‘Not everybody gets corrupted. You have to have a little faith in people.’ The parting shot from Woody Allen’s iconic 1979 film Manhattan resonates among the Wall Street elite lamenting the increasing lure of megabucks within even the most clubby of partnerships.
In a legal community renowned for its glacial pace of change, New York has recently seen its share of upheaval, triggered by headline-grabbing paychecks testing faith in patrician partnership models.
As such, senior figures remain preoccupied with departures from prestigious institutions. Hot topics of conversation for a travelling UK journalist earlier this year were Britain’s exit from the EU, Meghan Markle and Prince Harry’s exit from the UK, and the most-discussed point: the exit of a four-partner Cleary Gottlieb Steen & Hamilton team to Freshfields Bruckhaus Deringer, backed by a Kirkland-esque package. For a market famed as invulnerable to outsiders, Midtown has been looking a little less impregnable of late, the trademark swagger of the local firms not quite as poised as normal.
‘I don’t make things, I make things better. Always look for giants, don’t look for people of your stature.’Matthew Herman, Freshfields
And yet financially 2018/19 was encouraging for the Manhattan elite. After suffering flat and falling revenues respectively the previous year, bellwether outfits Wachtell, Lipton, Rosen & Katz and Cravath, Swaine & Moore returned to boom with respectable double-digit revenue growth. Simpson Thacher & Bartlett, Paul, Weiss, Rifkind, Wharton & Garrison, Davis Polk & Wardwell and Milbank all recorded similar progress.
And yet the long-term question remains, as in truth it has since the turn of the Millennium, as to the prospects of the New York model as a means of leading the profession on a global level. The last decade has seen the most striking performances in the US from expansive out-of-towners like Kirkland & Ellis, Latham & Watkins and Ropes & Gray, rather than America’s original legal elite. While New York leaders have sustained world-leading profitability, that has come via remaining focused on increasingly narrow slices of the vast US legal market. They are losing market share – and some of the dominance they once cast over the North American market – as they become progressively more specialised players.
Long term, those trends have raised the question of how sustainable their model is. But until recently, such questions were theoretical, not breathing down the collective neck of New York’s legal establishment.
Welcome to the NFL
In a market so dominated by home-grown law firms, even the most inward-looking of the Wall Street elite paid close attention to the two standout US developments from the Magic Circle last year – the aforementioned Freshfields team hire from Cleary and Allen & Overy’s (A&O’s) failure to secure a merger with Los Angeles-born O’Melveny & Myers.
‘Lockstep is deep in our DNA, but we need the bonus pool. If we had a different compensation model there are people we could target, but I’m not convinced we are missing out.’
Tim House, Allen & Overy
The irony of Freshfields sharing an office with Kirkland at 601 Lexington Avenue is not lost. ‘Easy access to talent!’ chuckles one partner at the Chicago-based giant.
Yet for once it was not Kirkland but Freshfields making the headlines, paying the corporate veteran Ethan Klingsberg $10m guaranteed for five years, an unprecedented package for a London law firm. Given that local lawyers have long dismissed City entrants for failing to get near Wall Street compensation levels for marquee hires, the reverberations of the move locally are hard to overstate.
And Matthew Herman, Freshfields’ recently-appointed US managing partner, looks to be the kind of figure to reinforce the firm’s repositioning from conservative London wannabe to a global challenger that gets the New York rhythm.
Herman radiates with energy about the practice’s future with his patter abounding with the obligatory sporting analogies (‘more New York than New York’ jokes one rival of Herman). Despite early stints at Willkie Farr & Gallagher and Brobeck, Phleger & Harrison, Herman is now a Freshfields veteran, joining as an associate and protégé of Ted Burke, the projects partner whose 1998 hire from Milbank started the Magic Circle firm’s US recruitment drive. Burke, of course, went on to become US managing partner in 2002 and a well-regarded global managing partner in 2005 – a role that helped its local credibility before his 2014 departure.
The progressive impact on Wall Street of Kirkland & Ellis through the 2010s has been a thing to behold and the firm’s name elicits a strange cocktail of distaste, grudging admiration and pronounced professional unease.
