Projects problems signal demise of lockstep

This marks a watershed for City firms’ finance groups. If Allen & Overy (A&O), the UK’s top project finance firm, is having to junk lockstep to make its practice pay, what hope for the rest?

As we report this week, A&O has decided to axe equity points from certain partners in its London projects group – the first time the magic circle firm has had to reconfigure London profits outside the lockstep.

A&O won’t comment on the financials, but several sources close to the firm tell us that the projects group was running at a significantly lower profit per point than the firmwide average, something that A&O is not denying.

Despite the fact that A&O is regularly at the top of the infrastructure tables, the difference in financial performance between the projects group and the rest of the finance practice was starting to look distinctly alarming.

Most of the big City projects practices had already seen this coming. Freshfields admitted two years ago it was unlikely to make up projects partners in the medium term. Even Norton Rose – not the most strategically nimble of firms – saw the way the market was moving and grew the sponsor side of the business to make up for poor pricing on the lender side. Since then it has been motoring. Clifford Chance has rebadged itself as a general energy practice, with growing success.

Trust Linklaters to do things the tough way. As The Lawyer revealed last year, it decided to say goodbye to several projects partners at the top of the equity. It has also launched in Dubai and poached a Clifford Chance partner in order to grow its business in the lucrative Middle East.

What is equally significant is how A&O has approached the economics of the situation. Not for the A&O project group the Linklaters-style axe; cautious as ever, A&O opted to tinker with the lockstep.

But is that the answer? Setting equity caps may save certain senior partners’ jobs, but it’s going to store up problems. This year’s compromise will become next year’s precedent. For the first time in London, A&O has embraced differential pay on economic grounds. Other practices in London labouring under the shadow of the firm’s mighty banking profits may have to start totting up their equity points as well.

Still, let’s just hope for the project partners’ sakes that if the dollar recovers, they’ll be demanding their points back. A&O might as well come straight out and say it: lockstep is dead.