Here’s something to make you choke on your coffee: Macfarlanes – pristine, conservative, independent, never-put-a-foot-wrong Macfarlanes – is taking a leaf out of DLA’s book. Class differences aside, there are more similarities between Macfarlanes and DLA than you might think. Consider: neither operates a lockstep; both firms are run by a tiny cabal headed by a high-profile, all-powerful chief (Robert Sutton and Nigel Knowles respectively); both have a tiny equity partnership; and both are very, very profitable.
And now Macfarlanes, belatedly, is after a market in which DLA is a major player: UK acquisition finance. And it is doing it the DLA way: building a practice by laterals and attacking the mid-market.
The hires beg two interesting questions. How will Macfarlanes’ two new laterals fit in with its corporate-dominated culture? And even more importantly, how on earth will the firm break into such a mature market as acquisition finance?
Hire and hire
Several months after Macfarlanes started wooing them, Bronwen Jones and Tom Speechley both arrived at the firm for the first time last week, Jones from the London office of Chicago firm Kirkland & Ellis and Speechley from Norton Rose. It is clear from their banter that their first couple of days have been filled with the usual training sessions on new phones and computers, but it might take them a little longer to get used to the firm’s clannish culture.
Macfarlanes has relatively little experience with partner-level hires, and the firm has something of a reputation as a tough place for laterals. One of Macfarlanes’ great strengths is its strong partnership culture, but the flip side is that lawyers who did not join as trainees can feel like perennial outsiders.
Much of this reputation is based on the John Cook incident. Cook was formerly head of competition at Norton Rose, but joined Macfarlanes as a partner in 1997. In 2000 he turned tail amid “cultural tensions” and returned to Norton Rose, where he now heads the firm’s Brussels office.
However, Macfarlanes partners are keen to point out that Cook is the exception rather than the rule. In fact, the firm has quietly shuffled in a few more partner laterals than you would expect in the last decade: funds partner Tim Cornick joined from Turner Kenneth Brown (now Nabarro Nathanson) in 1995; Tony Blackler, a construction partner, joined from Rowe & Maw in 1998; and Hugh Arthur, the firm’s highly rated pensions lawyer, joined from Biddle in 1999.
The key to bringing in laterals, say Macfarlanes partners, is less about indoctrinating new partners in the ways of Macfarlanes, and more about getting a person who is in the firm’s cultural mould in the first place. Aside from the protracted negotiations with Norton Rose over Speechley (the discussions with Kirkland over Jones’s exit were rather more straightforward), it is this need for certainty that meant the recruitment process for both new partners took most of last year.
In fact, Macfarlanes has been looking for finance lateral hires on and off since the early 1990s. For most of this century, the search has been on in earnest. The two new recruits came by different routes. Jones
was brought in by a headhunter, while Speechley came to the firm’s attention in 2001 while on secondment at Jones Day in New York, when he was part of the team that acted for Seagram on its acquisition by Macfarlanes client Pernod Ricard.
Keeping up with Jones
Macfarlanes partners, then, are pinning a lot of their hopes on Jones and Speechley. The two new partners are being tasked with kickstarting the firm’s finance practice, the profile of which has up to now been subterranean, as finance head Julian Howard freely concedes. This will involve targeting mid-market work, both bank side and borrower side.
On the borrower side, at least, the case is clear. The Lawyer has spoken to a number of Macfarlanes’ corporate clients, which have raised the issue of the firm’s finance capability, and the word that recurs endlessly is ‘overstretched’ – something Howard readily concedes. It is inevitable that with deals becoming bigger and more complicated, the UK’s mid-market private equity specialist par excellence will need a much grander offering in borrower finance work. Its roles on high-profile transactions such as for Cordiant and Canary Wharf last year underline the fact that it is the corporate firm of choice outside the top 10, which will require it to up its game on borrower side work.
Key private equity houses such as Alchemy, PPM Ventures, Soros and 3i – all clients of the firm – are starting to demand more advice on banking from their corporate lawyers. As one City banking lawyer puts it: “The private equity world is starting to realise that sale and purchase agreements only last a few years, but the banking’s there for seven, eight, nine years.”
Of the pair, it is Jones who is the obvious candidate to fill the borrower slot. She has always been much more of a borrower’s lawyer, having worked closely with Nigel Ward at Ashurst in the days when Ward was less bank-focused than he is now. While at Kirkland in New York and London, she undertook a string of Bain Capital deals, including the e270m (£188.3m) senior and mezzanine acquisition financing of SigmaKalon and the e270m senior and mezzanine financing of Trespaphan; she also advised Bain on the e1.4bn (£976.6m) senior and mezzanine financing of the Brenntag acquisition.
“It’s a great opportunity really, to do a wider range of work than I was doing at Kirkland,” says Jones. “I love doing the private equity side of lending work, so there’s not many places I’d be changing to.”
