US law firms gear up to take on magic circle

Towards the end of last year, Ian Bagshaw and Richard Youle moved from Linklaters to US law firm White & Case. Other similar moves include Clifford Chance's private equity head David Walker, partner Tom Evans and more recently Kem Ihenacho moving over to Latham & Watkins. The high-profile transfers are proof that US law firms are clearly beefing up their UK private equity practices.

According to Justin Stock, partner at US firm Morrison & Foerster, who has previously worked at Freshfields and O'Melveny & Myers, US law firms have steadily been moving into the UK market, with already more than 100 firms present and more on the way.

Stock believes that private equity provides a good angle for many US firms trying to break into the UK market if they have solid a private equity practice in the US. "Big corporates tend to have much deeper and institutionalised relationships with their law firms, making it a much slower and more difficult process to change firms, whereas private equity clients are slightly easier to move because the relationships are more personal."

Stock attributes one of the main reasons for moves by magic circle fund formation partners to US law firms to the continued dominance of US LPs. "Several key fund formation lawyers have moved to US firms because the biggest LPs are still US pension funds, so the US framework is fundamental and US advice is needed."

Furthermore, European private equity often follows legal developments in the US market, which is typically six months to a year ahead. "European buyout houses are more aware of US law firms operating over here because of the US's leading position when it comes to new developments," says David Bresnick, partner at Morrison & Foerster.

American consumption
While many US law firms have had some sort of presence in the UK for many years now, the recent jump in activity by this group is likely to have been caused by the increased presence of US buyers of European private equity-backed assets. Graphite Capital has sold two companies to US private equity firms over the past 18 months; most recently selling Alexander Mann Solutions to New York-based New Mountain Capital.

Furthermore, alternative forms of debt that have long been deployed in the US market to finance deals – particularly high-yield bonds, which have yet to gain the same level of traction in Europe – automatically provides US law firms with an edge when it comes to the increased number of US buyers in Europe.

This rise has created a hybrid approach to the legal framework of deals, combining both a European style and US style. "Most US buyers have never done a locked-box deal, which is the way that UK buyers normally transact. There's very different thinking towards risk. It's not that laws are different; it purely comes down to market practice," says Bresnick.

Nothing up their sleeve
Speaking to unquote" sister title Legal Week towards the end of last year, a private equity partner at a leading City firm noted: "The magic circle is going to struggle to compete with the US because they don't have the environment where you can construct private equity at the centre of the firm. A private equity partner is more entrepreneurial than your average partner; this is valued more at US firms, which take into account contribution and talent. The magic circle is more interested in the institution."

As confidence in the UK economy improves, deal volumes are slowly picking up. But, rather than this increased activity causing heated competition between the law firms, as private equity transactions tend to have several lawyers working on them, there should be plenty of room for new US players as well as traditional magic circle firms.

However, traditional UK law firms should have an eye on increased competition from the US, and be doing more than just leveraging their European networks, as US firms boost their partnerships with local players in individual markets.

Where magic circle law firms will always have an upper hand is for mega-deals, especially those with a complex regulatory piece, such as large insurance deals, which require a great deal of experience and large resources. For example, Matthew Bland of Linklaters advised on the recent Rothesay Life deal, which saw Goldman Sachs selling part of its stake to Blackstone, GIC and Massachusetts Mutual Life Insurance Company.

But, the take-home message is that US firms are clearly increasing their dominance, says Bresnick: "US firms are still gearing up in Europe. They have lots of mandates with headhunters and the main flow of resource is still into US firms."

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