Clifford Chance will need a canny strategy to maintain its PE funds credentials, says Catrin Griffiths
The timing was, perhaps, awkward. On Tuesday 7 June three Clifford Chance funds partners – head of group Ed Gander, Nick Benson and Nigel Clark – and tax partner Jonathan Kandel resigned en masse to London corporate head Simon Tinkler.
With Gander and Clark having booked holidays from the following Saturday (11 June) Clifford Chance’s management had to move very fast. It did not help that global corporate head Matthew Layton, the firm’s biggest private equity star, who has relationships with key funds on the transactional side, was away in Asia at the time. If the quartet believed they would have an easy exit to Weil Gotshal & Manges, they were swiftly disabused. The four were forced to resign again on Friday 10 June to David Childs, as per the partnership agreement.
Four gone conclusion?
According to several sources close to the situation, Clifford Chance threatened to sue them for breach of fiduciary duty.
“If there’s one thing CC can’t stand, it’s team moves,” observes a City funds partner.
“I suspect Clifford Chance will take a dim view of this, or any group of partners will go,” says one of the many former Clifford Chance lawyers who have been watching the story unfold. “They have a duty to the firm and to each other. I think it’s a disgrace.”
Sources within Clifford Chance say the firm’s priority is to ensure a proper service to clients without having to resort to a heavy-handed response.
“In the immediate aftermath people react emotionally, but that’s not the time to make decisions,” imparts one insider, who notably does not rule out the possibility of action against the four.
However, a muscular response underlines Clifford Chance’s biggest fear, which is seeing an entire practice walk out the door. Particularly when the funds group’s biggest current deal is the fundraising for Apax VIII, which is aiming for e9bn (£7.92bn), according to a report in The Wall Street Journal in May this year.
Indeed, in the short term it is all about servicing Apax. Both Gander and Benson have been working on the mandate for around eight months, with around another year and a half to go before final close. That deal is at a critical stage, with the documents about to go out to investors for negotiations.
The Apax relationship has been the source of some friction within the funds group. Clifford Chance may be keen to continue on that transaction as much as possible, but the client means a lot to both Gander and Benson – particularly Gander, who pitched for the deal back in 2010 without bringing the then practice head Jason Glover in the loop. Glover – the best-known City funds lawyer by a country mile and certainly the biggest rainmaker in the sector – left for Simpson Thacher & Bartlett six months after that Apax pitch. It was not directly causal, but three sources confirm that the relationship between Gander and Glover had to be smoothed out, with Layton being brought in to calm tempers.
One Clifford Chance lawyer sees Gander’s Apax pitch as an excusable moment of enthusiasm to make his name.
“Jason was such a big personality in the group that Ed [Gander] felt it was difficult to build up a client following,” says the lawyer. “If Jason had gone to the pitch, he’s such a strong name in the market everyone would focus on Jason in the pitch, so Ed felt he wanted to try to lead it himself, which included not involving Jason initially.”
With Gander having established his rainmaker credentials on winning Apax, he was a natural choice as Glover’s successor when the latter resigned for Simpson Thacher last June. Although only four or so years into the equity, it was clear that Gander had the ambition to lead the group rather than Nigel Hatfield, who was the most senior remaining funds partner but who had no desire to become involved in management.
Small wonder that just a year on from Glover’s departure the quadruple exit has created turmoil in the corporate department, as one Clifford Chance insider acknowledges. “When these people say they’re committed to the firm,” says the source, “and within 12 months of Jason going out the door those same people leave, you get very annoyed about it.”
But this is not just about partnership loyalty, although that, too, is a major factor. And it is not just about Apax either, although Clifford Chance will have its work cut out keeping the client in the long term, since Gander’s number two on that deal is Benson, who will also be joining him at Weil.
Funds work has been in the doldrums in the past couple of years, with global private equity fundraising in 2010 falling to a six-year low, according to data provider Prequin. Private equity fundraising worldwide slumped to $225bn (£138.59bn) from $295.9bn in 2009 for completed fundraisings last year, the lowest since 2004, when firms raised $210bn compared with the 2008 record of $666.5bn.
However, 2011 looks brighter for funds lawyers, with predictions that fundraising will touch $350bn this year.
