Hi-Ho silver

The past 12 months have seen continued growth from silver circle firms and they are more than confident of riding out any corporate downturn

Last year in The Lawyer UK 100 Annual Report we identified a new group of firms. Smaller than the magic circle, and indeed some of those outside the magic circle on gross fees, they were nevertheless outperforming the majority of their peers when it came to average profit per equity partner (PEP) and revenue per lawyer (RPL).

Branded the ‘silver circle’, the group included Berwin Leighton Paisner, Herbert Smith and Slaughter and May, but the four core firms were Ashurst, Macfarlanes, SJ Berwin and Travers Smith. Each had achieved consistently high PEP results, with margins of no less than 36 per cent (in the case of Macfarlanes it was 50 per cent); and each was distinguished by a client base that was primarily UK-based, as opposed to running a practice dedicated to servicing global institutions.

The latter is of course open to debate – indeed, Ashurt managing partner Simon Bromwich contends that his firm does not belong in this peer group at all. He argues that Ashurst, which derives around a third of its revenue from overseas, should be ranked in what he describes as a “group of seven pre-eminent, world-class, UK-based law firms”. Whether Ashurst deserves to be considered in the same peer group as the magic circle, Slaughters and Herbert Smith (Bromwich’s preferred grouping) is also open to debate. Quibbles aside, this year offers the first opportunity to assess how the core band of firms fared in 2005-06. To see if any fell away in the white-hot pace of a bull market, or if any new firms had performed well enough to justify their inclusion. And, as with the magic circle last week, The Lawyer has taken the opportunity to look at the six-year figures and compare the four firms’ performances.

Consistent performers

The striking thing about this group is not only its performance in the past 12 months, but its consistency over the past six years. Unlike Allen & Overy, which as reported last week (‘Out of Order’, 7 August) has lost ground to its magic circle rivals since 2000, all four silver circle firms have performed well over the same period (notwithstanding dips in 2003 and 2004).

In the past 12 months the PEP at Ashurst, Macfarlanes, SJ Berwin and Travers Smith grew by 23.6 per cent, 17 per cent, 23.7 per cent and 22.5 per cent, respectively. The respective PEP growth since 2000 is 28.6 per cent, 80 per cent, 27 per cent and 66 per cent. The already high margins have improved all round, except for Macfarlanes, which would really have to go some to beat last year’s 50 per cent. This year it stayed the same, while Ashurst rose to 43 per cent, SJ Berwin climbed to 46 per cent and Travers posted an incredible 52 per cent.

Similarly, the growth in total revenues among these four firms is consistently high. Although Ashurst had the poorest year in revenue terms last year, up by just 6 per cent from £201m to £214m, over the past six years the firm has grown its turnover by 64.6 per cent. Macfarlanes grew revenue by 21.6 per cent last year and 87.5 per cent since 2000, while Travers added 25 per cent to its revenue last year and 84 per cent since 2000. SJ Berwin has provided the best top-line growth, with a revenue hike of 27 per cent on last year and a phenomenal 114 per cent since 2000.

More illuminating is the RPL and the revenue per partner (RPP) figures. Most managing partners and finance directors view these figures, which are less open to accounting manipulation, as more trustworthy indicators of performance than PEP.

Here Macfarlanes wins hands down with an RPL of £443,000. That compares well with Slaughter and May, which had an RPL of £557,000 last year (of the magic circle firms, Linklaters performed best here with £451,000). But Travers, that deal-doing boutique par excellence, is not far behind with a figure of £383,000, which bests both Ashurst’s £357,000 and SJ Berwin’s £338,000.

The £1m RPP is another key benchmark, and all four of the silver circle firms make it with room to spare. Ashurst comes top of this league with an RPP of £1.41m. But the firm is also the only silver circle outfit to post a reduction (of 8 per cent) in RPP over the six years. In contrast, SJ Berwin is up by 20 per cent since 2000, Travers is up by 49 per cent and Macfarlanes by 50 per cent, from £923,000 to £1.38m. The figures suggest that Ashurst’s merger flirtations with Fried Frank Harris Shriver & Jacobson, a disruptive influence at any firm, and its investment in overseas offices had a dampening effect on the numbers.

