Legal bald eagles

11 January 2008

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With London the hub of European private equity activity, it is little wonder US law firms are anxious to establish a private equity practice in the City. Once prime floor space has been acquired, the hard part of establishing a presence and building a team begins. A number of US law firms have been bolstering their London teams with new corporate and M&A hires in recent months and firms continue to migrate to the City. US players to have opened offices in London in 2007 include Nixon Peabody and Proskauer Rose, the latter poaching experienced private equity practitioner Matthew Hudson from rival firm O'Melveny & Myers to head its Mayfair office.

It is a tradition for UK law firms to perpetuate horror stories about their trans-Atlantic competitors, which often have little basis in fact. Gossip and half-truths are the inevitable consequence of the bed-hopping that takes place among legal professionals. That said, US firms face real challenges setting up shop in such a costly market. The costs associated with the initial move and the maintenance of a City presence has led an increasing number of US firms to look at ways to reduce overheads. One option being seriously considered by a number of US firms is a merger with an established UK outfit. Others have introduced schemes to hold back partner pay, created a new tier of lower-paid associates or simply restructured and shed jobs.

An oft-cited consequence of US firms opening in the UK is the effect it has on pay structures and recruitment. "It is no secret that US firms pay more than UK firms," says one lawyer at a magic circle firm. In the past year, UK private equity practices have felt this effect more keenly than most, having lost a number of experienced professionals and rising stars to ambitious US groups. However, a few have also made tracks in the opposite direction. One partner at a UK firm with experience of US practices believes that it is not always the firm itself, but the perception of a US firm among potential clients, which can be a barrier to generating business. "Quite honestly, a lot of people don't like Americans. Their general perception of Americans informs their belief that US firms are aggressive and expensive and best avoided," he says.

Perception may be part of the issue, but the culture at some US firms is also to blame when business is not as strong as expected, adds the partner. He says that a recurring difficulty is the response of the US office to a UK sourced deal that requires an element of input from the US side. "If the deal has a US angle the US office will want to run it. Some US partners take an adverse view of the capability of the London office. This can result in UK work being handled in the US." Another City-based partner agrees: "At my previous firm, US partners rarely passed over contacts and communication between the New York and the London office was infrequent at best."

The partner levels further criticism at US firms that provide a full service, but do not invest the required resources. "Some do what they do and do it very well. Some try to be all things to all men and as a result you get a thin veneer. They see London as a trophy location."

However, few would deny that a select group of US firms have not only established a strong presence, but have developed a private equity practice to rival the best UK offerings. Weil Gotshal & Manges, Kirkland & Ellis, Latham & Watkins and Debevoise & Plimpton have muscled in on a number of private equity deals in the UK over the past year. And Skadden Arps Slate Meagher & Flom and Shearman & Sterling both won mandates for Delta Two in its ultimately unsuccessful pursuit of supermarket giant J Sainsbury and also worked on a number of more successful deals in 2007. These firms have shown bullish progress in the past few years, and if they can build on it will take an increasing share of the private equity pound in years to come.

Nathan Williams is Editor of Private Equity Europe.