There is, then, some urgency at Clifford Chance to get a team in place and to make sure it does not anger clients by running a difficult handover.
“If you’re in the middle of a fundraising it’s very difficult to move as it creates confusion,” says one City funds partner.
Clifford Chance will almost certainly have to revert to the model it used when Glover resigned. When he announced his departure in June 2010 he was in the middle of a major fundraising targeting e6bn for BC Capital Partners – a client he had just won from Linklaters. Rather than putting him on gardening leave Clifford Chance obliged Glover to work his notice – or rather put him “under house arrest”, as one funds lawyer quips – while the firm also put Benson on the deal as his number two. It is unclear whether Clifford Chance will require both Gander and Benson to continue working on the Apax deal, but Hatfield will certainly be put on that transaction on the Clifford Chance side.
Hatfield, the reluctant manager who is universally regarded as a class act by other funds lawyers, will become key to shoring up any fightback by the magic circle firm, as Clifford Chance’s Layton freely acknowledges.
“It’s always disappointing when partners decide to pursue their careers elsewhere,” says Layton, “but our funds practice globally and in London is well-established and we’re taking the steps necessary to rebuild and strengthen our resource in private funds under Nigel.”
Yet Clifford Chance is now confronting what SJ Berwin has had to face for years – a direct challenge to its business by firms that are potentially better placed in an evolving market. It was, of course, SJ Berwin, and particularly current senior partner Jonathan Blake, that invented the market in the 1980s and ’90s – so much so it had virtually no competition.
“SJ Berwin was a monopoly supplier back in the earliest days and it was a bit like British Telecom – all the lawyers would work immensely hard but with no supervision,” remembers one lawyer fondly of those early buccaneering years. “Everyone was really busy, but the product was shockingly bad – it was late and over budget.”
As the market evolved SJ Berwin became a dominant force, particularly in mid-market fundraising. And despite strong practices at Ashurst and Macfarlanes, Clifford Chance was its only serious competitor for years until the magic circle firm began to take the lead in the early years of the last decade, when it started cornering the market in mega-buyout fundraisings.
“There’s been a big set of changes, because most PE [private equity] houses went through generational shifts,” explains a magic circle partner. “The PE industry was mostly set up in the ’80s and ’90s and those guys ran the houses till the recent credit crunch. This has been significant for lawyers, as the internal leadership had changed and that’s been shaking up a lot of advisory relationships. So it’s a chance to lose a client and to win a client.”
SJ Berwin, which had lost pole position to Clifford Chance at the beginning of the last decade (in recent times it has lost Apax, Barclays Private Equity, Bridgepoint, Permira and Triton), was damaged further by a series of partner defections. In 2004 John Daghlian left for O’Melveny & Myers, keeping hold of the Coller Capital work (Coller subsequently bought a majority stake in Bank of Scotland’s private equity business in July 2010). Mark Mifsud, Richard Watkins and Justin Dolling moved to Kirkland & Ellis in January 2007), giving CVC Capital Partners even more reason to continue using Kirkland on its European deals. The team also took the Terra Firma relationship with it, acting on the e5.5bn raising for Terra Firma Capital Partners III that same year.
O’Melveny and Kirkland were not the only major players in the US funds market that were bulking up in London. Debevoise & Plimpton, which advises Doughty Hanson & Co and Exponent Private Equity among others, had hired Marwan Al-Turki from Baker & McKenzie in 2003 and Freshfields Bruckhaus Deringer veteran Anthony McWhirter in 2007, as well as shipping over one of its acknowledged stars from home, Geoff Kittredge from the US. And, of course, there was Simpson Thacher’s star hire of Glover in 2010, who brought EQT, BC Partners and Actis among others to the Wall Street firm.
This left Weil trailing its key competitors just as the US firms were dominating the post-crisis mega-fundraisings. Yet although Weil was consistently seen on big deals in the US – it advised on the Lindsay Goldberg III fund, which raised $4.7bn in the second quarter of 2009, for example – it was still understocked in London, despite years of trying. Small wonder that this was becoming a strategic priority, acknowledge Weil sources, who point to corporate head Barry Wolf as the main champion of investment. (Wolf started his career as a funds lawyer, so the mission may have carried an extra personal charge.)
