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16 September 2013
After many years in the wilderness, private client departments have rediscovered a favourable profile, even at the leading City firms. At Macfarlanes, however, private client work has never been out of fashion. In fact, last year the department had the highest billable hours in the firm, despite its reputation as the Slaughter and May for mid-tier corporates.
Partner John Rhodes is head of the tax and financial planning department. He says that some years ago, many City firms (Allen & Overy being the most notable exception) effectively gave notice that they would not make up any more partners in this practice area. But there has been an obvious revival, with some firms claiming that their expertise in private client work and desire for such work never went away.
Rhodes says this revival is being caused by the "rationalisation or Anglo-Americanisation of business in Europe". He says that "US banks in Europe are spearheading [this] reorganisation of industry in Europe". Funds made available to the US banks and investment houses are being used as alternative ways to make money over more traditional forms, such as the stock market, which are losing their appeal. Also, due to the euro, financial comparisons between jurisdictions are easier to make. Entrepreneurs who set up in Europe after World War II are coming to the end of their lives and splitting up or selling their businesses. This, and the shunting together of manufacturing organisations, are leading to initial public offerings (IPOs) and takeovers in Europe on a massive scale, particularly in Germany. The resultant cash is used for investment, further generating corporate finance and legal activity.
This lesson in economics is all very well, but it indicates a growth area for firms wishing to service fully their corporate clients in all areas. In Rhodes' opinion, European corporate governance structures also have a role to play highlighting the importance of private client lawyers in such deals. He explains that such structures were used by European families to "retain control of their empires and stop outsiders buying out". The family, trust and tax implications mean that private client expertise is required to comprehensively service such transactions.
City firms are being forced to look at private client work because they are doing it on the back of acting for the main investment banks. Rhodes points to Continental lawyers who are much more versed in the ways of family and private client work. He cites the examples of the Porsche and Daimler Benz families, who only recently have been treated in a corporate way.
Rhodes does not believe that it is the emergence of a whole raft of dotcom millionaires that is driving the resurgence of private client departments in City firms. They are just paper millionaires, he says. No liquidity, coupled with the recent demise of several dotcom start-ups, means that wealthy individuals and families, investment banks and senior executives within financial institutions and major corporations continue to be the main target for the leading private client firms.
Indeed, wealthy individuals and trusts form the backbone of Macfarlanes' private client base. Despite his 32-year career as a lawyer with the firm, Rhodes still finds the work "intellectually stretching". He emphasises that he is there to solve clients' problems. "What's fun is that we continue to do things across a much broader range. I don't care whether the problem I'm addressing is worth £100,000 or $100m," he says.
Despite turning work away last year, it is unclear whether the department is likely to expand significantly this year. "The only strategy the firm has ever held is to hire the best people and to keep standards up," says Rhodes. He predicts that the workload will continue to grow, helped along by the five new assistants hired in 2000. However, the department does not have a significantly greater number of partners now compared with when Rhodes joined in 1968. "The volume of work and the size of the client's income is out of all proportion to what we were dealing with," he says. Private client work is therefore clearly profitable for such firms, and Rhodes says that it also generates a considerable amount of work for other parts of the firm. He gives as an example Richard Branson's corporate work, which Macfarlanes has handled since retaining him as a private client. Branson was initially picked up several years ago when Freshfields, his former legal adviser, dispensed with its private client department, although Freshfields still deals with some of Virgin's corporate work.
Rhodes says that expansion is restricted because new recruits initially have to sit with a partner. Rhodes comments on the resultant difficulty in balancing work and play. He describes a practical joke when he was first made head of department: his team returned their weekly time sheets, which required them to indicate how busy they were, by unanimously marking them with an "H". This category, meaning "Help", comes at the end of a list of options and had never been used before. Rhodes then immediately confronted his team on what they wanted him to do. He thinks they were surprised by his reaction, and paternalistically says that "they'd all been working ridiculously hard; harder than I'd want them to work". But the problem seems set to grow if City firms are forced to recruit from a limited pool.
To compensate for its relatively small size, Macfarlanes has developed a strong long-term referral relationship with White & Case, to which Rhodes was seconded on qualification to help it handle its sizeable international portfolio.
Private client work at Macfarlanes has always had strong historical roots, as well as an international client base. Rhodes attributes this to the fact that the firm began life primarily as a private client firm, and therefore many of the partners have worked in the private client department at some stage. Consequently, they have a better understanding of the nature of his business. Rhodes sees this, as well as the synergies between his department and the other departments, as one of Macfarlanes' strengths. And despite the return of the City firms to this particular field, Rhodes remains confident that the firm can retain its stronghold in this area. "Our environment is a smaller one than working for Freshfields or Clifford Chance, and one of the bonuses is that we all know each other better," he says. n