Herman is ebullient about the Cleary quartet, recalling the 2005 strategy paper for building out the US practice he wrote with Burke. ‘When Ted hired me he said: “We have to get this right. There is 0% room for error.”’
Herman maintains that the Cleary team is just one step in a long-term plan to build out Freshfields’ US business, reflecting its early move into white-collar crime and investigations work, with the 2009 hires of Adam Siegel and Aaron Marcu from Covington & Burling to create a litigation practice.
Herman can do the patter as well: ‘I see my role as managing partner like the old BASF advertisements – “I don’t make things, I make things better.” When you are building out a practice in the world’s most competitive market, always look for giants, don’t look for people of your stature. Aaron Marcu, for example, you should see his rolodex – he knows everyone. And Adam Siegel is a star in that regard too. We are extending the platform in the right way. I only wish I could have done it faster.’
The hire of antitrust litigator Eric Mahr from the Department of Justice in 2018 is also cited as a key development and a reminder that the agenda also includes Washington DC, and there are plans to further bolster DC in tax, antitrust and executive compensation.
For Herman, the acquisition of the Cleary team, which also includes Meredith Kotler, Pamela Marcogliese and Paul Tiger, is akin to winning a prize fight and if there are any concerns about how Klingsberg’s robust style will mesh with Freshfields, he does not let on.
‘Increased mobility means erosion of partner loyalty. If partners are not as sticky, the whole model is vulnerable.’
Brad Karp, Paul Weiss
‘Meredith in civil litigation is a huge win. She’s in the traffic in Delaware. And in our debt and capital markets team, David Almroth, Valerie Ford Jacob and Michael Levitt are great contributors to the business. They all work hard for clients and are great on managing the business side.’
Herman remains alive to the challenges of altering perceptions, especially since Freshfields’ US corporate ambitions have been dogged by stop-start investment that has, until now, left the locals smirking. ‘Changing the narrative doesn’t happen overnight. It can be two steps forward and half a step back. Welcome to the NFL!’
Tim House, A&O’s (very English) US senior partner, is sanguine about his firm’s ambitions in the face of major reversals. ‘Post-O’Melveny, the experience of the whole firm is that we now have 550 far better informed partners about the US business. We are investing on a greater scale than in the past, in teams rather than individuals. The strategy is not therefore a transformative merger now but a sustained and accelerated build, laterally and with internal promotions.’
He plans substantial investment in finance (leveraged finance, direct lending, asset finance, projects and restructuring), corporate (M&A and private equity) and litigation to bolster the 36 partners in New York and ten partners in Washington DC to be in the plan.
‘Lockstep is deep in our DNA, but we need to use the bonus pool. All partners, across the range of seniority, are potentially eligible for bonus points for exceptional contribution. If we had a different compensation model there are people we could target, but I’m not convinced that culturally, and in terms of quality, we are missing out,’ says House. Such messages may be necessary for form’s sake, but no one doubts that A&O’s stark choice locally is to further pivot to Manhattan pay models or fall further behind.
Kirkland vs Wall Street
Uncharacteristic nods to Freshfields apart, the managing partner community of New York is not a breed to get easily riled… with one very notable exception; the progressive impact of Kirkland through the 2010s has been a thing to behold and the firm’s name elicits a strange cocktail of distaste, grudging admiration and pronounced professional unease.
Certainly, Kirkland was not the only institution pushing the star transfer market to new heights – the most-cited lateral locally remains that of Cravath M&A veteran Scott Barshay’s $10m transfer to Paul Weiss in 2016 – but Kirkland pushed the model beyond anything New York firms had ever before witnessed. With the firm breaking the $4bn turnover barrier this year – well ahead of any Wall Street peer – and partner profits exceeding $5m, this is a threat the like of which local firms have never seen.
More than the dollars offered, it is the sense that Kirkland is intent on entirely upending the local order that rankles. One law firm chair expresses common sentiments: ‘Kirkland is ruining the whole marketplace by paying completely irrational amounts of money.’
