US firms are picking up more than their fair share of big-name banking and finance partners. Why?
Many US products thrive on the UK market. Be it the Big Mac, Coca-Cola or Skippy peanut butter, American products tend to be a hit on this side of the Atlantic – and the banking and finance practice area, along with private equity, is no different.
Already with far fewer mouths to feed than was the case in the early 2000s, the magic circle spent last year saying adieu to even more partners as they walked into the arms of the Americans.
Exits in London include Clifford Chance structured finance partners Neil Hamilton and Matthew Cahill to Paul Hastings and Sidley Austin respectively, Allen & Overy(A&O) private equity expert Derek Baird to Simpson Thacher & Bartlett, and Freshfields Bruckhaus Deringer equity capital markets partner Simon Witty to Davis Polk & Wardwell.
The moves echo resignations made in 2011, when SJ Berwin private equity funds duo Nigel van Zyl and Oliver Rochman left for Proskauer Rose, Ashurst private equity duo Gavin Gordon and David Arnold -departed for Kirkland & Ellis and a four-partner funds team moved from Clifford Chance to Weil Gotshal & Manges.
US law firms are continuing to succeed in Europe’s banking and finance space. So why – or more importantly, how – are they pulling with such success?
One explanation is that Europe’s high-yield debt market – a product created in the US and normally governed by New York law – has risen since the banking crisis (see chart overleaf). According to Fitch Ratings’ quarterly investor survey, 29 per cent of European investors voted high-yield as their most favoured investment choice in January, more than double the 13 per cent in October.
“What used to happen with private equity houses is that you’d go to your friendly bank, the JP [Morgan] or the Barclays or the RBS, and they’d bring the whole deal. That was the way things were done – that was the province of the magic circle,” explains Ropes & Gray London banking head Maurice Allen. “Since the credit crunch happened and the banks stopped underwriting these deals, high-yield started coming into its own.”
UK firms, however, are keen to point out that this does not make their US rivals a major threat.
“US firms in London haven’t been so successful in the mainstream areas,” says one magic circle partner, who counts leveraged loans, investment grade loans, trade finance, property finance and bank work as mainstream. “They’ve been successful within specific areas, such as high-yield and private equity, but haven’t necessarily trodden on the toes of big UK firms.”
Even lawyers at US firms agree with this argument.
“There are a number of US firms in London whose finance practices have done well, but they have a consistent theme – they’ve remained focused in London on what they do well in the US,” says Kirkland & Ellis partner Neel Sachdev.
“At Kirkland, for example, we focus on acting for sponsor-side borrowers and issuers on leveraged buyouts, and we don’t generally act for banks. We didn’t come over here with the intention of breaking into acting for European commercial banks. The US firms who have tried to build a strong bank-side finance practice are up against firms with long-standing relationships with European banks, such as Linklaters, A&O and Clifford Chance.”
So why are US firms shining in London? Weil Gotshal & Manges’ City banking head Stephen Lucas, who joined the firm from Linklaters in 2011, notes that US firms are benefiting from the fact that banks are increasingly looking to arrange -financings from liquidity sources in Europe and the US.
“The US market can provide an alternative source for financings for European borrowers, and on potentially better terms,” he explains. “On larger situations, sponsors and arranging banks often test financings in the US and Europe before deciding which way to go.”
Others agree that this is a reason why those with offices in both the US and London get picked for this type of work, because clients can save from not having to use two firms, which would double the fees.
“Not many Europe-based firms have cracked the US market in banking or high-yield to be able to take on these sorts of deals,” observes one US partner. “And as banks in Europe are lending less, alternative credit providers are growing. Just as larger, magic circle firms are geared to banking clients, smaller US firms [in London] can be well-geared to act for alternative credit providers.”
This can give US law firms an edge over their UK counterparts in particular areas of law. But the emphasis here is on the word ‘particular’.
“There are a couple of things playing to the strengths of US firms, but they might unwind,” explains Linklaters’ banking partner Bruce Bell. “While high-yield is a permanent phenomenon, raising loan debt in the US for European deals could be temporary – it’s a recent phenomenon as it’s a product of the weakness of the loan market in Europe.”
“[Partner movement from UK to US firms] largely depends on how much scale certain US firms think they need in English law,” adds Bell.
Mayer Brown’s London head of banking and finance, Dominic Griffiths, agrees.
“There are some good opportunities to work for funds that are beginning to provide alternative modes of finance to corporate customers. This bodes well for US firms in particular, which can provide full real estate, capital markets, structured and leveraged finance skills to such funds and other non-traditional lenders,” he says. “It is, however, seriously misguided to suggest there will be a wholesale shift in activity away from the banks. There’s still good work to be had from traditional lenders. Law firms just need to be agile in the types of legal advice they provide; they have to adapt to the changing needs of those banks.
“The firms that are able to adapt and stay close to their key financial institution clients will do well. This has been the case in the US, where the leading firms are as capable of working bank-side as they are for sponsors and funds.”
In the end the question is whether UK firms are at a disadvantage compared to their US rivals – a question that for now receives a divided -answer.
“Previously, the magic circle and top UK firms were heavily reliant on banks, and if you wanted to act for banks you would need big groups of people and lots of offices,” explains the co-head of Ropes & Gray’s -finance practice, Mike Goetz. “That isn’t what the funds require. The big firms, having invested in big offices, are finding that when the work is pushed out to the funds, the funds like using the best of the local firms. If you’re buying a big company in Germany, for example, you might use a Hengeler Mueller because it is locally connected.
“The magic circle network that feeds work into all their offices doesn’t work as well for those groups. Banks loved it, but banks are now a smaller portion of the market.”