Nabbing the banks
But building up a finance team to service borrowers is the uncontroversial bit and hardly constitutes a revolution in strategic thinking. What makes the Macfarlanes move so noteworthy is its bid for lender side work – hence the recruitment of Speechley from the beleaguered but bank-led Norton Rose.
Macfarlanes’ paucity of lender work has historically led to internal issues: Howard admits that one of the reasons the finance practice found it so hard to grow was the difficulty in attracting trainees into the group.
“To do bank work you have a real resource issue to jump over,” he admits. “There’s no point in going after work when [the banks] don’t think you’ve got people to service it.”
It may come as a surprise to most banking lawyers, but Macfarlanes has squeezed through the odd deal for lenders such as the Royal Bank of Scotland (RBS) and HBOS. The bulk of this has been on the property finance side, but it acted for RBS at the tail end of last year on the buyout of RCG Moody International.
But where will this work come from? “Certain banks are off-market for us because of the type of work they do,” notes Speechley. “JPMorgan Chase, CIBC, Lehman… it would be nice, but that’s not part of the plan.”
The main acquisition finance providers to the UK mid-market are RBS, Barclays, HboS, HSBC, Société Générale and BNP Paribas. Leaving out the likes of Allen & Overy (A&O), Clifford Chance and Linklaters, all of which will do mid-market deals now and then, Macfarlanes will be up against the likes of Mark Vickers’ team at Ashurst, DLA, Lovells, Denton Wilde Sapte and possibly still Norton Rose (see below).
To take just two examples: Barclays’ mid-market work is dominated by DLA and Lovells, while mid-market work for RBS tends to get hoovered up by DLA and Vickers at Ashurst.
Institutions are never particularly portable, but as Vickers showed when he left DLA for Ashurst, relationships do count. The Macfarlanes partners will not speak about clients, but it is well known that Speechley has strong contacts in RBS from his years at Norton Rose. Last year, he advised RBS on the high-profile £33m senior debt facility to Soldier as part of its recommended £84m bid for Hamleys and also on the £165m financing at the take private of Clydeport.
All of this would mean nothing if RBS had dropped Macfarlanes from its roster. As The Lawyer reported extensively last year, a whole number of firms made it onto the bank’s various panels. In the review, the bank made no distinction between areas of work, preferring to split its advisers by transaction value. The Lawyer understands that Macfarlanes is on all three of the bank’s panels, no doubt due to the firm’s corporate pitch rather than its finance team – but as an approved adviser, the firm has a start.
The ex-Norton Rose rising star has also made good inroads with NIB Capital, a lender that he has advised on a series of deals, such as last year’s €65m (£45.3m) senior and €20m (£14m) mezzanine facilities on Stirling Square’s acquisition of a majority stake in Schoeller Wavin Systems NV.
Speechley’s highly clubbable way with clients will no doubt net his new firm a number of instructions from familiar institutions. What is more, unlike Tim Polglase, Clive Wells, Andrew Bamber and Robin Harvey, who moved from Norton Rose to A&O two years ago under very restrictive covenants, Speechley will have a pretty free rein. It means that Macfarlanes’ new finance group’s target of half a dozen deals a year is less ambitious than it might have been, despite the fierce competition between law firms for that work. If – and it is a big if – Macfarlanes can charge £100,000-£200,000 a pop, then the maths should work. It is going to have to; average revenue per partner at Macfarlanes was over £1m last year, according to The Lawyer 100.
Howard, Speechley and Jones acknowledge that building a finance business will take a while. “You have to look at it over three years,” says Speechley.
On the face of it, an obvious model might be Ashurst, the private equity player that marshalled itself into a force in banking. But apart from the cultural similarities, the Ashurst analogy does not quite hold up. Ashurst began building up its finance capability when then-partner Stephen Mostyn-Williams (now at Cadwalader Wickersham & Taft via Shearman & Sterling) spotted an opportunity in the early 1990s to exploit the growing need for advice on leveraged
buy-outs. Since then, Ashurst has built a small but solid pan-European finance business – something that Macfarlanes is highly unlikely to do. Furthermore, the debt finance market in 2004 is very different from the market 10 years ago. Macfarlanes is not going to gatecrash the high end of leveraged buyouts, although it claims that it can transaction-manage cross-border European deals with the best of them.
And so back to the DLA model. Speechley and Howard are clearly admirers of what DLA has achieved in lender work. “DLA’s penetration of the mid-market is greater than many people think,” says Speechley.
Of course, some of DLA’s success has come through its national network – think of Manchester partner Simon Woolley, whose HboS relationship was so strong that he snared the massive Arcadia financing. DLA’s volume is good, particularly in the £40m-£100m range, and deals such as Pizza Express, again for RBS, are testament to the solidity of the DLA practice. That national network has helped underpin DLA’s highly competitive fee quotes, although it is not all about rates: with a London team of four bank-side partners alone, DLA has a reputation for service that few other mid-market players can match.
DLA, Ashurst and Lovells – plus a newly revitalised Denton Wilde Sapte – will be tough competition.
Macfarlanes always had the brand. It now has the people. Will it get the work?