Senior figures in Manhattan point to Kirkland’s 2018 hire from Cravath of litigator Sandra Goldstein on $11m a year guaranteed for five years, a move that critics claim is related to addressing Kirkland’s woeful ranks of senior women. Only three months before, Cravath had been left bruised from the loss of one of New York’s leading lights, M&A star Eric Schiele, for Kirkland. As one of the oldest of old-money Wall Street firms, raids on the lockstep-based Cravath tend to get peers particularly misty-eyed… unless they’re doing the raiding.
Sitting in his trophy room stocked with an M&M machine, a Coke fridge and countless sporting accolades, Brad Karp, the affable chair of Paul Weiss, laments the drawbacks of the age of mobile stars. ‘Increased mobility means erosion of partner loyalty. All firms have is clients and partners. If partners are not as sticky, the whole model is vulnerable. Every chair should focus on doing well financially and having a compensation system that treats people fairly,’ says Karp.
‘Younger attorneys will love it. It’s a hip environment.’Scott Simpson, Skadden
But then it is easier for Paul Weiss to be sanguine. The firm, which operates a heavily-modified lockstep, is met with universal plaudits from law firm leader peers around town. With a twin-engine of a muscular M&A team and an unsurpassed litigation practice, it was the only Wall Street-bred firm in Legal Business’ Global 100 report to have made the top ten best-performing firms over the past decade. Karp points to 35% headcount growth in the last decade across five core practice areas of private equity, M&A, restructuring, litigation and white collar, with the firm now boasting 115 partners in New York.
Sullivan & Cromwell, Davis Polk and Simpson Thacher are all also cited as traditional leaders that have stood up respectably in recent years. In the case of Davis Polk that came at some cost, with former head Tom Reid instituting a tough round of partner exits to get the firm in shape after a troubled period of drift.
Some are more at risk than others. Shearman & Sterling stands out clearly as the prestigious Wall Street brand that has faced long-term decline, a trend evident as far back as the mid-2000s, when a poorly-hedged practice was badly hit in the post-dot-com slump.
Shearman has since remained one of the weakest performers of the post-Lehman era. The 900-lawyer firm is now at risk of falling out of the global top 50 in 2019, sitting in 49th place with revenues of $955.5m, up just 17% in the previous five years.
The more prestigious, Cravath, which last year grew revenue 15% after decline the previous year, maintains its concentration and a largely undiluted profit pool in New York. The firm is famed as well for its collegiate culture, refusal to recruit externally and commitment to generalism – all factors that make it a bellwether for a certain model of Wall Street practice.
Notes one veteran Cravath M&A partner: ‘We are not just a selection of pro athletes cobbled together. Partnership should mean something. Some firms have lockstep in various geographies and pricing scales which are fundamentally different. Lockstep for us, with our US focus, same geography and pricing scale – means all profits are shared equally.’ The partner also points to the firm’s unique rotation system in corporate and litigation, which means there is less imperative for younger lawyers to hitch their wagons to rainmakers.
If Cravath does not have quite the unchallenged cachet it enjoyed 20 years ago in a less globalised Manhattan market, it remains a powerful institution that has proved able to withstand the semi-occasional loss of marquee partners.
It is a different story entirely at another lockstep outfit, Cleary, which, with its numerous non-domestic offices and geographical spread, has long stuck out among local firms. Until recently a remarkably consistent financial performer, the firm’s growth has languished behind peers in the last five years. Its revenues for the 2018 financial year of $1.274bn were up just 7% over the previous five years, well behind its peers. As rich as the package for Klingsberg dangled by Freshfields, it is impossible to see such a departure if Cleary was not already tangling with some wider issues. The acrimonious exits to Freshfields were also a blow to the sensibilities of a firm famously proud of its culture.
It also caused Cleary to undertake a review of its lockstep, a step also taken by Debevoise & Plimpton, with both firms deciding to stick with lockstep for the foreseeable future, a decision that surprises some peers.
