It’s been five years since The Lawyer originated the term ’silver circle’ as a catch-all for the UK’s domestic second tier. Matt Byrne takes a look at how these firms have fared since then
Five years ago The Lawyer coined the term ’silver circle’. We used it to describe a group of firms inhabiting, arguably, a more interesting tier of the market than the behemoths of the big four.
These were firms that, back then, were powering up the profit and revenue tables. They were defined not only by their disproportionately high profits, but also by their focus on a premium UK client base, much of which was private equity-dominated, along with, as we noted at the time, “a whole lot of real estate”.
These firms were also characterised by their disdain for “an overtly managerial approach and a horrified avoidance of big-firm bureaucracy”.
As we said back then, that practice area mix and entrepreneurial style was “sexy and it pays”.
Five years down the line The Lawyer has crunched the numbers to assess how the this group has fared since 2005. Last week’s story (12 July) analysing the results of Allen & Overy (A&O), Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters underlined how the magic circle has pulled away from the rest of the UK market. Even back in 2005 this was already the case and, as our figures revealed last week, that trend has only continued over the past five years.
But what of the silver circle? How has a bunch of firms characterised back then by their “focus and sheer ambition” been treated by the past half-decade?
Ever decreasing circle
The empirical evidence suggests that the answer to that question is ’not well’. Judging by the bald numbers alone, it does not look good for the four firms that formed the core of 2005’s silver circle: Ashurst, Macfarlanes, SJ Berwin and Travers Smith (we also said that three firms – Berwin Leighton Paisner (BLP), Herbert Smith and Slaughter and May – had silver circle credentials but were on the periphery thanks to their differing business models).
A comparison of the headline figures underlines the fact that the big four magic circle firms are pulling away. Take average profit per equity partner (PEP). The average PEP at the four global firms grew from £712,500 in 2004-05 to £1.16m last year, an increase of 63 per cent.
And the growth among the core silver circle firms? One per cent, from £632,000 to £638,000.
But PEP can be manipulated, equity partners can be ejected, games can be played. The more widely accepted metric of high performance is revenue per lawyer (RPL). Yet this tells a similar story.
Growth of the magic circle average over five years was 45 per cent, with RPL rising from £358,000 to £519,000 last year (indeed, back in 2005 any RPL starting with a three was effectively the benchmark of a quality practice).
That 45 per cent is more than three times the growth the less internationally minded, more narrowly focused silver circle firms managed over the same period. Their average RPL grew from £329,000 to £367,000, a rise of just 11.6 per cent.
Only when it comes to total revenue can the silver circle firms get anywhere near matching their larger rivals in terms of growth. The magic circle mushroomed by 44 per cent over five years, from £3.17bn to £4.57bn.
The silver circle again lagged behind, albeit only marginally, posting a 39 per cent increase, from £451.5m to £628.4m.
All of which makes for interesting number crunching; but a little more digging is needed to shine a light on the individual fortunes of the silver circle quartet.
Even back in 2005 there were some significant differences between the four firms. Notably, Ashurst’s and SJ Berwin’s broader international reach contrasted with Macfarlanes’ and Travers’ virtual single London site approach (Travers already had its small office in Paris by 2005).
It is an understatement to say that, with Travers in particular, not a lot has changed.
“It’s true that in most of the key indicators we’ve stayed the same, more or less,” comments Travers managing partner Andrew Lilley, “because we’ve always aimed to stick at what we think we’re best at. Our practice areas, the proportion of those practice areas that make up turnover, our premises, our overseas offices, and therefore international strategy to an extent, and even the number of partners – we’re still just over 60 – are all roughly the same. We even had the same managing and senior partner until this year, when Chris [Carroll] stepped up.”
But no but yes
Lilley disputes the charge, however, that if Travers has stayed put while its rivals have gone forwards, this effectively means it is going backwards.
“No, because there are definitely some ways in which we’ve changed,” he counters. “The way in which we service and manage our overseas clients and relationships is one. We haven’t sat with our head in our hands. One of the key changes is we have a much more structured approach to maintaining international contacts and business development, spearheaded by Chris [Carroll]. So fundamentally our international strategy hasn’t changed, but the way we service and maintain our international relationships has.”
Travers’ philosophy has always been that, for as long as its business model remains viable, it will stick with it. And over the past few months, whether by luck or design, there have been signs that its dedication to its core market has paid off. Two of Travers’ top private equity clients, Bridgepoint and Barclays Private Equity, have virtually had 100 per cent of the market in some months.
This partly explains why Travers posted a revenue increase of 12 per cent last year to reach £72m, while Macfarlanes posted a decrease of 2 per cent to £92.4m. Travers backed a couple of winners.
“Partners at Travers understand the deal,” says one legal market consultant. “If private equity does well, they do well. If it doesn’t, they don’t.”
That said, do not expect it to start bulking up off the back of its success.
“We’ve never believed in growth for the sake of it,” adds Lilley. “We don’t aim to have 100 partners until we need 100 partners. My objective when I took over as managing partner was to make sure that Travers was still broadly as it is now when I finish. If I achieve that I’ll be very happy.”
Over at Macfarlanes, senior partner Charles Martin allows that in what has been and remains a “hell of a challenging market” it would be “slightly odd to suggest that we’d been immune as firms”.
