Freshfields’ PEP peaks

Everybody knew it was a good year for transactional lawyers. Everybody knew that average profit per equity partner (PEP) across the City was going to skyrocket. But nobody in their right mind thought the benchmark for multinational firms’ profitability would be set by Freshfields.

Yet last Wednesday (30 May) Freshfields rocked the market by doing just that. It revealed that its PEP for 2006-07 was £1.04m, ahead of Clifford Chance‘s £1.02m and closing in on Linklaters‘ 2006 figure of £1.06m (although Linklaters is still to report its figure for 2007).

Freshfields has obviously had an outstanding year. It was Bloomberg’s number one M&A adviser in Europe and advised on 11 out of the 20 largest IPOs by Chinese companies in Asia. It advised Ferrovial on its E15bn (£10.2bn) acquisition of BAA and fought for the London Stock Exchange against a rampaging Nasdaq. The list goes on and on. And on.

So why the surprise that it’s just posted a record profit? Well, Freshfields has also just completed the biggest restructuring exercise ever seen at a City law firm. Around 100 equity partners have left the partnership, one way or another. As The Lawyer reported (21 May), the cost of that restructuring was £55m, which somebody had to pay for, somewhere.

Consequently, the market was anticipating that cost to be reflected in Freshfields’ PEP. Yes, next year’s figures would be outstanding, went the thinking, but this year there would be pain.

Except that, if £1.04m is to be believed, there hasn’t been. As our back page story reveals, much of the costs of the restructuring are included in Freshfields’ £491m net. Which means its £1m-plus PEP is calculated before deductions for departing partners. Which means that the PEP for continuing partners is less than that symbolic £1m mark.

The words of Freshfields managing partner Ted Burke on the reasons for its strong deals list are illuminating. “We’re pleased to have worked on so many interesting and significant transactions for our clients,” he said. “It does require some good luck to have worked on so many.”

In other words, Freshfields got lucky winning roles on some of the biggest deals in town. But sometimes, in all areas of business, you make your own luck. With its PEP, that’s exactly what Freshfields did.