The private equity funds market in London has been raided and invaded by US firms of late, so what has been the impact?
The past few years have not been exactly kind to the private equity market, with little sign things are picking up much after the 2008 crash. A recent report by Preqin shows the number of funds seeking investors dropped in the past year, although the amount of money raised is slowly climbing (see chart below).
Despite the failure of the market to substantially revive, the same few years have seen great activity by US firms launching private equity funds practices in the City. Among those to have hired partners from some of the big UK players are Debevoise & Plimpton, Kirkland & Ellis, O’Melveny & Myers, Simpson Thacher & Bartlett and Weil Gotshal & Manges – all seeking to establish themselves as credible funds players in London.
“There’s a surprising focus on hiring private equity funds partners, bearing in mind that the legal service market is a lot smaller than it was,” says O’Melveny & Myers investment funds head John Daghlian, who was one of the first to make a move to a US firm.
Michael Halford, London head of SJ Berwin’s international funds group, agrees things have got a lot more competitive recently.
“The backdrop to this is that there are new firms opening up, but equally the fundraising market itself has been tough since the financial crisis,” Halford says, adding that there is a “flight to quality” among clients.
Align of vision
Simpson Thacher partner Jason Glover thinks the move-in by US firms represents a shift in strategic thinking by firms and a desire to move away from only offering private equity deal advice.
“Historically, law firms focused on capturing the dealflow from private equity; they’ve realised that strategically they’re not very well placed if they see the most critical thing to a business’s long-term existence being done by somebody else,” says Glover. “There’s a desire to align strategic importance with their own practice.”
Glover also points out that for a firm, private equity funds work can be a solid source of revenue even in a downturn and can provide access to the very best clients.
“Because the fundraising market is difficult it’s requiring the most senior people in private equity houses to be involved in these fundraisings – to have the legal role in that gives you as a firm exposure to the top people in an organisation and that’s important,” he stresses.
Glover says the long tail on private equity funds is another draw.
“As a work product it’s pretty attractive because, unlike transactional work, with funds you have long-term visibility, which means you can plan and anticipate revenue streams quite a long time ahead,” he says. “In a volatile market, for a law firm to have a stable income stream is quite helpful, and a funds practice can provide that.”
He goes on to say that regular income from servicing funds adds to this steady flow of income.
Proskauer Rose partner Nigel van Zyl says the globalisation of the industry has had an influence.
“The younger generation of funds lawyers and partners have decided they can better serve their clients from a global platform,” he says.
According to van Zyl, clients appreciate the knowledge and data-sharing that happens between lawyers in one firm’s international offices.
Travers Smith’s investment funds head Sam Kay concedes that the pool of possible referral partners for firms without a global presence has shrunk in the past few years, but is not too concerned.
“We need to instruct US firms to assist on certain funds jobs,” he says. “I don’t think that’s a bad place to be. It means you can be quite careful who you choose to get the right quality of advice.”
Halford is also sanguine about the increase in US competitors in London and the fact that SJ Berwin does not have US offices of its own.
“The US part of doing a European private equity fund isn’t that significant,” he argues. “Most of our lawyers know what the issues are because the same ones come up time and time again.
“What we’ve started to see is that it’s a big advantage not being part of a US law firm. We’re in a strong position to see lots of approaches being taken to new laws and give to our clients an overall view from London as to which is best. We’re also in a position to pick the right US law firm for the client.”
Despite the US players moving in there has been little division in the market between these and the UK outfits that used to be the main funds advisers when it comes to the type of client being represented. Almost all firms act for both general partners (GPs, or the investment firm itself) and limited partners (LPs – the investors).
Van Zyl says LPs form quite a large part of the Proskauer practice, with the firm closing more than 1,800 investments with a collective value of $61bn (£38bn) between 2007 and 2011. However, the firm also has 350 GP clients on its books and is picking up more work in the secondaries market too.
“We see a high percentage of the market,” van Zyl says. “One of the key things our clients want is to know we have a good understanding of the market.”
Daghlian paints a similar picture of O’Melveny’s funds practice, saying approximately 50 per cent of it comes from GP clients, 20 per cent from LP clients and the remainder from secondaries.
“Our mix gives us a great overview – you get to see what everybody else is doing,” he says, adding that he cannot see the secondary market slowing down soon.
Halford says his impression of the market is that it varies, but he too describes SJ Berwin’s funds practice as having a mixture of large GP clients, some LPs and secondaries work.
At Travers Smith, Kay reveals the firm advises a mix of GPs and LPs, with the main focus on mid-market GPs.
“That hasn’t been affected much by the American firms that have moved in,” he says. “The GPs in the mid-market still tend to prefer UK firms.”
One of the few firms that does not split its practice is Simpson Thacher, which acts only for GPs.
Glover argues that it is difficult to advise both GPs and LPs.
“We’ve always taken a principled view on this,” he says. “If you’re acting for an investor one week, how do you act for a GP the next week with that investor on the other side?”
He suggests that GP instructions are the more sought-after, although LPs can provide a good ‘in’ to a fund and still give a firm the necessary exposure to a desirable client.
“What you tend to find is if people can’t capture the GP mandate, rather than not act for a fund at all they’ll take a role acting for an investor,” Glover adds.
Yanks a lot
One thing seems clear – whatever the client base of the firm, funds partners believe arrivals from the US will continue, either as a courageous move to pick up a little bit of what European private equity work there is or as a defensive move to safeguard client relationships.
The challenge for any incomers now is finding the right partner to kick-start the practice, although anecdotal evidence from lawyers indicates recruiters are still making calls even to those who have already moved from a large UK funds practice to a smaller US team.
“It never ceases to amaze me when I hear of another US firm seeking to set up a funds practice in London – it’s a limited market,” says Halford.
The advantage will be in the hands of the most-established firms, believe many.
“Clients are quite loyal to firms and the high-quality firms that have lost people will continue to do well,” says Glover, although he does add that the City funds market as it stands is probably too crowded.
“If you take a step back, historically I’d have said the market was served by 10 firms, now it’s being serviced by 20. Is that sustainable? Of course it’s not. Some existing practices will find it difficult to continue in their present form.”
For now, however, there is little sign of anyone trying to withdraw from the market. The firms that have lost people have made efforts to rebuild their teams and are bullish about the situation; Halford, for example, points out that SJ Berwin’s funds team remains one of the largest and busiest in the City, with 25 partners.
Although the fundraising market is tough for some, with funds taking longer to close, there is definitely still work out there and people wanting to do it.
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Notable private equity funds hires by US firms in the City
January 2004: SJ Berwin private equity partner John Daghlian leaves for O’Melveny & Myers
January 2007: Kirkland & Ellis picks up SJ Berwin funds formation partners Mark Mifsud, Richard Watkins and Justin Dolling
July 2007: Anthony McWhirter moves from Freshfields Bruckhaus Deringer to Debevoise & Plimpton, joining Marwan al-Turki who joined from Baker & McKenzie to set up the practice in 2003
July 2010: Clifford Chance London private funds head Jason Glover leaves for Simpson Thacher & Bartlett
June 2011: Clifford Chance partners Ed Gander, Nigel Clark and Nick Benson are hired by Weil Gotshal & Manges to set up a fund formation practice
July 2011: Nigel van Zyl and Oliver Rochman leave SJ Berwin for Proskauer Rose in London; Proskauer also hires Kirkland’s Kate Simpson
January 2012: Simmons & Simmons partner Noel Ainsworth is hired by Morgan Lewis & Bockius
February 2012: White & Case funds head Matthew Judd quits for Ropes & Gray
March 2012: Proskauer Rose partner William Yonge joins Morgan Lewis