While Macfarlanes is also known for its private equity practice, with clients such as Alchemy and 3i, it also arguably has a focus on the larger end of the M&A market, reflected by its roles in deals such as Pernod Ricard, Allied Domecq and Absolut Vodka.
With less of those around and the firm’s higher emphasis on property than Travers (it accounts for around 20 per cent of total revenue at Macfarlanes) the firm has suffered recently. That said, with PEP down by just 1 per cent to £710,000, the begging bowls are not yet in evidence on Cursitor Street.
No low show
“Our margin was 48 per cent last year,” says Martin. “That tells you that we’ve done a reasonable job of not panicking and started taking on low-margin work. Revenue was very slightly down, which while hardly in shoot-the-lights-out territory, is reasonable given the market.”
Neither has the firm shed lots of partners. At the year-end it had two more than at the same time the year before.
“Yes, a few partners have left, but at the end of the year we had a net gain of two equity partners,” stresses Martin. “That has cost us in PEP performance but reflects our fundamentally long-term confidence in our business model.
“That model is all about quality and value for money. It resonates with what I believe clients are looking for, that is firms that are lean in their approach and prudent with their cost base. Focusing on the clients first, second and third is key for us. You have got to deliver something different, that meets a real client need. A lean cost base helps to deliver that. These things are part of the essence of why the silver circle has an important and sustainable place in the legal marketplace.”
Cue Ashurst and SJ Berwin. The former firm’s launch of a US office with the hire of a team of structured finance lawyers at the height of the downturn still bemuses many in and outside the firm, while the latter is currently in play, locked in merger talks with Proskauer Rose.
Both are symptomatic of firms that have arguably been more ambitious in scope than either Travers or Macfarlanes, but which may be paying the price.
“The level of partner exits at Ashurst has certainly affected the glue,” claims one legal market insider. “It’s not a happy ship. That said, it’s much bigger than the others and probably needed the clearout to an extent.”
Ashurst’s woes have been well-documented, but in terms of its market positioning, managing partner Simon Bromwich takes some convincing that his firm belongs
in a bracket with Travers and Macfarlanes, even in 2005.
“Those are excellent firms, but their strategies and ours began to differ markedly well before 2005, as Ashurst embarked on a much greater international push,” insists Bromwich.
The proportion of Ashurst’s revenue that is derived from its international offices was around 36 per cent last year, up from below 30 per cent in 2005.
“There’s obviously a huge size difference between Ashurst and the global magic circle firms, but our quality is excellent, which marks us out as a genuine alternative for clients,” adds Bromwich. “Our target is to once again get within striking distance of their profitability – that drives us hard because it helps us to keep improving our team and our client relationships.”
Bromwich’s version of the magic circle is likely to include that perennially hard-to-categorise outfit Slaughter and May. Certainly Ashurst senior partner Charlie Geffen’s will. And as far as UK firms to target goes, it is Slaughters Ashurst and Geffen are after.
“In reality what Charlie wants Ashurst to be is Wachtell [Lipton Rosen & Katz],” claims one former Ashurst partner.
That is a long way from what SJ Berwin, the most under pressure of the silver circle quartet, is likely to become should its merger talks with Proskauer bear fruit.
The UK firm’s potential bride is examined in detail in the US column on page 9. Suffice to say that the market believes SJ Berwin, built on a transactional base of private equity fund formation and real estate, needs a deal.
The five-year figures, with PEP down by 22 per cent from £575,000 to £447,000 and RPL up by just 8.5 per cent, bear this out. Macfarlanes was the only other of the four to post a reduction in PEP, although its partners can probably live with £710,000 for a while. And its RPL was the highest of the four at £431,000.
Gainin’ on ya
The silver circle wannabe that contrasts most sharply with SJ Berwin is namesake BLP. The growth and development of this year’s Law Firm of the Year at The Lawyer Awards has been nothing less than staggering.
The firm kicked off the decade with the merger of Berwin Leighton and Paisner & Co in 2001. The first five years were very much about integrating the two firms, developing the platform and getting on the radar.
“The five years since 2005 was a period of immense investment for us,” says managing partner Neville Eisenberg. “In that time we brought in between 50 and 60 laterals. Around 30 per cent of our partners at the firm now joined in that five-year period.”
The firm also revved up its international strategy. Where it used to be just London and Brussels, it is now in Russia, Singapore and Abu Dhabi. Around 7 per cent of the firm’s revenue comes from overseas now, while its stellar practice areas include real estate, tax and finance, with new capabilities in securitisation and antitrust.
“There’s been massive investment in infrastructure to support the higher-quality practice,” adds Eisenberg. “In that context we believe we’ve reached the point where we’re being recognised as a firm that’s transformed itself. The next five years will be all about the extent to which we can deliver. Having built this thing, let’s see how it performs.”
At £455,000, BLP’s PEP is still some way off the heights it would like but its drive and ambition alone over the past five years make it firmly a silver circle firm in 2010.
But as with last week’s story on the magic circle, which highlighted the two-tier ranking that is developing among the UK’s four largest firms, there are parallels in the silver circle.
Although it is not clear that any firm is pulling away in the way that Freshfields and Linklaters are from Clifford Chance and A&O, this mixed bag of performances and strategies, of hunkering down and sticking to knitting, of expansion and wannabe strategies, has left a greater degree of separation between these firms than ever before.
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