The once-mighty Linklaters real estate department is a shadow of its former self. Should management rethink its grand plan?
In 1999 Linklaters hired Bain & Co management consultants to take a good look at the size and shape of the firm. This marked the first occasion in the firm’s history when partners would be asked to leave as part of a strategic review and the first department under the spotlight was real estate.
Following Bain & Co’s review two property partners were asked to leave the firm and another agreed to be de-equitised. Cuts in other departments would follow but it was telling that real estate was the first group to feel the axe.
“Until Bain, no Linklaters partner had ever been released for that kind of issue,” says someone who was at the firm at the time. “It was tough on the people involved. Both of those individuals [who were asked to leave] were excellent partners; they were just in the wrong place at the wrong time.
“But it was the right decision. A department’s success depends on it keeping its shape. Bain brought in a whole bunch of metrics that made the analysis of partners’ contributions much easier. It was at a time when the real estate market was not doing so well and the real estate partners at the firm tended to be very senior and so were taking more of the [profit] pot.
Today – 13 years, three more firmwide restructurings and countless taps on the shoulder later – sources close to Linklaters claim the firm has just one equity partner left in its real estate department, practice head Andy Bruce. Is this the final stage of a controlled burn by management or has the department shrunk too far?
Linklaters is not the only firm that has retrenched in real estate in the past few years. The entire magic circle – as well as many firms outside it – has shed property partners and it doesn’t take much effort to discern why. Pricing has always been an issue in real estate because the work rarely involves bet-the-company deals whereby clients are willing to pay through the nose for legal advice. Combine that fact with the magic circle’s relentless drive to increase profit by creating shorter but more lucrative client lists and the outcome is obvious.
The slide has also been greased by the sluggish estate market, where a lack of available debt has killed deal volumes and driven down prices. One property head at a top 20 firm even contends that it is no longer possible to run a full-service practice at a firm where average profit per equity partner is over £700,000.
“Put simply, you can’t have a worldwide recession, part of which was triggered by real estate problems in the US, without it having an effect on real estate practices here,” says one magic circle real estate partner. “We might have some more restructuring deals but that hasn’t made up for the lack of private equity investments that firms were doing so well off at the peak of the market.”
On top of this, Linklaters has the difficulty of being wedded to a lockstep remuneration model.
“A lockstep firm requires people to perform within a narrow band of similarity,” says the former Linklaters partner. “You can be part of a large and successful department, but if that department can only sell its time for half what M&A can and your partners are paid equally, it can cause a strain that’s tough to manage.”
But even against this bleak backdrop, in which cutting property partners seems eminently sensible, the withering of Linklaters’ practice has stood out. One reason is the way it has been done. The other reason people have taken more notice is that Linklaters’ real estate team was once the best there was, and by a wide margin.
There are tales – some almost certainly apocryphal – about firms with such dominant property practices that you can walk from one part of the country to another without leaving land owned by clients of the firm. Linklaters is one of these. A source recalls how former Linklaters real estate department head Robert Finch, who left the firm in 2005, would look out of his office window and expound about how every building in the visible skyline could be traced back to a Linklaters client. True or not, the guy had a point: Linklaters was everywhere.
The Gherkin is a good example – Linklaters was inextricably linked with the City landmark for a decade. The firm won a beauty parade in 1997 to advise Swiss Re on its conditional acquisition of the site in 1998 and then oversaw the building’s construction and development. Naturally it was Linklaters, led by Julian Innes-Taylor (now at Lawrence Graham), that was picked to advise on the £600m sale and leaseback of the building in 2007, when German property company IVG Immobilien and private investment bank Evans Randall acquired it and Swiss Re stayed on as a tenant.
“Nobody could hold a candle to what we were doing,” recalls another former Linklaters partner. “We were doing transactions that were beyond the computation of most people. When the press discusses real estate they talk about negotiating leases and the like, but there’s a whole world beyond that and we were definitely the market leaders. BLP [Berwin Leighton Paisner] might have had all the volume work, but we didn’t care. We had the quality.
“Corporate support was maybe 20 per cent of what we did. A huge chunk was development work, around one-third was investment and the rest was corporate finance, restructuring and cross-jurisdictional portfolio sales.”
Of course, Linklaters’ real estate team still gets deals – big ones, too. The last publicly announced one was the Battersea power station sale in July. The firm, led by partner Mark Burgess-Smith, advised Ernst & Young as administrators and receivers on the £400m sale to a Malaysian joint venture. Norton Rose, led by real estate partner Dan Wagerfield, advised the buyers.
“Over the past six months, even in what has been a quiet real estate market, our London real estate team has led on investment acquisitions and disposals where the value of the deals totalled in excess of £2bn,” says a spokesman for Linklaters.
