Victoria Young and Madeleine Farman talk to new heads on the US, high yield and China.
While in recent years Allen & Overy (A&O) has been probably the most confident of the City’s leading banking shops, it remains a fast-evolving world for even the most potent of banking teams. Since the market turned in 2008, Magic Circle firms have faced tight margins and the increasingly ominous incursion of US-dominated finance products in Europe’s credit markets.
However, A&O’s new department heads, supported by also new managing partner Andrew Ballheimer, are putting out a bullish message about how the City giant can respond to the changing times, threats and opportunities.
Taking over in April 2016, banking heads Philip Bowden and Andrew Thomas replaced Andrew Trahair and Stephen Kensell, who had an eight-year run at the helm of the firm’s 176-partner global practice. Replacing the complementary pairing of heavyweight Kensell alongside the focused and details-orientated Trahair is a considerable job. The practice is also central to the firm, generating about 45% of turnover, once securities is thrown in the mix.
As the name to beat, the finance team does attract some criticism, with some veterans claiming that A&O being increasingly corporate in both senses of the word has squeezed out much of the personality and mavericks that carved out its banking reputation. Still, the consensus is that A&O has taken a slight edge on peers like Clifford Chance (CC) and Linklaters over the last decade. Having leaked good banking partners to US rivals like a sieve during the pre-Lehman boom years, A&O has generally held on to its key practitioners and is widely acknowledged to have done a good job of quickly reshaping its business after a sweeping partnership restructuring in 2009.
In last year’s election to lead the finance practice, which was less about manifestos and more about personal reputations, partners picked two Australians in Bowden, who is known for his work for lenders on Liberty Global financings, and former Amsterdam managing partner Thomas. The two were appointed against two rival dual-ticket teams.
As Bowden puts it: ‘If you read the election statements of the three tickets, they didn’t say markedly different things. We need to grow in the US – what a surprise! We need to increase our funds base – what a surprise! We need more high yield in Europe. None of this is rocket science; it’s about how you execute it.’
During a transition period, the new duo have already faced a few reverses, having seen Kensell decamp to Latham & Watkins (Kensell had been a credible contender for the senior partner role that last year went to Wim Dejonghe) and another unwelcome resignation in April of financial regulatory head Bob Penn.
Andrew Thomas and Philip Bowden, Allen & Overy
‘We want to be more ambitious.’
On the other side of the ledger, in New York A&O broke lockstep in July to secure a team including White & Case partners Scott Zemser, Alan Rockwell and Judah Frogel, Proskauer Rose partner Rajani Gupta and Milbank, Tweed, Hadley & McCloy associate Todd Koretzky, who joined as partner.
The good news is that BNP Paribas regular Zemser is widely regarded as a credible catch – as is Rockwell – and it will be welcome that A&O opted for a team move to give it some momentum in the notoriously tough Wall Street market.
In any event, Bowden remains robust on US expansion: ‘Our challenge is that we have the leading finance practice everywhere except New York, but we are actively involved in follow-up investment. The focus for the US piece is still in New York. We are looking at potential lateral hires in restructuring, high yield and leveraged finance.’
As Zemser puts it: ‘The goal of New York and the US for the firm is ambitious but definitely reachable. At the highest levels there are discussions and actions being taken regarding growth, being aggressive in the marketplace and being bold. The firm wants to recreate what it has globally in the US.’
Bowden says while A&O’s decision to approve a profit pool for above-lockstep packages for star hires went through in 2014 with a 90% majority of those who voted, it has been a challenge to find the right candidates.
‘It’s a nice culture at partnership level and that means you have to get consensus,’ says Bowden. ‘Things take longer, but you get buy-in. We had worked the phones beforehand and after [the vote to bring in the four-partner team] so you make people understand the story beforehand. We got 400 votes for and five against in a week, which is good.’
While building out a US offering might seem counter-intuitive given A&O’s repeated attempts to scout out a credible US merger, that ambition appears to be receding and last year’s Brexit vote is cited by former partners as an additional complication.
