When a market virtually disappears overnight, it is not unusual for firms to start pruning their partnerships. So when the collapse of Lehman Brothers in 2008 precipitated a grinding halt for private equity deals it would have been no surprise to see certain firms sharpening their shears.
But two of the firms most traditionally associated with private equity, Macfarlanes and Travers Smith, have managed to ride out the recessionary storm in relatively good shape without slashing and burning partner numbers. And the long-term approach looks to have paid off as the market begins to emerge from hibernation.
Macfarlanes and Travers share a number of characteristics. They are both among the older City firms, both known to err on the conservative side, neither see many comings or goings, and in recent years both been heavily focused on private equity, leading some to suggest that they would have suffered more than most over the past 18 months.
As one partner at a City rival says: “They’re both domestic firms and neither practice is very well hedged.”
Firmwide, 2008-09 was a bad year for both. Macfarlanes saw its average profit per equity partner (PEP) dip below the £1m mark for the first time in three years, while Travers experienced an overall revenue fall of almost 40 per cent. In both cases, the fact that the firms are not as well hedged as some rivals and that they rely heavily on corporate turnover were contributing factors.
Macfarlanes made a number of redundancies in January 2009, with seven real estate associates losing their jobs. A month earlier Travers lost four fee-earners in real estate and corporate.
However, the survival of two of the biggest private equity teams in the City shows that their managements were prepared to stick with their tried-and-tested strategies.
“The good thing for us is that private equity was never a fashion,” says Travers head of private equity Phil Sanderson. “We’ve been in it for years and years, so when commentators said it was a bad thing, we knew they were wrong.”
Travers has now won mandates on seven private equity deals in 2010 alone, nearly twice as many as its nearest rival Clifford Chance. But Sanderson admits that palms got sweaty as Travers’ much-lauded private equity team waited for the deals to start flowing.
“When you sit at your desk reading about the death of capitalism, you’d be a fool not to question it,” he says.
Head of corporate Chris Hale accepts that luck had a part to play in the decision “not to do anything drastic”.
“We knew it would return,” he says, “but we didn’t know how quickly.”
But if private equity is back, a couple of things have changed. For one, some of those better-hedged firms have taken their eyes off the ball during the hiatus.
“Other competitors will have diverted resources away from the market, and we haven’t,” says Sanderson. “Macfarlanes is also able to play the more sensible game that we have.”
For Travers that means both reinforcing old relationships, such as that with Bridgepoint , as well as snaring the odd new one, such as those with Darwin Private Equity, Intermediate Capital Group (ICG) and Synova.
Unlike Travers, Macfarlanes is not a name that has been cropping up on the new trickle of deals.
Instead it has diversified its private equity practice. It has been an active adviser on restructuring and secondary market work – the work that “often goes under the radar”, as corporate partner Ian Martin puts it.
“It’s sensitive stuff that people don’t want to talk about,” he adds, “but we’re well hedged as a private equity firm as it’s much broader than just a deal-doing space.”
Restructuring has, in fact, become increasingly vital to Macfarlanes’ survival. Martin himself acted on the restructuring of Four Seasons Health Care’s £1.5bn of debt in one of the firm’s standout deals of 2009.
As if to underline its new diversity, the firm has even taken the rare step of hiring laterals. Three partners joined last year, with former Allen & Overy restructuring expert Francis Bridgeman the most high profile.
But private equity is still a major focus. Head of funds Bridget Barker has retained her relationship with Candover, advising its advisory board during its recent discussions around terminating its funds. Meanwhile, other relationships are strong, not least that with 3i, led by partner Stephen Drewitt and private equity chief Charles Meek.
But as a competing corporate partner puts it: “Everybody’s been doing restructuring and that’s not always well publicised, but if they could get on deals they would be.”
Meek insists that his practice is not just about the headline-grabbing deals. “Some of the bigger buyouts in 2006-07 are going through a difficult process now,” he explains. “We’ve been helping longstanding private equity clients and their portfolio companies to get through. I don’t think we’ve made a big song and dance about it, but we’ve been very busy.”
Even the recent news that the much-heralded IPO explosion may be a mirage – with New Look’s listing among several to have been shelved – might not necessarily spell trouble for Macfarlanes and Travers.
“It might affect the mega buyouts, but the private equity model’s still very efficient and there are different types of exit,” says Sanderson.
He points to Bridgepoint’s recent sale of Pets at Home to Kohlberg Kravis Roberts for £995m as an example, with private equity partner David Innes advising the seller, as the type of deal that can still get done.
And with deals topping out at the £1bn mark, mid-market firms could look to a brighter future, although they will be fighting with the high-end firms for these deals.
“The fact that the top-end deals will be smaller in size will suit the likes of Travers and Macfarlanes,” says another City corporate partner. “People thought more partners would leave [these firms] than have, so whether it was through luck or judgement they’re to be commended.”
The private equity market is not a zero-sum game and it looks as if the town is big enough for two.
“We have a great deal of respect for Travers Smith,” says Meek. “There’s plenty of space for two firms to operate in a similar sphere.”