The figures are impressive, but it is difficult to ignore the questions about Linklaters’ commitment to real estate when it is not just alumni and rivals at it, but industry professionals too.
“Linklaters has very few people left – all the guys we’ve used are gone,” says a director at one of the UK’s largest property agencies. “It’s a deliberate and marked move away from real estate and it means that people like me can no longer recommend them to potential clients.
“We just don’t tend to come across them any more,” he adds. “We still come across Freshfields [Bruckhaus Deringer] and Clifford Chance, and increasingly people at BLP and Eversheds, where real estate is a significant part of the business. We also do a lot with Norton Rose and Ashurst.”
In the interest of balance, it should be noted that another director at a top real estate services company said that although he was aware of firms cutting back generally in the sector, the Linklaters partners he used had not left, and for him that meant it was business as usual when it came to instructing the firm. In the end, as is often the case in real estate work, it comes down to personalities.
“Linklaters has a great team with some seriously good people like Patrick Plant, I haven’t really noticed any change” says the director who does, however, acknowledge that Linklaters practice is smaller that it used to be. “It was a vast team that was the right shape when activity was at its peak but things become tricky when activity drops […] Since Lehman, bar the odd quarter of above-average take up, we’ve dropped right down and you can’t just expect firms to plough ahead with the same overheads.”
Nonetheless, rival firms say they can smell blood, with talk of loose clients increasing. One anecdote, told by a real estate partner at top 15 firm and corroborated by another source close to Linklaters was that KPMG recently asked firms to pitch for some work but Linklaters declined the invitation, saying it could not or would not do the work.
“ Linklaters has done an awful lot of work for KPMG,” says the source close to Linklaters. “It’s an indication of how bad things are that they said something like that to a client as important as KPMG.”
Likewise, a source at a rival firm said that Goldman Sachs and UBS have been looking for another firm to do some property work following Linklaters’ retraction in real estate. Another said that Bloomberg has already turned to BLP for one mandate following the departure of Huw Baker to Lawrence Graham earlier this year. A source inside Linklaters, however, insists that the talk about Goldman, UBS and Bloomberg is not true. What this highlights, however, are the widely held assumptions about the practice in the real estate legal market.
Even if it is true, you may well ask ‘so what?’, as long as Linklaters has enough of a real estate practice left to support its corporate and finance departments, what is the problem? The firm has made no secret of where its priorities lie and it is difficult to criticise management at a firm where turnover has increased by 68 per cent and average PEP by 69 per cent in the past nine years.
“Linklaters is still a quality outfit [in real estate],” affirms one property partner at a rival firm. “When you get documentation from them it is great quality. They’re just in a rare position whereby they can take their least profitable clients and sack them. It’s a great luxury for a law firm.”
The problem is that after successive partnership clearouts sources that are well-placed to judge the inner workings of Linklaters believe they have spotted cracks indicating that the real estate department is struggling to perform its corporate support role.
Linklaters’ first firmwide restructuring, in the aftermath of Bain’s strategic review, was soon followed by another, called Clear Blue Water and masterminded by then-managing partner Tony Angel (now senior partner at DLA Piper) in 2003.
It was around this time that Linklaters first articulated its plan to focus on cross-border corporate and finance work, and label everything else as non-core. In total, some 24 partners were cut and, again, real estate and construction were the first departments in the firing line when it came to letting go of and de-equitising partners.
Six years later the firm’s current managing partner, Simon Davies, devised his own snappily-titled cull – New World. Here some 40 partners were cut along with a significant percentage of the firm’s associates. Like in 2003, the imperative was to chase Slaughter-and-May-like profitability and the way to do that, it was reasoned, was to continue to strip out any department or partner that was superfluous to supporting the needs of the firm’s corporate and finance teams.
It was at this time that the firm pulled away from development work. In May 2009 it was reported that Ann Minogue, a leader in non-contentious construction whose hire from CMS Cameron McKenna in 2001 was seen as a big coup for Linklaters, left for Ashurst. At the same time other partners in the real estate department were being de-equitised.
The cuts until this point had done little for firm morale. According to several former Linklaters lawyers, they sent a clear message that real estate partners were second-class citizens in Linklaters. Even partners at rival firms lamented this as a sign of real estate’s diminished prestige among the most profitable firms.
However, at that point it was still generally accepted that – barring one or two unplanned departures – the cuts had gone no further than management had anticipated. It was not until much more recently – in the past four or five months – that sources close to the firm got the impression the wheels had come off in terms of how the real estate department was being managed.
The red flag was the departure of department head Anne Byrne and partner Joe Conder to Capital & Counties Properties and US firm Goodwin Procter respectively. Impressions were cemented by the subsequent news that Linklaters was searching for a new real estate partner and a counsel to lead its construction team (The Lawyer, 10 September). According to those familiar with the firm, it could mean only one thing: corporate was lacking the tools it needed to service clients.
