Is Wragge & Co's London private equity launch a futile attempt to secure instructions from the London office's big venture capital clients such as 3i and Bridgepoint Capital, or should City private equity lawyers be watching their backs?
Wragges has a good track record of muscling in on new clients. The Birmingham-based firm won 3i in 2000 and has been its Midlands adviser ever since. It is also the preferred adviser to Bridgepoint, Aberdeen Murray Johnstone (AMJ) and Close Brothers Private Equity in the region. In the last 12 months the firm has completed five deals for 3i, three for Bridgepoint, two for AMJ and one for Close Brothers.
Wragges' decision to offer a private equity capability in London has been marketed as a strategic move to help it break into the mid-market arena. But a number of prominent private equity lawyers wonder if the strategy might be a response to the lack of deals in Birmingham. One London-based private equity partner said: “Life's tough in the regions for private equity lawyers. Wragges' move to London is reactive of the fall in the number of deals in the Midlands.”
A report published by KPMG's private equity group last month concluded that the number of management buyouts (MBOs) completed in the third quarter of 2002 dipped. The report, which looks at larger UK MBOs, states that during the third quarter only three deals, valued at £538m, were completed in the Midlands compared with seven at £636m in the second quarter.
The sluggish Midlands private equity market, combined with some private equity houses retreating from the region, has resulted in tough market conditions. 3i, for example, closed its offices in Leicester and Nottingham and merged them with Birmingham, while Bridgepoint closed its Scotland, Leeds and Manchester offices.
Furthermore, Royal Bank Private Equity (RBPE), part of the Royal Bank of Scotland group, quit Birmingham in the summer with the departure of office head John Dillon. Dillon, who has a strong relationship with Wragges' Birmingham private equity practice, joined rival Royal London Private Equity (RLPE) in London. RBPE's other regional advisers included Hammonds and DLA.
Maurice Dwyer, head of private equity at Wragges', rejected these assertions and said the firm had been planning its London move for more than two years. But he does accept that there has been a shift towards London and said the number of deals available in Birmingham “wasn't sufficient to satisfy the firm's growth targets, so it was necessary to move into another area”.
But the London private equity market is a different ball game. There are more players and competition is fierce. All manner of firms want a slice of the action, particularly in the mid-market (£10m-£250m) range, in which Wragges wants to make its mark.
City firms in the frame include Macfarlanes, 3i's panel firm in London, and SJ Berwin, Bridgepoint's preferred London firm. Charles Meek and Blair Thompson are the respective relationship partners.
The national firms chasing mid-market deals in London include DLA, Eversheds, Hammonds and Pinsent Curtis Biddle.
Addleshaws, which recently moved private equity partner Simon Pilling to London, is also highly regarded. The firm claims that it was recently appointed to the panel of a leading private equity house, but would not specify which one. It already has strong ties with 3i and Barclays Private Equity in London through partners John Hiscock and Darryl Cooke respectively.
But will Wragges be able to take on established and highly-regarded London private equity teams?
Wragges has not yet secured any instructions in London and admits that there are no guarantees of doing so immediately. Dwyer accepts that the first obstacle is for the firm to establish itself in London. He said there was no time limit, but admitted that he would be disappointed if the team was not showing tangible results in the next two or three years.
Some leading private equity partners believe that Wragges' entry into London will be successful in the long term, but only if it pours sufficient resources into the office. One London-based private equity partner said: “Wragges must prove to the London market that its office is not merely one man and his dog.” Dwyer admits that resources might become an issue in the future, but says in the short term it could second lawyers to London.
A partner from a rival firm commented: “Although Wragges coming into London isn't seismic, the firm will pose some threat to mid-market players.”
RLPE's Dillon has hinted to The Lawyer that he may instruct Wragges in the future. But another private equity house said the distribution of work is not that simple and was based on several factors, including personal relationships and the nature of the deal.
One obvious advantage that the national firms have over London firms is cost. National firms can head up deals in London and do the bulk of the work in the regions. For example, Wragges has a transaction services team in Birmingham dedicated to due diligence, enabling it to offer cheaper legal advice. But Dwyer argues that the firm does not operate a strategy of undercutting rivals on billing.
On whether or not there is sufficient work to go around, the view remains pessimistic. According to the KPMG research, the value of nationally completed deals has dropped by 45 per cent from the previous quarter. 35 MBOs totalling £2.64bn were completed in the third quarter of 2002, and the value of UK deals completed this year is £10.57bn, a fall of 40 per cent over the same period last year.
Stephen Craik, a corporate finance partner in KPMG's Birmingham private equity group, said: “Volatility is underpinning caution. The earliest we can now expect a sustainable upturn is the new year, provided there are no more shocks.”
One London-based private equity partner commented: “In the current economic climate, there's a diminishing amount of work because private equity houses are nervous to invest in deals where there's no obvious exit opportunity.
“There are too many lawyers fishing in a pond in which fish aren't biting.”
Overall, private equity houses have reacted positively to Wragges' move into London and given the firm's ability to generate transactions in the Midlands its strategy may prove to be successful in the long term. But this is very much dependent on the number of private equity deals rising in the future.