One Cleary partner is candid on the pressures facing their firm: ‘Lockstep compensation is getting scarce, but we have reaffirmed our commitment in the face of that. We are consensus-driven and had to think deeply, have an intellectual debate. The choice was made that right now the best system is lockstep.’
Nonetheless, no one doubts that the broader direction of travel is away from such compensation systems and in favour of richer packages for rainmakers. Even in Manhattan, change comes eventually.
Such riches flow to more junior lawyers as well. In November, Milbank set a trend to award associates bonuses of $100,000 for its class of 2011 and $15,000 (prorated) for its class of 2019, with Cravath, Paul Weiss and Cleary among the firms following suit, matching the range set in 2018. That is on top of the $190,000 starting salary for first-year associates at top firms, even if such packages have generated growing complaints from clients about excessive charges for junior lawyers.
Movers and shakers
On the evening of Monday 13 January, Eric Friedman and Scott Simpson are just out of a day of annual financial wrap-up, including performance reviews of partners at their firm, Skadden, Arps, Slate, Meagher & Flom.
Friedman and Simpson are energised about the imminent move from the office Skadden has occupied for 20 years in the Condé Nast building at 4 Times Square to the new development at One Manhattan West in the in-vogue Hudson Yards district, west of Midtown. ‘Clients are moving there. Younger attorneys will love it. It’s a hip environment,’ enthuses Simpson. Skadden proudly announced it completed the relocation on 2 March.
It is a move being made by a growing number of law firms as they strive to revamp fusty images to appeal to the demands of Millennial partners and upgrade their infrastructure.
And with the tech and media sectors becoming an increasingly dominant part of bid activity, giants like WarnerMedia, Turner, HBO, CNN and Warner Bros are moving there, along with clients like BlackRock, Kohlberg Kravis Roberts & Co, Wells Fargo and Silver Lake.
Boies Schiller Flexner, Milbank and Cooley have set up shop at 55 Hudson Yards, Debevoise has signed a lease and even Cravath will be moving out of the affectionately named ‘Death Star’ – its offices at Worldwide Plaza in Midtown – whose gold escalators, wood panelling and lofty law libraries have dazzled visitors for 30 years. Cravath rolls up in Two Manhattan West in 2024.
David Koschik, vice chair of White & Case, puts such jostling in the context of a fiercely competitive market always hustling for an edge. ‘It is all about talent and clients, and you can’t have one without the other. You have to make sure you are doing the kind of work that is attractive to talent, for large corporates and private equity clients – top-end work, global and cross-border.’
‘It is all about talent and clients, and you can’t have one without the other. You have to make sure you are doing the kind of work that is attractive to talent.’
David Koschik, White & Case
Still, in the New York market, more than London, prestige and history count for much among monogram-cuffed junior lawyer hopefuls. But then, as illustrated in the latest Vault 100 rankings, here prestige and profits go hand-in-hand.
Cravath, Wachtell, Skadden and Sullivan maintain their 1-4 rankings respectively with profit per equity partner (PEP) ranging from Wachtell’s $6.53m to Skadden’s $3.72m. Latham creeps into the top five most prestigious US firms with $3.45m to replace Davis Polk ($4.41m), with Simpson Thacher ($4.1m), Kirkland ($5.04m), Gibson, Dunn & Crutcher ($3.35m) and Paul Weiss ($5.02m) making up the rest of the top ten.
Matthew Ingber, head of Mayer Brown’s New York arm, notes the challenge of competing locally. The Chicago-born firm has been in growth mode, doubling in size locally over the last five years, and with that has come new challenges in hiring talent. ‘We have noticed a changing dynamic with associates. They’re raising issues with more confidence, ranging from the lighter question of snacks to the really important issues of wellness and diversity, as they should. They speak their minds and we as a firm have to listen, learn and adapt. That applies across the board, whether it’s recruiting, retention or other management efforts.’