“Linklaters’ real estate department has had a desperate time in the past two or three years as a consequence of senior management meddling,” says one source close the firm. “Everyone is clear that the department has been reduced to a corporate support role, but now they don’t have enough people left to even do that.
“Management is being beaten up by corporate because they can’t get enough support from real estate and there has been approval, in principle, for a lateral hire.”
“I can’t imagine for one moment they have planned this,” says one former partner. “My guess is that the firm has taken its eye off the ball.”
Byrne and Conder’s departure was preceded by another firmwide cull, news of which broke in December 2011. This time around there was no pithy title, but some 10 per cent of partners faced the latest round of cuts.
Noteworthy real estate departures since then include Huw Baker and Julian Innes-Taylor, who left for Lawrence Graham, and the highly respected real estate finance head Claire Watson, who left to join BLP. Though Watson sat within Linklaters’ banking team, her departure is said to have been linked to Baker and Innes-Taylor. Without them, her practice became vulnerable.
In addition to the departures there were further de-equitisations among real estate partners and former group leader Plant moved to working a four-day week. One former partner who had been at the firm in previous redundancy rounds comments that this latest restructuring looked “like a case of wanton destruction”.
In the fog of a firmwide partner cull it is often difficult to discern which partners jumped and which were pushed. But sources close to Linklaters are adamant management had not anticipated the departure of either Byrne or Conder, who were both equity partners.
“What seems to have happened,” says a former partner, “is that in December the firm did the cuts on a faceless, by-the-numbers basis. Management wanted Byrne and Conder to stay but didn’t really check with them how they felt about the cuts.”
Investment specialist Conder is on gardening leave until October. Conder made partner at Linklaters in 2005 after joining from Taylor Wessing legacy firm Taylor Joynson Garrett in 1999 and even rose to co-head of Linklaters’ real estate practice. Sources say Conder was one of the few partners in Linklaters real estate team with a portable practice and who would regularly bring in his own clients. That kind of practice, it is said, would not have much space to flourish at Linklaters anymore.
Byrne, on the other hand, is believed to have wanted to do something different after 11 years as a partner in private practice. That said, a number of people have intimated that her role as head of a department over which she had little control and where she had to be seen to be supporting such savage cuts, made the decision easier for her.
“Many years have passed since the [real estate] department had control over itself and I suspect that Anne just got fed up with it,” claims one source. “She got so unpopular because she was having to say things that even she didn’t believe in.”
(Byrne declined to comment on Linklaters and could not be reached for comment with regards her departure)
The scramble to plug the gap left by Byrne and Conder shows critical mass in real estate is still essential for magic circle firms. A firm can mow the lawn as often it wants, but scorching the earth is still not an option – not for Slaughter and May and not for Linklaters.
“[Linklaters leaving real estate] doesn’t seem conceivable to me, not because there’s anything particularly wonderful about real estate, it’s just that there are sufficient instances where there are big jobs for major clients that a firm would be unable to get if it didn’t have a real estate practice,” says a partner at another magic circle firm. “I don’t think there’s any particular allegiance to real estate but it’s too important an area for magic circle firms not to want to say they’re capable of dealing with it.”
Indeed, Linklaters maintains that it is committed to real estate.
“As with all well-managed businesses, our real estate practice has adapted to market conditions,” says a spokesman for the firm. “Our strategy of being a market-leading real estate practice however, has not changed and our real estate sector offering, which includes market leaders in all aspects of our work, remains a strong one, both in London and globally, and the team continues to have strength-in-depth at both partner and associate levels.”
Nonetheless, sources close to Linklaters remain adamant that multiple rounds of cuts turned the firm’s real estate into such a fragile ecosystem that the loss of Byrne and Conder was an issue.
“If the firm had been left with Conder, Byrne, Mark Burgess-Smith and Andy Bruce as equity partners, then I would think that for Simon Davies that would have been the perfect situation,” says one former partner. “But now, without Byrne and Conder, they’ve only got two instead of four, and it’s not enough.”
Close to the edge
Linklaters has now found someone – Paul Wilson from DLA Piper – to fill the construction counsel role, but as The Lawyer went to press there was no news on the real estate partner hire. One former partner mentioned the possibility of Plant returning to full-time hours, but it is not clear if the firm would still require another partner to join the practice if that was the case.
Many in the market will be keen to see what calibre of partner Linklaters can attract. Some question whether the real estate department’s successive shake-ups will have a lingering effect on the firm’s ability to recruit.
“There is next to no equity in the department now,” says one former partner, “and the salaried partners that remain don’t have the same loyalty to the firm. It’s questionable how long they’re going to stay and anyone coming in would want to know that talent will stick around.”