Allen & Overy’s finance practice at a glance
Heavyweights
Jonathan Brownson, Trevor Borthwick, Gareth Price, Conrad Andersen, Denise Gibson, Paul Flanagan, Simon Roberts, Alan Rockwell, Tim Polglase
Rising stars
Sanjeev Dhuna, Ben Myers, Nick Clark, Kate Sumpter, Jocelyn Land
Partners globally 171
Partners in London 63
Key clients Lloyds Banking Group, Goldman Sachs, Deutsche Bank, HSBC, BNP Paribas, The Bank of Tokyo-Mitsubishi, Standard Chartered Bank, Lone Star Funds, CVC Capital Partners, Apax Partners, OMERS, Advent International, Charterhouse Capital Partners, The Blackstone Group, Pamplona Capital Management
Bowden says: ‘The reality is we have spent a lot of time talking to people and top teams in M&A and finance practices, and the likelihood of merging with one of those is not great, either because they didn’t want to or we didn’t see it as a fit.’
He adds: ‘The best way to convince the market is to go out, back yourself and keep making lateral hires. We are not simply waiting two years to see whether Zemser beds in. We are in discussions with others.’
Reinventing the wheel
Wall Street challenges aside, A&O’s finance practice has fared credibly through the inevitable process of reinvention since the banking crisis, expanding partner headcount 15% between 2011/12 and 2015/16. The firm has stable partner ranks, with London’s core finance practice currently 63 (not including its 40-strong capital markets roster) – only two more partners than it fielded in 2012.
Bowden describes the firm’s practice in Europe as largely a finished project. A&O has historically been potent in Benelux and Germany, but less dominant in France and Spain, while Italy has been a weak link.
He says: ‘Ten years ago we were still doing a build-out in Europe, but by and large, with the odd exception, we are more or less done. There might be an opportunistic hire here and there, but other than that we are done.’
In contrast, the perennial issue of high-yield capability has yet to be entirely resolved. Its European five-partner high-yield team, whose most prominent name is still Kevin Muzilla, pales in comparison to Latham’s resource and reputation of eight London partners and 13 in Europe. The team has developed with the blossoming of Europe’s junk bond sector over the last decade, but it is still short of the potency A&O wants in its heartlands. But even without the kind of head-turning hire made in 2015 by Freshfields Bruckhaus Deringer with Ward McKimm, many see it as the strongest yet built by a City player (the firm has in recent years consistently ranked strongly in Bloomberg’s European high-yield tables, often second in volume for bank roles to Latham, a trend which continued in 2016). Bowden notes: ‘We are strong in Europe in high yield, but there is always an offering to overcome, especially with the US investment banks. There is a hurdle with those clients to make the leap.’
‘In New York we are being aggressive and bold. A&O wants to recreate what it has globally in the US.’
Scott Zemser, Allen & Overy
High yield, of course, is just a microcosm of a wider Americanisation of Europe’s debt markets over the last decade that has seen US lenders and products increasingly encroach… and US-bred advisers with them.
The UK’s upcoming EU exit only makes the problem more pressing, not because A&O lacks a local hedge, but in the implication that a hard Brexit would probably strengthen the hand of advisers deploying New York law in Europe. And on this point, overall credibility of the offering is as important if A&O is to attract and retain the lawyers it needs to sustain its banking dominance.
As one former partner puts it, the US problem has created a lot of ‘angst’ among partners: ‘There has been an inversion. Ten years ago the US firms would wave big cheques, but people would say, “Where’s the platform?” If they can’t service the clients there’s no point. What A&O is encountering is that, while you can wave a cheque, if the brand’s not there or the platform’s not there, they won’t come. With a firm like Latham, people are attracted to the platform.’
The talent factory – names to watch
As one rival partner puts it, Allen & Overy (A&O) ‘has a good focus on know-how and training, and its associates are very good’. The firm has a reputation for producing quality finance partners and names to watch in the practice include Sanjeev Dhuna, who is noted for his work in emerging markets. He recently advised Advent International as financial sponsor of India’s first synthetic rupee-denominated margin loan, and acted on the take-private of Essar Energy and Amtek Global Technologies on its €235m long-term facilities provided by Kohlberg Kravis Roberts & Co. This was the first time a private equity debt fund had solely underwritten a financing of this size.
Others to watch include senior associate Ben Myers, who worked with Dhuna advising Bank of American Merrill Lynch as mandated lead arranger and sole lender to Royal Dutch Shell for its acquisition of BG Group. One rival partner observes ‘he is tipped to make partner soon, having been a solid pair of hands’. In the financial regulation space, Kate Sumpter, who was made partner in 2016, is touted as a robust practitioner and is currently co-lead on the firm’s mandate to advise HSBC on ring-fencing implementation. Made up to partner in 2015, project finance partner Jocelyn Land is also highlighted, having advised Babson Capital Management, Edmond de Rothschild’s BRIDGE, IFM Investors and Schroders on TanQuid’s €245m loan refinancing.
