Lawyers are a pessimistic bunch by nature and, with the big four Magic Circle firms posting another year of solid but unspectacular revenue and profit per equity partner (PEP) growth, the consensus view is that 2018/19 could have been a lot worse.
Amid a wider slowing of the UK economy and Europe’s deal markets in the face of Brexit and a range of cross-border headwinds, the City’s big four international players posted another year of the moderate results that have defined their post-banking-crisis form.
Linklaters led the pack, posting a 7% uptick in revenue to £1.629bn and a 10% rise in PEP to reach £1.7m. The latter result, making Linklaters alone in achieving double-digit PEP growth, will be welcome, given its lagging position in its core peer group last year when it saw only a 2% rise to push its PEP to £1.54m.
Freshfields Bruckhaus Deringer matched its 5% revenue growth of last year, adding £70m to its top line to reach £1.472bn, but failed to sustain 2018’s 12% PEP hike. Partner profits increased 6%, bringing PEP to £1.839m, while net profit edged up 1% to £688m. One highlight was the private equity practice, with the global financial investors group commanding double-digit growth to generate 16% of revenue.
This is the first set of results underpinned by changes to Freshfields’ lockstep ushered through in late 2017, although the effect is unlikely to play out fully for another three to five years. Senior partner Edward Braham struck an upbeat note: ‘We had a very good year. Revenues are up, profits are up. Confidence and morale are good.’
Meanwhile, Clifford Chance (CC)’s managing partner Matthew Layton highlighted his firm’s performance over the previous four years after CC posted a 4% revenue uptick to £1.693bn and a profit pool up by 2% to £637m in 2018/19. PEP inched up by 1% to £1.62m in the context of increasing partner ranks by four to 562 and equity partners by two to 394.
The results are more subdued than 2017/18, when CC led the pack to report the highest revenue of the group, with a 5% income hike to £1.623bn, and a PEP surge of nearly 16% to £1.596m.
On Layton’s four-year benchmark, CC can point to a respectable 25% increase in revenue, with PEP up 45%, since the introduction of his global strategy in 2015, built around three key pillars – bringing CC together around key client relationships, creating an inclusive culture and focusing on tech. Successes have included reducing the firm’s reliance on banks, with revenue coming from alternative financial investors increasing by 20% to about £525m in 2018/19 – 31% of the firm’s turnover.
Revenue from bank clients now accounts for 32% of billings compared to about 50% ten years ago, with corporates bringing in the remaining 37%. ‘We have worked hard to see that balance shift,’ said Layton. ‘I would expect financial investors to continue to move up. A third each is the right balance.’
Allen & Overy (A&O) for a second consecutive year fell short of its standout performance in 2016/17, when it sent PEP surging 16%. A 5% revenue uptick which added £75m to the top line to £1.627bn was accompanied by 8% growth in profit before tax to £708m although PEP rose just 1% to £1.66m amid a 2.4% increase in headcount.
Managing partner Andrew Ballheimer summed up the 12 months’ trading: ‘Volatility, trade wars, Brexit and Trump notwithstanding, it’s been a good financial year. Each of our practice areas are in the top ten in terms of work and economically.’
Ballheimer said that deal activity has been solid but was uneasy on the market outlook. ‘Threats are out there. Brexit will be priced into the market for the next eight to ten years. With the election pending in the US as well, there will be no clarity for a while.’
Ballheimer was more upbeat about the potential of the Asia market, highlighting the launch of Peerpoint in Asia-Pacific. He says the firm’s advanced business areas including Peerpoint, aosphere, and Fuse, as well as its consulting business, have been highlights, with the group increasing revenue by 20%.
But despite grinding out another year of respectable growth, the Magic Circle is facing the challenge of competing against fast-expanding US rivals while Brexit looms over the UK economy. The 2019/20 year will also see the City elite wrestle with rising costs, thanks to a string of dramatic pay rises for associates that have sent starting pay above £100,000, a trend set by Freshfields in May and followed by the rest of the Magic Circle.
nathalie.tidman@legalease.co.uk
The City’s big four – 2019 and 2009
Revenue:
PEP:
All percentage changes are from the previous financial year (ie percentage change from the 2017/18 results to the 2018/19 results)