The corporate boom influence

Ashurst’s blip aside, there is no surprise that the corporate-heavy firms in the silver circle have done well out of the corporate boom. But how sustainable are those performances?
Of the four firms, Travers is the most vulnerable to a downturn – that would be the case with any firm that has more than half of its revenue derived from corporate. Travers’ figures for the years between 2001 and 2004, when turnover barely changed and PEP fell from £515,000 to £390,000, highlight just how dependent it is on a healthy dealflow.

Equally, though, its rebound in the past two years, when PEP almost doubled from £415,000 to £705,000, proves the upside can be pretty good too. But the firm’s disarmingly candid managing partner Chris Carroll admits that Travers is a cyclical business. With Travers, it is feast or famine. But as Carroll points out, when the downturn comes, a lot depends on what sort of downturn it is: “The last downturn was City and financial services-focused, so deals dried up. But it was not a recession. A recession throws up other opportunities for law firms.”

SJ Berwin senior partner Jonathan Blake reveals that, during the week in which this article was being written, the firm’s partners had been discussing precisely how a downturn would affect his firm.

“We had a discussion on this very topic yesterday [8 August] at the senior partner’s lunch,” says Blake. “Our conclusion was that we were pretty well hedged. I think the private equity work we do positions us differently from other firms. Private equity funds are continuing to raise vast amounts of money and, despite the fact that prices might become cheaper, there’s no logic at all [to the view] that deals are going to stop. A downturn is all about confidence, not about logic.”

Blake argues that the differentiator between the downturns of 2002 and 1992 was private equity. “We don’t find corporate to be particularly cyclical,” he says. “In a downturn our corporate department hasn’t fared badly. Why? Our corporate department is heavily into private equity and this area is more confident. They’re not going to suddenly stop doing deals just because the prices are cheaper.”

SJ Berwin, like Ashurst, can also point to its overseas offices as a potential source of growth should the deals start to dry up in London. “The Continental offices were more profitable than London last year, despite London having its best year ever,” says Blake. “They’re certainly not dragging us down. And this was unexpected. We wanted the Continental offices for additional credibility and reach and to generate deals for London. The profitability was a double benefit.”

International reach is not a resource either Travers or Macfarlanes can rely on, nor one which either is currently likely to seek. Corporate continues to dominate Macfarlanes’ practice, with a major highlight last year being Pernod Ricard’s £7.4bn takeover of Allied Domecq. In total Macfarlanes was involved in more than 70 completed transactions last year with an aggregate value in excess of £24.6bn.

Corporate, at £46m, represents more than half of Macfarlanes’ turnover. But since 2000 the firm has shown itself adept at growing other business areas. Debt finance, notably, is showing the benefit of considerable investment over the past couple of years, as are pensions, investment funds and tax (the turnover of these groups, estimated at in excess of £10m, is included in corporate’s figures). Last year the acquisition finance team received first-time instructions from Barclays, while it continued to handle numerous deals for key clients Royal Bank of Scotland and NIB Capital.

On top of that is real estate, which continued to account for some 20 per cent of revenue, with billings of £18m, up from the previous year’s £14.8m.

“It’s misleading to describe Macfarlanes as a corporate boutique,” says the firm’s senior partner Robert Sutton. “Of course our M&A and private equity practices are central, but the practice as a whole is broadly spread, with a significant real estate group, first-class private client and litigation practices and strong specialist teams.”

Last month Dickson Minto senior partner Alastair Dickson warned that, despite the recent raft of massive fundraisings, the summer was likely to be a lot quieter than in the past three boom years and that the autumn upswing was unlikely to rectify fully that trend.

“I might be wrong, but the autumn will tell us… this could be the year that we see a correction,” he said (The Lawyer, 17 July).

There might be signs of a slowdown in the City that are not related solely to lawyers being on the beach, but Sutton and his silver circle counterparts are confident they will ride out any storm. n
Profit per equity partner
Gross revenues