Have the magic circle firms squandered their lead in acquisition finance? They still have the broadest banking practices of any firms with a London presence, ranging from asset finance to restructuring, and they still dominate on investment grade lending.
But the financial crisis has changed the dynamics of leveraged finance, the practice area that defined the boom and fuelled banking department profits until the collapse of Lehman. The British lenders are no longer dominant, and it’s becoming increasingly difficult for UK firms to make a good margin on current panel rates. The easiest way to raise funds for private equity investment is from the alternative finance providers and the capital markets. And for that, the ace in the pack is having a US high-yield practice.
Allen & Overy (A&O), Clifford Chance (CC) and Linklaters can each defensively field a high-yield partner or two, though when The Lawyer asked for headcount and practice area breakdown the magic circle firms were strangely unforthcoming. The UK magic circle brand simply does not extend to US capability; the perception among clients is that they can’t handle this finance work. And that has meant that when sponsors are switching to US financing structures and in Europe they’re also switching to the likes of Latham & Watkins and White & Case.
Seven years ago the clear UK leaders in leveraged finance were A&O, CC and Linklaters. An examination of the promotion stats since 2011 shows magic circle firms have invested not in leveraged specialists but restructuring partners. Ashurst was up there too in the boom, but its merger with Blakes means its global weight is now firmly towards projects and infrastructure rather than its old marquee practice of private equity. You’re hard pushed to find a UK-heritage firm with a London finance practice that has grown revenues in the past three years, unlike its US rivals in the City.
There’s a staffing problem too. The magic circle firms have not hired one London partner from a US firm in the past two years. They can’t; they’re stuck with lockstep. Richer US firms are becoming serious acquirers of clients and private practice talent. Latham has replicated what it did in New York in the 1980s – open in a new city on the back of high-yield and watch the coffers fill and the banking stars join. US finance capability stateside is no longer a diversion that magic circle partners can pooh-pooh. This is a battle the UK elite are losing.