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Maclay Murray & Spens' loss of private equity star Graeme Sloan to Latham & Watkins earlier this year was a major blow to the former's private equity ambitions, particularly in the crucial London battleground. But his departure is symptomatic of a wider malaise affecting any Scottish firm looking to play in the private equity market.
Sloan's exit was a graphic illustration of a trend that has been increasingly clear over the past few years: the shifting of the centre of gravity of the Scottish private equity market from its Edinburgh heartland to London. The question for Scotland's leading firms is no longer 'do they follow the clients?', but 'can they?'.
The issue is not about Sloan's exit or the departure of any one partner. Partners move all the time. What has changed in Scotland is the focus of the private equity houses themselves. The trend is for even the most Scottish of houses to spend the majority of their time foraging in and around London and the South East for deals as the larger mandates dry up north of the border.
In recent years 3i has closed its Edinburgh and Glasgow offices, although it maintains its presence in Aberdeen. Indeed, Scotland's northernmost city, with its market fuelled by corporate activity in its core oil and gas market, is an exception to the wider trend.
Away from Aberdeen, major local house Dunedin Capital is still headquartered in Edinburgh but is going much further afield for its deals and is increasingly working in England. According to Dunedin managing director Sean Middleton, around 60 per cent of its dealflow comes from London and the South East, a figure boosted by its acquisition of private equity business Sand Aire late last year.
"The Sand Aire acquisition was a logical extension of our current operation," says Middleton. "Advisers do like you to have an operation on the ground."
Elsewhere directors from Penta, a spin-off of Royal Bank Development Capital, are increasingly spending their days in London and, going back further, NatWest Bridgepoint pulled out some years ago. It is worth noting that Scottish Equity Partners, which is particularly active in the North of England, now goes under the decidedly unScottish-sounding name of SEP. The rebranding is interesting, as it was originally a spin-off of Scottish Enterprise, but is now appearing to distance itself from Scotland to widen its investment remit.
At a wider corporate level, the increased presence of Scotland's two big banks in the London market means their transactional teams are doing more and larger projects in London than in Scotland.
The move of the private equity houses away from Scotland's central belt raises questions about the sustainability of work levels in the Scottish market in the long term. It has not gone unnoticed by several of Scotland's largest firms. They have already changed their strategies to reflect the shift of some of their biggest clients. But that strategy requires either a lateral hiring programme or current partners, as in the case of Lathams' Sloan, being prepared to relocate down south.
Dundas & Wilson, Maclays, McGrigors and Shepherd & Wedderburn all now do their utmost to badge themselves as UK firms with thriving London offices. And all four have solid track records for deals both north and south of the border.
Shepherds, for example, is on SEP's panel and advised it on a £10m investment in Empower Interactive recently. The firm also showed its commitment to the Aberdeen market with the hire earlier this year of corporate finance partner Helen Dickson from the dissolving Ledingham Chalmers.
McGrigors, of course, picked up the bulk of Ledinghams' energy team this year (as first revealed by The Lawyer, 23 January) and has consequently entered Aberdeen in a major way, while Maclays (historically 3i's firm of choice) continues to win private equity work in the city.
Of the big four, only Dundas has set its face against opening in Aberdeen and has instead been busy promoting its London office for some time now. Its real push on private equity in the capital came last November, when it hired former Hammonds partner Simon Sale. The firm was looking for someone to ramp up its private equity offering in London along with David Davidson, a Scottish-based partner who spends two to three days a week in London. Since then former Hammonds senior associate Nadim Meer, who worked with Sale for seven years, has also joined Dundas.
Dundas's niche two-partner team acts for between eight and 10 houses, including Clavar Capital, Charlotte Ventures and Dunedin. Last month Dunedin invested £10m in Sale's client Etc Venues, instructing Keith Anderson of Dickson Minto on the deal.
Why is Dundas pushing its London presence now? "It's partly just natural growth in the corporate team," says Sale. "Basically we're all M&A lawyers."
In Scotland that comment is especially true of the firms outside the big four. Two years ago Brodies, one of Scotland's fastest-growing firms, hired private equity specialist Iain Young from Tite & Lewis. Young admitted that, while he was a specialist at his former firm, returning to Scotland meant a return to being a generalist.
"To be honest, the private equity market in Scotland isn't a distinct market in the way it is in London," he says. "There isn't enough private equity work for any practitioner to say he's a specialist. To be successful you need to be flexible and look further afield."
Biggart Baillie partner David Allan echoes Young when he says the firm is increasingly hunting down south for its deals. "Yes, we've traditionally done private equity work in Scotland and, in common with everyone else, we find there's less of it," he says. "If we want to hang on to that work we have to look south of the border."
Biggart Baillie, which counts Aberdeen Asset Management among its clients, only has offices in Edinburgh and Glasgow. Increasingly it will be forced to look further south, possibly to the extent of opening an office in London.
"Historically that hasn't been an option for fear of prejudicing relationships," says Allan. "That could change, but it's not on our agenda at the moment."
There is another way to tap the southern deals market without troubling to open your own office: merge. Henderson Boyd Jackson (HBJ) and Gateley Wareing's marriage has opened the Scottish firm up to a whole new market, as confirmed by Dunedin's Middleton. "The Gateley Wareing-HBJ merger is interesting. We've used Gateley Wareing in the past, but not HBJ," he says.
Now the newly merged firm will just have to wait and see if its bulked-up form results in bulked-up instructions.