Market forces
As the US enters presidential election year on the crest of another buoyant year for private equity and M&A activity, with US buyouts hitting $224.9bn, the highest level since 2007, the geopolitical outlook remains unpredictable with few willing to commit thoughts on how events will play out in 2020. On one hand the US economy has expanded consistently for over a decade – in contrast to a troubled European region – on the other hand, politics and policymaking has never been more partisan or unpredictable. The jaded US public was faced with the spectacle of impeachment of a sitting US president – the process was abandoned in February – and the election this year promises to be another bitterly partisan affair. Local lawyers are at best ambivalent on Trump but wary of the lack of consensus and range of views being thrown up by potential Democrat challengers.
Skadden’s Friedman maintains that the North American legal market looks set to remain stable, but admits the challenges: ‘The geopolitical situation is fluid. A few weeks ago, Iran was not one of the top geopolitical risks affecting Big Law, it was China and Brexit. The US has reached out to North Korea. That sounds good until it turns bad. They are running missile tests affecting allies like Japan. It is a very fragile environment.’ And such comments came in January before coronavirus came on the scene.
‘It is unclear whether the looming election will lead to an uptick in transactions as players look to get things over the line ahead of a new administration. When the Democrat nominee is named, we’ll know more,’ hedges one M&A adviser, looking to the ideologically wide-ranging field the Democrats are currently considering to challenge Trump. ‘Joe Biden vs Trump is not going to change anything but Elizabeth Warren is a different matter.’ As Legal Business went to press in March, Biden looked on course to secure the Democratic nomination.
As things stand, corporate advisers are broadly hopeful, understandably given the consistency of the US economy in recent years. David Leinwand, M&A partner at Cleary, speaks of a full M&A pipeline into 2020 driven by the huge war chests of funds but also notes increasing pressures on pricing. ‘For clients, the biggest challenge is putting money to work in a seller’s market. We are having to come up with innovative strategies to avoid being beaten up by auctions,’ says Leinwand.
Cravath M&A partner David Perkins also notes the impact of a more competitive market. ‘The tension for clients is that they are chasing illusive proprietary opportunities, not widely-marketed transactions, to make investments. In the search for things which are proprietary, there are more minority interests and exotic deals to meet the needs of both parties. These opportunities require a lot more time and effort to create bespoke deals that bridge the value piece.’
Cleary litigation partner Victor Hou also echoes the view of many that the Trump administration has scaled back large-scale corporate investigations, a situation which could change during a new election cycle. Moreover, under the Trump administration, the Securities and Exchange Commission has been far less active in pursuing financial institutions than during the Obama years. There have been fewer high-profile cases. ‘The largest regulatory investigations were the Libor and benchmark rate-rigging scandals. Cleary acted for three banks – Goldman, Citi and HSBC. No other law firm did that. It kept us extraordinarily busy,’ says Hou.
Firm leaders are poised to take advantage of a possible end to the presidential cycle that traditionally sees a transition of talent from government services into private practice, with many compiling their wish lists of strategic hires already.
Boston-bred Goodwin Procter is a firm that has outstripped many of its peers financially and in terms of headcount, with revenue rising 11% in 2019 to $1.33bn and PEP rising 6% to $2.61m.
Rob Insolia, Goodwin’s New York-based chair, is bullish about the firm’s position in the market. ‘The confluence of technology into other industries is our biggest opportunity. Our focus is to help our clients anticipate and deal with the disruptions and opportunities caused by this confluence.’
Another firm in expansive form is New York’s Milbank. Describing his firm as a ‘small big firm’ having broken the $1bn mark in global revenue for the first time in 2018, chair Scott Edelman notes the contribution the firm has seen in London, where heavy investment has seen City income surge to $171m in 2019. ‘We were worried about Brexit but have continued to invest in the City and in a new London office, and have had real success there. We have created practices that are strong on both sides of the Atlantic.’
Such sentiments speak to the growing nexus between New York and London legal centres, yet in truth Manhattan remains as ever primarily driven by US considerations and fairly specific US considerations at that. New York will certainly remain able to exist in its own bubble for the foreseeable future, but the cost of that has been a gradual loss of influence for local firms in the wider US plc advisory market.
For most Wall Street lawyers, most of the time, that seems a pretty good trade off… and yet… LB