After years of strong growth, the City’s mid-tier saw more mixed results in 2016
With Brexit looming large over the UK legal market, many of the second 25 of the LB100 have lost momentum. Outpacing the growth of leading players ranked in the top 25, last year firms including Macfarlanes, RPC and Nabarro defied critics who suggest the City mid-tier are in structural decline. This year, however, many firms have posted subdued results.
Total revenue for this group totalled £2.75bn, 14% of total LB100 revenue, while average income is down 2% to £110m. The overall top line picture is down because two high-performing firms ranked 27th and 31st last year, Osborne Clarke and Withers, have now moved into the top 25 to occupy the space left by Dentons and Squire Patton Boggs. This, in turn, has paved the way for two regional entrants into the top half of the LB100, Blake Morgan and TLT. While TLT takes 50th spot this year with revenues of £71.6m, this is markedly down on the £79.4m posted by Trowers & Hamlins in 50th place last year. A reduction in bottom-line totals means average profit per lawyer across the group declined 2% to £63,000. However, profit per equity partner (PEP) climbed a notable 8% to £487,000 on average.
Macfarlanes, which has been the standard-bearer for impressive financial performance in challenging economic times, saw revenue stall at £161m for 2015/16, up less than 1% from £159.6m. Against this, PEP declined to £1.28m, a 17% drop on the £1.56m posted last year, which at the time surpassed the big four international firms in the Magic Circle.
‘People don’t appreciate how difficult it is to replicate revenue growth.’
Jonathan Watmough, RPC
Senior partner Charles Martin, who was recently reappointed for another three-year term until 2020 alongside managing partner Julian Howard, describes this performance as ‘more normal’, adding: ‘We saw last year as a spike rather than this year as a dip. We’re paying our people properly and costs don’t go down.’
Macfarlanes remains, however, one of the strongest-performing firms in the LB100 over the last five years. Revenue has grown 70% from the £94.7m posted in 2010/11, while PEP has gone from £752,000 to £1.3m – a 73% jump.
With the firm continuing to feature on significant deals, including advising Altria Group on the disposal of its shares in drinks manufacturer SABMiller during its £79bn takeover by AB InBev and, more recently, acting for Verizon in its $2.4bn takeover of Fleetmatics Group, Martin says the firm is ‘reasonably confident’ it can manage any post-Brexit fallout.
‘We have good people – at the last downturn we went through a protracted period where there were obvious issues needing to be dealt with. This time, the firms that are lean and agile and in a good position to adapt will manage Brexit.’
Blaming Brexit
Whereas some of the steam has inevitably been taken out of Macfarlanes’ rate of growth, a similar situation has occurred at RPC, which has enjoyed continuous upward trajectory in revenue terms in the years post-Lehman. And while that growth has continued – revenue broke the £100m barrier, growing by 7% from £94.4m – it has slowed on the 12% growth posted in 2015. Profits for the core law firm business rose by 1%, although managing partner Jonathan Watmough describes the result as ‘a stellar year’, adding that the increase was a great achievement given the uncertainty surrounding the EU referendum.
Which firms have the biggest UK business?
This table lists the top 50 firms by UK revenues only. Once international fee income is taken out of the equation, the strong UK performance of firms such as Addleshaw Goddard and Pinsent Masons becomes apparent. Unsurprisingly, UK-centric firms such as Macfarlanes perform particularly well but it is interesting that the vast majority of firms have achieved revenue gains in the UK.
The financial year 2015/16 was one of investment for RPC, which diversified into other areas of business beyond legal practice, most notably in management consulting and software development.
Watmough says: ‘People don’t appreciate how difficult it is to replicate that revenue growth. Given the bar we set the previous year, and compared to what other people have been seeing, we’re happy.’
The ‘we’ve-done-well-considering-Brexit’ mantra is common among firms in the second 25. Nabarro saw less than half the revenue growth of RPC, up 3% to £130.4m, compared to last year when the firm posted an 8% revenue increase to £126.1m, its biggest rise in more than a decade. PEP suffered too, falling to £585,000, a marked difference from last year where the firm posted double-digit growth.
Senior partner Ciaran Carvalho, who was elected in March, says new client wins during the last financial year, including BP and eBay, and major panel appointments, such as Land Securities, all point to a successful year.
He adds: ‘We are focused on four sectors – infrastructure, healthcare, technology, and real estate. Over those 12 months, you had the spectre of the referendum and that had an impact and some of our clients were still trying to assess the landscape. Against that backdrop, things have been quite good for us.’