“We’ve got the market-leading fund formation teams in the US and Asia and we’re at the top of the transactional market in the UK and across Europe,” states Weil London managing partner Mike Francies. “Recruiting a top UK funds team has been on our wish list for years and we’re absolutely thrilled to have achieved this now.”
Indeed, there is clear evidence of a wider structural shift towards the US firms for this work: more than 50 per cent of the money raised for European funds is out of the US, note funds specialists.
“It’s an increasingly regulated market in the US and what’s needed is not just knowledge of the law, but how to operate within that law, so an extensive US practice is increasingly important,” says Simpson Thacher’s Glover.
“If I was a funds lawyer I’d go to a US firm, so it’s a completely logical move,” agrees one high-profile private equity partner at a City firm. “Particularly with Weil – it gives them a nice proposition to get them into M&A work.”
It has not gone all the US firms’ way, though. Clifford Chance New York partner Roger Singer is rated, although the firm’s practice in the US is small. And it was Linklaters partner Jonathan de Lance-Holmes who captured Cinven off Ashurst’s Jeremy Sheldon last year (Sheldon has since retired), while Linklaters partner Scott Bowie is seen as an enormous asset in that market.
However, the US onslaught is not over.
“Weil certainly won’t be the first and won’t be the last,” says Glover. “There are other US players out there looking for the leading funds players. In five years’ time I’d predict that US firms will have a pretty significant share of the European buyout market, with one caveat – I do think that whether or not SJ Berwin is able to merge with a US funds player is significant.”
So how much work can Clifford Chance realistically hope to hang on to? That topic dominated conversation among funds lawyers and professionals last week, and reactions are mixed.
One funds investor contacted by The Lawyer hails Weil’s hires, saying: “As a statement by them it’s really impressive. It’s really putting a stake in the ground.”
However, another is less convinced. “We’ll not go to Weil,” he states flatly. “I suppose one would look to the US firms, but it’s not clear at the moment – it’s in contemplation.”
“It’s obviously very significant for Clifford Chance, who’ve lost a significant part of their practice,” comments Macfarlanes funds partner Bridget Barker. “It’s a great fit for Weil Gotshal.”
Others are sceptical that Gander’s team can scoop all the clients. “It’s easy to underestimate how loyal clients are to the brand,” muses another City funds partner. “There’s a security fact about having CC stamped on your PPM [private placement memorandum].”
A third partner agrees, commenting: “As long as the resource is competent they don’t need a finder, because the institution will bring in work.”
Clifford Chance is undoubtedly emphasising the global aspect of its business. “The funds market is a truly global practice, with investors in the growth economies – particularly Asia – becoming increasingly important,” insists Layton. “Bringing together leading expertise and skills in relevant areas on a global basis, including tax and regulation, is key.”
Indeed, the institutional relationship was certainly strong enough with Duke Street, which opted not to follow Glover to Simpson Thacher but stay at Clifford Chance.
Hatfield’s longstanding involvement with Barclays Private Equity, particularly on the real estate funds side, gives Clifford Chance the upper hand with that client. 3i, which market sources predict may raise a fund early in 2012, will be a key battle; Hatfield has led the Clifford Chance relationship there. Last week Permira announced its intention to raise a e6.5bn fund, and its work is currently split between Fried Frank and Clifford Chance.
However, Gander is in a good position to import Bridgepoint, a relationship he has led since the fund moved to Clifford Chance from SJ Berwin in 2008. He is also the point man for Triton.
Fox in the box?
Clifford Chance will need to recruit, or promote internally, fast. Senior associate Stephen Fox is touted by some as an obvious internal promotion, notwithstanding his close personal relationship with Gander, who was best man at Fox’s wedding.
The external recruitment option is arduous, particularly since the US firms can offer more money.
“The problem in the marketplace is that there are too many firms chasing too few top-notch lawyers,” says Glover.
Partners Nigel Van Zyl of SJ Berwin, Matthew Judd of White & Case (and formerly of Clifford Chance), Solomon Wifa of O’Melveny & Myers, Piers Warburton of Ashurst and Blair Thompson of TDR Capital (and formerly of SJ Berwin) are all obvious targets for the headhunters. Of course, they may be difficult to prise out and Clifford Chance will have to work hard on its sell. And it will need to; for Hatfield to save the practice single-handed may be a bit too much of an ask.