Can Freshfields’ young guns retain the Magic Circle firm’s private equity crown?
Freshfields Bruckhaus Deringer’s youthful private equity team are on the frontline of the struggle between UK and US law firms to control the City legal market.
The firm has led the European private equity deal rankings for the last three years, seeing off the challenge of both Magic Circle and US rivals.
However, the shock exits of star partners David Higgins and Adrian Maguire over the last two years to aggressive, big-spending US firm Kirkland & Ellis leaves the practice in the hands of an unusually young team.
Financial sponsor co-head Charles Hayes (seated left) made partner in 2016, Victoria Sigeti (standing right) in 2015, James Scott (right) in 2017 and Tim Wilmot (left) in 2010.
Can Freshfields’ young pretenders keep the firm on top of the European private equity pile? Or will the firm follow previous UK buyout champions into mid-table mediocrity?
A City institution
Freshfields is a City institution. It has acted for the Bank of England since 1743, counts Barclays, HSBC and JP Morgan as clients and its corporate practice remains one of the dominant forces in UK and European mergers and acquisitions (M&A).
Hayes argues that these longstanding institutional relationships, allied with the firm’s geographical spread and deep expertise in practice areas such as financial regulation and healthcare, gives the firm’s private equity team an edge in a cut-throat market.
“We are permanently aware of the need to remain competitive, both in terms of the war for talent and in terms of the clients we act for, and we don’t take any of this for granted – but we do think that we’ve got something a bit different,” Hayes says.
“By virtue of acting for all the big pharma that we have one of the world’s leading healthcare practices, its by virtue of acting for the Bank of England and some of the world’s leading financial institutions that we have one of the best financial regulatory practices in the world.
“Clients continue to look at those areas of expertise as being market leading,” he says.
Over here
The threat from US market entrants to Freshfields and its Magic Circle peers is very real.
The likes of Weil Gotshal & Manges, Latham & Watkins and Kirkland have targeted the lucrative London private equity market, ripping lawyers and market share from the incumbents.
Kirkland has surfed a wave of private equity cash to emerge as the world’s richest law firm, using its resulting financial firepower to build a formidable London buyout team.
The Chicago-headquartered firm has hired a group of hungry young private equity partners from the Magic Circle, including ex-Linklaters’ partners Roger Johnson, David Holdsworth, Stuart Boyd and Matthew Elliott.
Read more: Inside the US law firm building the most expensive team in UK legal history
The prized scalp of Higgins, on a reported $10m (£7.8m)-a-year deal, and the subsequent poaching of Maguire, has given Kirkland the older heads needed to consolidate its market position.
Data from Mergermarket shows Kirkland is leading the way this year on European private equity deals by value, acting on 52 deals valued at €45.1bn (£39bn).
Freshfield is in third spot behind Linklaters, acting on 49 deals valued at €37.5bn.
If Kirkland can hold onto its lead, it would mark the first year since 2015 that Freshfields has not topped the European private equity rankings.
European private equity advisory rankings year-to-date
| Firm | Value (€m) | Deal Count |
| Kirkland & Ellis | 45,144 | 52 |
| Linklaters | 42,215 | 53 |
| Freshfields | 37,491 | 49 |
| Latham & Watkins | 36,845 | 48 |
| Allen & Overy | 36,308 | 66 |
Source: Mergermarket
Fergie time
Reminiscent of Sir Alex Ferguson’s mantra that no player is bigger than the club, Freshfields’ partners stress the wide, institutional nature of their client relationships, which they suggest will not be damaged by one or two high profile exits.
“Of course it’s a blow…but there are people to fill that gap,” Wilmot says.
“We very much see ourselves as custodians of these relationships for the firm – for now and for the next few years – but none of us are under any illusions that they are our personal relationships,” Sigeti says.
“It’s not like we’re a barristers chambers where you have got one QC and it’s all about the experience and the advocacy of that QC, we are a team – and on the big, complex deals where you are mobilising tens if not hundreds of lawyers, you are as strong as your weakest link,” Scott says.
This philosophy is at the heart of the clash between the Magic Circle and the US firms.
Read more: City’s elite Magic Circle law firms under pressure from expansion of US entrants
Magic Circle firms operate lockstep models, with pay based on seniority, while most US firms use a merit-based pay system.
The theory behind lockstep is that partners will act in the best interests of the client, rather than jealously guarding relationships, giving clients’ better service, and making it more difficult for partners to take relationships with them if they leave.
However, the rich rewards dangled by the US firms have seen a steady stream of partners leave to take the US dollar and led to a move away from pure lockstep at the Magic Circle as they work out how to keep their leading lawyers.
Last year Freshfields revamped its lockstep to give top partners the opportunity to earn up to £3m per year, and there are reports that the firm is mulling further changes to its model.
However, discussion of lockstep is above the (admittedly high) pay grade of the firm’s private equity team.
“We’re not allowed to talk about that,” Hayes says.
America first
While the US firms have made headway in London, the UK elite have found it tougher to break the lucrative US market.
Allen & Overy’s recent failed merger with US firm O’Melveny & Myers was one attempt by a Magic Circle firm to improve its stateside prospects.
Freshfields has taken a different tack, announcing on Friday the hire of a four-partner team in New York from US firm Cleary Gottlieb led by rainmaker Ethan Klingsberg, whose clients include telecommunications giant Verizon Communications and Google owner Alphabet.
The highly regarded team, which includes a private equity element, was almost certainly brought in on an above lockstep deal, essential for hiring top talent in the competitive New York market.
Speaking before the hires were announced, Hayes argues that while a strong US practice is essential for the firm, it is not necessary for Freshfields to have a top-tier private equity practices on both sides of the Atlantic.
“For the business we do on our platform, do you necessarily need to have a massive private equity business in New York? Well I think where you need to start is by making sure you’ve got the other things that support your business.
“So it’s the regulatory practice, it’s the US debt financing, we’ve just got the former head of Cfius [Committee on Foreign Investment in the United States] Aimen Mir, we’ve got the civil litigation, we’ve got the antitrust. So when you ask what do you need in the US from a private equity perspective, you actually need to approach the topic from a slightly different perspective,” he says.
Theory of evolution
Freshfields success or otherwise in retaining a dominant position in European private equity, rests on the shoulders of its young partner team.
Hayes says the firm has recognised the continued growth of private capital and is willing to do what it takes to support the practice
“The firm has recognised that it has on its platform a business that is well poised to take advantage of that shift towards private capital…the firm has shown itself very willing to support our group and invest in us,” he says.
However, broader strategic questions – lockstep, US strategy – faced by all of the Magic Circle firms, remain unanswered.
Whether the firm can evolve to meet these challenges will play a major part in the team’s drive to stay at the top table of European private equity.
Whatever happens, Hayes says, “ it’s still Freshfields”.
Picture credit: Greg Sigston