Another big gap in the practice is in financial regulation, which is becoming of increasing importance if you want to secure high-margin work from bank general counsel. With last year’s departure of Penn to Cleary Gottlieb Steen & Hamilton, A&O hired Nick Bradbury, a young partner from Herbert Smith Freehills, who arrives later this year. Bowden concedes the practice needs considerable investment, with the firm looking to get the non-contentious and contentious fin-reg teams to six to seven partners in the near future (against four when Bradbury arrives). But the firm is notably behind Magic Circle peers in this area. As one former partner puts it, ‘the team basically suffered from years of under-investment’.
There are no such quibbles in asset finance, where A&O under Mario Jacovides remains the standard by which other players are judged. The hope will be that politicians’ promises to ramp up infrastructure investment will bring more pep to a sector that has been subdued for years, though years of tight management have given A&O a lean and effective projects team intently focused on premium work. Real estate finance, with astute hands as Paul Flanagan, is likewise another well-shaped and profitable practice. In restructuring, A&O has been similarly stable.
Getting leveraged
‘What A&O is encountering is that, while you can wave a cheque, if the brand’s not there or the platform’s not there, US partners won’t come.’
The leveraged finance practice, trimmed and substantially reshaped since the banking crisis to bolster its links with general banking, has expanded its ranks. (In keeping with the current fashion for flexibility at Bishops Square, Bowden himself has a practice spanning general lending, leveraged and sponsor work.)
Leveraged, of course, is the area in which A&O faces its toughest competition from US rivals and needs to deliver emphatically if it is to demonstrate that this will still be a platform for elite banking lawyers ten years from now. It has been a more than respectable run so far in deal finance, with older hands complemented by the widely-cited Jonathan Brownson, Nick Clark and Denise Gibson, who the firm recruited four years ago from Goldman Sachs. For many, Gibson is the name to watch, being repeatedly cited in glowing terms internally and by rivals. (‘Not a rising star, becoming a heavyweight,’ says one hard-to-impress rival.)
Corporate lending has been, in Bowden’s words, ‘static’, though that reflects market conditions and no-one is seriously expecting a challenge to the A&O and CC duopoly on this front. Loans heavyweight Trevor Borthwick comments: ‘We have been successful in building investment funds and we have been raising our focus on corporate, but it hasn’t been at the expense of our focus on the big banks who we still see as major clients.’
Thomas says the practice has seen some progress in that area, with a ‘mark the man’ approach to clients. ‘It’s the same guys and girls doing deals, so the natural way has been to mark the man. The banking clients are now funds clients and you just follow them.’
‘We need to grow in the US. We need to increase our funds base – what a surprise! None of this is rocket science; it’s about how you execute it.’
Philip Bowden, Allen & Overy
Critics will maintain that it is little more complicated than that. For a team so associated with bank clients, the challenge is as much about demonstrating the cultural affinity to widen its client base into the new array of funds and sponsors. Robin Harvey, having built a productive partnership with Stephen Lloyd’s private equity team, has been active with sponsors while fellow leveraged finance veteran Tim Polglase has built a more balanced practice in recent years.
Whatever the challenges of refashioning A&O for the times, Bowden should be able to draw on substantial internal support in the City, with the former Freshfields lawyer a respected figure (representative quote from one former A&O hand: ‘He’s intelligent, fair, straightforward and straight-shooting’).
Bowden is also known for beating the drum about mainland China, which was a point of strategy the pair set out for partners in May last year.
Bowden wants to push harder on outbound work from mainland China, an area in which it has been historically difficult for US and UK firms alike to generate workable margins from thrifty Chinese institutions.
Bowden says: ‘The firm’s approach has not been as co-ordinated as it could have been and outside of Asia-Pacific we haven’t been as hooked up with the guys on the ground in China. The goal is to build relationships with our Chinese clients so when they make investments outside Europe they come with us. There is also an investment in people who can not just speak Mandarin but are credibly fluent.’
Bowden concludes: ‘A&O is a very big beast and it takes longer to shift direction. [But] we want to be more ambitious than we have been.’
Muzilla perhaps puts it more pithily: ‘The strategy for A&O is that we’re going to have the best finance practice in town. That includes the whole spectrum of products, US and English law.’