Previously outpaced by US rivals and the UK mid-tier, some optimism has been restored by the global elite in London. Legal Business decides where to place its bets
‘I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.’
Warren Buffett
A potent mix of factors combined to hobble the UK’s largest law firms during the last financial year. The recovery of Western economies stalled; emerging markets slowed or went into recession; and political uncertainty prevailed, fuelled by the UK’s referendum on its EU membership and the US presidential race. Firms entered 2015/16 with promise, which quickly evaporated as caution stifled huge swathes of the market. Deals stalled or were abandoned entirely.
Against this backdrop, 16 of the UK’s 100 largest law firms suffered flat or falling turnover, with profit per equity partner (PEP) down at over a quarter of the top 100 firms as their combined share of the global legal market waned. While the Magic Circle collectively performed better than in recent years, the chasing pack has once again been hampered by stuttering performance.
‘There are some firms in the City with good names that are struggling and they are making cuts simply because they need to save costs.’
Simon Levine, DLA Piper
With Dentons and Squire Patton Boggs not featuring in the Legal Business 100 (LB100) this year after mergers shifted their centre of gravity away from the UK – between them taking over £2bn out of the list – total turnover of the UK’s 100 largest firms fell £450m, or 2%, to £20.19bn. This is the second consecutive year of falling revenue generated by the group.
However, those at the top of the food chain will be less concerned by headline numbers, following a relative return to form for leading UK firms striving to position themselves in the global elite. Average revenue per lawyer is up 1% to £325,000 while profit per lawyer is also up 1% to £103,000. More importantly, average PEP across the group rose 5% to £699,000, making full-share partners £32,000 better off.
But improved profitability has come at the cost of headcount. The number of lawyers employed across the top 100 firms dipped 3% to 62,214, while the number of equity partners fell 6% to 9,141. On a like-for-like basis, the top 100 is holding growth level, with no return to the period of easy growth. Further pressure has since been added to trim workforces, with firms having already begun looking at redundancies as real estate and corporate work dries up following the Brexit vote.
Simon Levine, co-chief executive at DLA Piper, says: ‘There are some firms in the City with good names that are, frankly, struggling at the moment, and they are making cuts simply because they need to save costs.’
A handful of City stalwarts suffered double-digit drops in turnover in 2015/16. Ashurst and Olswang lost £70.2m between them last year. Lisa Mayhew, managing partner of Berwin Leighton Paisner (BLP), which also saw turnover fall (see case study below), says the chasing pack have been worse hit by ‘major currency swings, which impact on results when you’re this size’. With the UK’s largest firms having substantial footprints in continental Europe and Australia, a weakening of the sterling, euro and Australian dollar against the greenback has handed more firepower to US rivals.
Red or black
DLA Piper tops the LB100 for the sixth year in a row, with revenue up 4% to £1.586bn. Although boosted somewhat by its large US business, global co-chair Juan Picón says a ‘shift in expectation levels’ has led to greater revenue being generated by each partner globally, with more cross-selling and more significant mandates. Levine adds: ‘Every practice across the international arm beat budget last year. I can’t ever remember that being the case.’
Most managing partners report turbulence in capital markets and a slowdown in transactional activity as early as autumn 2015. And while a number of firms that had slow years have been quick to blame Brexit, though the vote didn’t take place until after the end of most firms’ financial year, fears over the outcome did act as a brake on European real estate and corporate deals in early 2016.
Jeremy Hoyland, managing partner of Simmons & Simmons, which posted record turnover of £295.1m but saw PEP fall 10% to £584,000, says the firm’s London office had a flat year due to transactional activity ‘tailing off after Christmas’ due to the EU referendum. Echoing a trend across the market, though, Hoyland says Simmons had a ‘better performance in continental Europe and in Asia’. Nonetheless, Simmons became the first major firm to lay off lawyers in London following the Brexit vote this summer, with real estate and banking the worst-affected areas.
It was something of a revival for the £1bn club. Four of the seven UK firms generating over £1bn – DLA Piper, Clifford Chance (CC), Norton Rose Fulbright and Hogan Lovells – registered falls in revenue during 2014/15 but all recorded recoveries last year.
‘M&A had a good year. Really solid. People thought that would wane because of Brexit, but that wasn’t the case.’
Gideon Moore, Linklaters
The City’s big four global firms – Freshfields Bruckhaus Deringer, Linklaters, CC and Allen & Overy (A&O) – extended the gap over those below them. This gap can only widen further if the expectation of CC managing partner Matthew Layton that ‘growth in the Americas and Asia will be higher than what we’ll see in mature UK and European offices’ proves to be true.
These four firms had their strongest collective year since the financial crisis, with Freshfields and Linklaters finally passing their pre-crisis levels as all four hit record revenues. This saw Linklaters and A&O breaking the £1.3bn barrier for the first time, while CC recorded a double-digit percentage rise in PEP.