Shoosmiths similarly cites Brexit after following up a strong 2014/15 with muted financial results. Revenue rose 4% for 2015/16 to £107m, whereas in 2014/15 the firm saw turnover grow 11% to recover to near pre-2008 levels, reaching £103m. PEP also fell 6% in 2015/16 to £364,000 from £386,000. But to put it into context, chief executive Claire Rowe tells Legal Business that ‘this is a reduction on last year, but is still our second highest PEP in the last nine years’, adding that ‘undoubtedly the Brexit vote caused a considerable amount of uncertainty’.
Facing bigger problems is shipping and insurance specialist Ince & Co, which has endured another disappointing year with revenue falling 4% from £79.4m to £76.2m. This follows an 8% drop in turnover last year from £86.7m – the worst of the UK’s top 100 law firms in 2014/15. The years following the banking crisis generally served the insurance and shipping specialists well, but since 2013 Ince has faced difficult times, with margin pressure in its core marine business seeing falling revenues and job cuts. Turnover is down 12% on the £86.2m posted in 2011.
In an interview with Legal Business earlier this year, management argued that the firm’s fortunes were changing. The firm is now looking to secure a merger, having approached Watson Farley & Williams to discuss a otential combination during the last financial year, which never got off the ground.
Another firm with long-term challenges is Olswang, which has matched a 10% fall in lawyer headcount with an 11% drop in revenue to £112.5m from £126.7m – the worst year-on-year performance of any firm in the LB100. Olswang lays the blame on ‘decoupling’ from its 50-lawyer, 14-partner Berlin office, which was acquired by Greenberg Traurig last year. As well as the drop in overall headcount, equity partner count fell from 50 to 46, helping PEP to remain steady at £489,000.
Chief executive Paul Stevens says: ‘We have posted consistent profitability in a year of transition, and I am extremely pleased to see our bank borrowings significantly reduced over the last two years. This financial discipline, along with many of the projects and initiatives currently underway, such as our move toward agile working and various IT improvements, will position us well in the years to come.’
An answer may come through consolidation: Olswang was in merger talks with CMS Cameron McKenna at the time of going to press.
‘It has been an unsettling time, but we are well hedged, well balanced and well placed to face any challenges.’
Sharon White, Stephenson Harwood
‘A little more secure’
Despite a less robust performance from the group overall, a notable band of firms seems impervious to the turbulence, not least Mishcon de Reya (see case study), which has been one of the most consistent LB100 operators of recent years.
Usually compared to Macfarlanes, Travers Smith stands apart from its peer after posting its seventh year of revenue-boosting growth to £120.4m, up 14% on the previous year. A heavy hitter for mid-tier transactional work, its PEP also hit record levels following a 7% increase, breaking the £1m barrier for the first time. Senior partner Chris Hale says the firm’s success is down to well-focused teams that are properly led, and the firm has managed to maintain its position in the competitive private equity and financing market against US firms.
‘The partners are a little bit more secure from large cheques being dangled in front of them [by US firms],’ comments Hale. ‘There will be fewer of these cheques following Brexit, so I hope the combination of these make it less likely we will lose partners to US firms. We haven’t lost many – around four over the last decade.’
Also posting another record year was Stephenson Harwood, which saw revenue rise 9% on last year from £145m to £157.6m, while PEP inched up 1% to £753,000. That increase follows 2014/15’s robust 20% rise in revenue. The firm made multiple hires within its corporate and litigation practices, and formalised an association with Chinese law firm Wei Tu earlier this year.
‘It has been an unsettling time and a time for a lot of change, but we feel as a business we are well hedged and well balanced and we feel we’re well placed to face any challenges that arrive,’ says chief executive Sharon White.
The key question is whether 2016’s subdued performance heralds the end of the remarkable five-year run for the City mid-market, or whether their evolution into more focused and more sharply-run operations will continue to power their rise through the post-Brexit uncertainty ahead.
Martin concludes: ‘We don’t really know what the vision for England is yet. Is this some turbo-charged entrepreneurial global centre for capitalism? In which case, firms with a strong domestic focus that are also adaptable might start to prosper but I didn’t vote for this, so I don’t know. Ask the people that voted for it. Give Boris a kiss from me if you see him.’ LB
sarah.downey@legalease.co.uk
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