That may be a pessimistic interpretation. Linklaters is still one of the best and most profitable law firms on the planet, and it can afford to throw money at problems like this.
For many former partners and others with an interest in Linklaters’ real estate practice, the main complaint is not what Linklaters has done with its real estate practice, but the way it was done. After all, most understand that Linklaters has to stay profitable.
“I understand all the arguments against it but no group of partners wants to be subsidising another less profitable group of partners,” says a former partner.
Still, some believe that there must have been a way to keep profitability up without retrenching so far.
“The reality is, of course, that Linklaters could have done extremely well in the [real estate] space in the same way that Clifford Chance has done,” opines one partner at a US firm. “It seems more a case of a lack of time and energy on management’s part rather than market fundamentals being wrong. But then, management doesn’t always understand the industry. Many of the bigger firms like [Linklaters] don’t give real estate the weight that it deserves and can justify.”
Clifford Chance has not been immune to the pressures facing the country’s most profitable firms when it comes to real estate, but retrenchment there has not been comparable to the scale of cuts at Linklaters. One source close to Clifford Chance contends that the difference between it and Linklaters is that Clifford Chance’s management has always seen real estate as a great source of clients for other parts of the business. One of the firm’s most valued clients, Canary Wharf, was won in 1987 by the firm’s then head of real estate David Bows.
One former partner, however, suggests the problem facing real estate departments within magic circle firms cannot be solved without taking a closer look at the lockstep.
“Lockstep was a good model when not everyone was armed with a laptop and could work out relative profitability [within the firm],” says the partner. “Also, in the old days when you would become a partner at 30 and leave at 65 no questions asked, people accepted ups and downs more because things would even out in the end. Now partnership is less secure and partners are less sympathetic.”
One suggestion is to treat different practice areas like international offices. In some cases at Linklaters, partners in foreign offices would be given full equity status but would have their profit share multiplied by a country factor (of less than 1) reflecting the fact that they could not bring in the same revenue as partners in London.
“You have to separate class or status from remuneration,” says one source. “If you look at the banks it’s the traders not the directors earning the most. Firms should deal with each practice area independently. That is a far more sustainable model than dragging down a practice until it’s an irrelevance.”
Indeed, if you were to gather a group of former Linklaters real estate partners together in a wine bar – as, The Lawyer is informed, does happen from time to time – the main gripe is not the cuts, but that more was not done to keep the practice intact.
“Maybe the big mistake was not doing something inventive with the real estate department,” says one former partner. “But the firm has just run the real estate department into the ground, not getting much in return.”
“We were the top real estate practice in the country,” says another former partner. “If I’d been managing partner I’d have found a way to stop the strain.”
Room at (not quite) the top
Real estate has never been the most lucrative of areas for headhunter.s
“Real estate lawyers don’t move much,” says one real estate head at a firm outside the top 20. “In part, this because the practice is less portable.”
“Moves in real estate account for around 10 per cent of partner moves,” adds a former headhunter. “Well, it’s somewhere between 10 and 15 per cent, but it trails far behind corporate and finance.”
One consequence of the magic circle’s retrenchment in real estate is that there is an enlarged pool of property lawyers looking for new homes and, invariably, they are forced to drop down a tier to find one.
But is coming from a magic circle background a clear advantage when it comes to property lawyers? One school of thought is that the elite environment and corporate support role that partners at top firms get used to can make them ill-suited to life at firms that expect them to win business as a matter of course.
“They’re good people, but their mindset is different,” says one real estate head at a top 20 firm. “And there’s a huge issue around de-skilling as a result of spending 20 years at firm where work is delivered to you.”
This is a sentiment shared by numerous sources among the chasing pack of firms, but those within the magic circle – or who once were – dismiss it as tosh.
“I’m not sure that’s the case,” says one magic circle real estate partner. “The days of work just walking up to the nameplate have gone. It used to be the case, but that was a long time ago.”
Another source says: “If you’re used to moving in the higher echelons, going back into the market is different, but I don’t think anyone with the intellect and experience that comes with working at Linklaters could fail to be successful at another firm.”
On the plus side the market is more buoyant – possibly thanks to firms such as Berwin Leighton Paisner, Nabarro, Pinsent Masons that are looking to fill the void left by the magic circle – than you might expect.
“There are more places prepared to hire real estate partners than some realise,” says Sainty Hird & Partners partner Nick Woolf. “I went to see a head of real estate at a fairly big City firm recently and he thought his was the only show in town. I had to tell him otherwise.
“When a partner comes from a magic circle firm it is tricky, though. It comes down to following and earnings. Partners have to understand they’re going to have to take a salary drop. But if you’re moving from a firm where real estate is being cut back, at least you won’t have to worry about client conflicts and there’ll be more opportunities available to you because you can drop your charge-out rates. If it’s done right, such a move can be rejuvenating for a partner.”