The contribution of these four firms towards overall revenues of the LB100 increased slightly, accounting for 26% of the pie in 2015/16 compared to 25% in 2014/15. Combined revenue rose 4% to £5.33bn last year, with average PEP across these elite firms increasing 5% to £1.33m. Freshfields, which had been slow to recover from the crisis, was the strongest year-on-year performer with a 7% rise in revenue to £1.327bn in what was its strongest showing for three years (see case study, above). Managing partner Chris Pugh says Germany was ‘fantastic’, boosted by a flood of Chinese investment bringing ‘a spike in deal mandates’. The firm’s contentious practice also ‘performed strongly’.
A significant factor in the group’s rebound was the return of major public M&A. At Linklaters and Freshfields, which both posted meagre 1% revenue rises in 2014/15, a surge in involvement on big-ticket deals pushed up the top line as brewer SABMiller picked Linklaters to handle its £79bn sale to Anheuser-Busch InBev opposite Freshfields, while BG Group chose Freshfields to handle its $53bn takeover by Royal Dutch Shell, which was advised by Slaughter and May.
Layton, meanwhile, notes: ‘Our litigation practice, which also covers regulatory investigations, had yet another successful year and our finance and corporate teams saw significant growth driven by transaction volumes and the work we did at the top of the market.’
A&O, however, having set the pace for the Magic Circle over the last five years, was on more subdued form. While revenue was up 2% to £1.31bn, PEP was flat at £1.21m. A&O experienced a slowdown in the second half of last year, and the firm has traditionally had smaller transaction and litigation groups than its rivals, which drove growth across those businesses. The firm’s recently elected managing partner, Andrew Ballheimer, said that ‘it’s now a very well balanced business’ following growth of its corporate and contentious practices. ‘If you have this hedged business, it should do well in most markets,’ he adds.
Rolling the dice
Four firms in the top 25 – Ashurst, CMS, BLP and DWF – posted falling revenue in 2015/16 compared to seven firms the previous year. And although Dentons, which agreed a remarkable six mergers last year to nearly double in size to £1.38bn, and Squire Patton Boggs, which generated £607m last year, are no longer in the table, their replacements in the top 25 put in strong showings.
Osborne Clarke continued its remarkable run with an 18% rise in revenue – the third-highest increase of the entire LB100 – to reach £178.6m. This means it has doubled its turnover in just five years on the back of a strategy that has seen it focus on high-growth sectors such as life sciences, renewable energy and digital business. UK managing partner Ray Berg puts it plainly: ‘Our clients have grown and we have obviously been active helping them through that.’
The likes of Eversheds, Bird & Bird and Pinsent Masons all experienced growth of over 5% following international expansion. Pinsents and Eversheds opted for growth in Germany, while Bird & Bird’s rapid up-scaling in Asia has started to pay dividends.
Little revenue growth can be attributed purely to higher billings. Bryan Hughes, chief executive of Eversheds, argues: ‘The market is set now, there is very little growth in terms of organic market growth – it’s not there, so you have got this continuous fight for market share.’
Richard Foley, senior partner of Pinsents, says: ‘Asia grew really well, up around 20%. Munich has had a really strong year again too. We have had good growth in the UK but growth outside the UK has been considerably higher and we expect that again.’
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Many law firm leaders point to shrinking legal panels as a chief motivator behind further consolidation, which has seen UK-based firms hire large overseas teams and boutiques, and they expect this to continue as organic growth becomes harder to find. Foley adds: ‘If you don’t have the scale to respond to those bigger panel opportunities then you find it difficult.’
But it is clear that while the top 25 UK firms have re-entered growth mode, rising costs in the home market, the Brexit vote and a slowdown in the deals market have dampened enthusiasm before it even got going. With most looking outside the UK for their growth, the weakening of the pound will undoubtedly lessen their global firepower in the medium term.
‘I don’t see the attraction of running a £400m firm at the moment. Bigger firms look unmanoeuvrable and overweight.’ Matthew Lohn, Fieldfisher
Freshfields’ Pugh, however, believes that the recent upheaval will reveal those holding all the chips. He concludes: ‘We’re well placed. We have a track record of being good when things get complex. That’s a way in which we come to the fore.’
tom.moore@legalease.co.uk
madeleine.farman@legalease.co.uk
Legal Business would like to thank Mason Hayes & Curran for its sponsorship of the Legal Business 100.
Further Reading:
- Case study: Berwin Leighton Paisner
- Case study: Clyde & Co
- Case study: Freshfields Bruckhaus Deringer
- LB100 Focus: Don’t look back in anger: Ashurst leadership tries to rally partners but the drift continues