEP growth slow compared to 12 months ago. A&O saw the most notable drop off after a striking 17% rise to £1.9m in 2020/21, while Linklaters was also unable to match last year’s growth, which saw PEP swell by 10% to £1.77m. CC’s growth rate stayed relatively static, with this year’s growth a modest improvement on the 9% rise seen in 2020/21, when PEP hit £1.85m. Freshfields was the only one to significantly improve on its 2020/21 growth rate. Twelve months ago, the firm reported a PEP figure of £1.91m, up 5% from the year before.
Long-term margin performance is a particular point of pride for CC, where partnership profit has jumped by 74% since 2015, while PEP has spiked by 82%. Over the same period, revenues have increased by 42%. Chief financial officer Patrick Glydon said: ‘During Covid we adopted a very clear focus on discretionary cost management as well as staying very close to our clients. And we’ve continued maintaining that discipline. That’s been the key driver of that margin improvement.’
But even after this respectable growth, profit figures from the Magic Circle pale in comparison to Macfarlanes, which saw a robust 19% increase in PEP to £2.48m. It was yet another good year all round for the firm, which saw its revenue increase for the twelfth consecutive year with a 16% uptick to £303.7m, in addition to a 12% hike in operating profit.
Senior partner Sebastian Prichard Jones told Legal Business: ‘Our results in 2021/22 reflect an active approach by our clients as the world emerged from the pandemic. We were fortunate to operate in areas which saw sustained high levels of client demand across the market, in both our transactional and non-transactional practices. Our alternative asset manager clients in particular were very active.’
Ashurst also enjoyed a successful 12 months, as the firm saw its top line grow by 12% to £798m. PEP was similarly promising, with a 13% rise taking it to £1.175m. Ongoing US development ambitions had a part to play in the results, particularly the recent expansion into Texas.
‘We’ve been very focused on the environment and ESG and that has been very important to our clients.’ Penelope Warne, CMS
Herbert Smith Freehills recorded its ninth consecutive year of growth, with across-the-board increases in revenue and profit. Global turnover saw a respectable 6% uptick from just over £1bn to £1.1bn, while overall profit increased 4% from £366.9m to £381.2m. PEP rose 6% from £1.099m to £1.163m.
Elsewhere, Taylor Wessing enjoyed an impressive year, typified by a 32% surge in profit, which reached £93m. It also saw double-digit UK revenue growth, with a 25% upswing to £219.3m. Internationally, the firm’s turnover grew by 13% to reach £371.3m.
And Fieldfisher confirmed a ninth consecutive year of growth, posting an impressive 15% firm-wide revenue increase to £330m. PEP at the firm was even more buoyant, topping the £1m mark for the first time as it jumped 22% to £1.05m.
At Addleshaw Goddard, an increased presence on the continent was credited with driving an 18% jump in revenue to £377m, as well as a 16% growth in profit, which reached £155m. Over the course of the year, the firm has established bases in Dublin, Luxembourg, Frankfurt and Munich, which contributed to a notable 30% rise in overseas turnover.
Bird & Bird had a similarly robust year, posting a 10% increase in fee income to £445.6m. In euros, this translated to a 15% hike to €525.3m. Profit was also up 22%, while PEP swelled by 11% to €767,000.
Simmons & Simmons also fared well, with a solid 6% revenue growth to £465m, and an 8% profit increase to £185m. PEP also passed the £1m barrier for the first time, amid an eventful year for the firm which saw it open an office in Silicon Valley, relocate its Dubai office, and establish a new patent prosecution practice in Munich.
It was also a positive year for CMS, which shook off a muted 2020/21 that only saw a 3% rise in global revenue, with a healthy 18% growth in its global top line to €1.746bn. There was also promising growth at a UK level, as the income from domestic business grew by 14% to £644m.
The firm does not provide profit figures, though LLP accounts to April 2021 show profits of £29m for the UK LLP, up 3% from the year before.
Commenting on the results to Legal Business, managing partner Stephen Millar expanded on the firm’s overarching strategy: ‘We’re not choosing to be just like those firms that really, if they’re honest with themselves, only want the biggest deals or the biggest disputes and financings, or those that just want to be very bespoke in certain areas. We’re investing to be a broad church across all of those areas, and this is really manifesting itself with the brand. This year we’ve been the highest-rising brand in Europe.’
Senior partner Penelope Warne (pictured) added: ‘We’ve been very focused on the environment and ESG and that has been very important to our clients. We’re naturally very strong as a firm in technology and energy. These areas are very, very relevant for our clients right now.’
Among the national firms, TLT stood out thanks to its 30% rise in revenue. Totalling £144m, the results see the practice reach its 2025 target of £140m turnover three years ahead of schedule. Shoosmiths also had a solid year, as revenue grew 8% to £181.8m, and profit 9% to £60.7m.
Other firms had more mixed results. RPC, though posting a 10% revenue increase across London, Bristol, Singapore and Hong Kong, saw a 10% fall in PEP, which shrunk to £571,000. The firm highlighted an increase in investment across IT, infrastructure and people, as well as the development of the new Bristol offices as the reasons behind the dip in profits.
Meanwhile, DAC Beachcroft failed to capitalise on the momentum established by last year’s impressive growth, with its most recent figures showing an 8% fall in pre-tax profits to £62m. According to the firm, much of the dip in profits is attributable to an unusually high investment in people and infrastructure. The firm was able to muster a sedate 2% growth in revenue.
Stephenson Harwood saw revenue stay completely flat at £206m, following a correction to its 2020/21 figures. The recent turnover would have amounted to a fall had the firm not amended its figures for the previous year after it settled a £3m dispute relating to unpaid fees between announcing and closing its accounts.
And HFW attributed a 1% dip in revenue from £200m to £198.7m to a ‘prudent’ reduction in lawyer headcount during the pandemic, while PEP also slipped, down 2% from last year’s record high of £683,000 to £669,000, which the firm chalked up to the drying up of pandemic-era cost savings: ‘HFW saw exceptional cost savings during the pandemic. These cost savings diminished during FY22 as countries across the firm’s global network began to return to normality.’
Overall, the fact that most firms were able to avoid a dip in turnover after the booming transactional market seen in 2020/21, is a sign that changing macroeconomic circumstances are yet to fully hit the sector. The coming months are likely to give a better indication of which firms are truly well hedged and those which are still living off the momentum of the last 18 months.
For more detailed analysis of firms’ 2021/22 financial performance, please see our Legal Business 100 report in the next issue.