Lovells' 'Mexican Wave' concept tempts PruPIM to radical steps
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All eyes are on the Pru's new approach to real estate lawyering after the UK's largest institutional property investor finally reached a decision on how to carve up its legal spend, worth several millions of pounds a year.
As revealed on www.the lawyer.com/lawyernews, Pru-dential Property In-vestment Managers (PruPIM), part of Prudential's M&G investment arm, will massively extend the company's relationship with Lovells, but it has dealt a severe blow to Berwin Leighton Paisner (BLP) by striking it off the panel, ending 10 years of shared instructions between the two firms.
The review, run by Bob Allen, PruPIM's director of property legal services, has led to a new and radical approach to a problem faced by all major property players: how to keep costs down and quality up for routine work, while securing cutting edge advice for more sophisticated transactions. PruPIM's chosen approach is already being called into question by the market.
As revealed first on www.thelawyer.com/lawyer news, PruPIM has been won over by Lovells' so-called 'Mexican Wave' supply model, which promises access to the lower fee rates of provincially-based suppliers for routine work, as well as access to Lovells' expertise for more complex transactions. The appointment covers the Prudential Life Fund and other Prudential funds, valued at more than £10bn.
CMS Cameron McKenna has also been retained to continue its smaller role acting for the Scottish Amicable Life Fund and Scottish Amicable Net and Exempt funds, comprising £1.5bn of assets.
Under the new relationship with Lovells, relationship management including work allocation, control and overall responsibility will rest entirely with Lovells. Crucially, the City firm will give PruPIM the comfort of a guarantee and quality assurance for subcontracted work.
Lovells head of property Robert Kidby said: "We've been working hard on developing the 'Mexican Wave' concept for some years." The firm has already used the IT-driven approach on major outsourcing deals including Prime, Steps and Abbey National, but this is the first time it has been rolled out formally.
Details of the provincial firms involved have yet to be released, but The Lawyer understands that Cripps Harries Hall has already been appointed. A number of former Lovells lawyers have moved to the Tunbridge Wells firm making for a strong relationship between the two. A second firm will be added shortly.
The new approach has triggered the end of a high-profile client relationship for BLP, which the firm can ill-afford to lose just weeks after making assistant redundancies in property and across the firm. But deputy head of real estate Claire Milton said the Lovells approach was not right for her firm. "We know about the model, but felt that any solution we came up with had to retain the BLP quality stamp and the BLP wrap. It wasn't a route we wanted to go down. We didn't feel that it was something our clients generally wanted. It will be interesting to see how it works out. It will require lots of management from Lovells to make it work," she said.
BLP is putting a brave face on the client loss and is keen to stress that the PruPIM work had become increasingly high volume and low value. Milton said: "Our real estate business brought in £34m in the last year. The Pru was a very modest proportion of the work."
The decision to slash BLP from the panel is not the only surprise from the review. Kidby is well known for his client care prowess, but PruPIM's decision to adopt the subcontracting model has shocked the market after Allen first rejected the option of adding a regional firm or firms to the panel to drive costs down (The Lawyer, 21 January).
Talking to The Lawyer last week, Allen said the new arrangement had the advantage of cutting out the need to deal direct with regional firms. "Our early research had indicated that the cost savings of employing regional solicitors direct did not present substantial savings on the costs we already had in place with our existing City-based suppliers. Combining this with the additional remoteness of suppliers and management of new relationships from our London base, we felt there was not sufficient advantage to be gained from this route. By adopting the Mexican Wave model, we have only our relationship with Lovells to manage," he said.
But one source close to the review said that regional firms simply could not compete in the early stages of the review, as PruPIM was receiving such heavily discounted fee rates from existing suppliers. "Lovells' partner rates were understood to be as low as £210 a year ago," said the source. "What PruPim has done is cobble together a deal with a City firm which doesn't have critical mass and therefore has to subcontract. It can't be as effective as having a firm that can deliver at the right price. The subcontractors will be under the skirt of Lovells, which is bound to cause frustrations, but it will guarantee them a shedload of money."
A real estate lawyer at one City firm said: "This is a new way of doing business. No one is going to know whether it can really work for a good 18 months. BLP has been doing this work in the City. Some of it is now going to be done by Cripps Harries Hall and other firms. Who knows if it's going to be done to the same standard? BLP hasn't lost out to Lovells, it has lost the work to Cripps Harries Hall."