Legal Week’s 2006-07 results, the first finalised picture of the performance of the
Average profits per equity partner (PEP) across the top 50 were up by 13.5% to power six firms past the £1m mark and take the average PEP from slightly more than £500,000 in 2006 to £569,500 this year.
The magic circle unambiguously led the field, benefiting from another busy 12 months for M&A and securities markets. The
With the inclusion of the smaller fifth member Slaughter and May, the magic circle also easily outpaced its smaller rivals to grow revenues by 16.6%, with Allen & Overy and Linklaters both adding more than £150m in revenue to their top line along the way. Profits growth neared 25% to send PEP past £1m for the entire group.
Clifford Chance (CC) managing partner David Childs said the results vindicated a decade-long run of foreign investment by the big four firms. He told Legal Week: “Our foreign offices are now maturing. We are seeing significant revenue increases from these offices and they are becoming more profitable. The model is proving itself.”
Norton Rose chief executive Peter Martyr conceded that the group was pulling away from UK rivals, commenting: “It is entirely reflective of the M&A boom. They are very large and more advanced in global structure and are picking up a disproportionately large part of the M&A boom.”
Chasing pack gets caught
The figures also confirm predictions that the traditional ‘tiers’ of City firms are breaking down as a confident band of upwardly-mobile practices — among them SJ Berwin, Berwin Leighton Paisner (BLP) and Macfarlanes — go head-to-head with traditional ‘chasing pack’ firms, such as Lovells and Norton Rose, that once enjoyed a relatively free rein below the magic circle.
Despite a generally confident performance from this section of the market, City firms outside the magic circle put in some of the most widely diverging performances in the top 50.
While Ashurst, SJ Berwin and Nabarro performed well above trend, large firms including Lovells and Denton Wilde Sapte struggled to keep pace.
Competition in this ‘first division’ has been further intensified by successful national practices such as DLA Piper, Eversheds, Addleshaw Goddard and Pinsent Masons. Belying their reputation as counter-cyclical practices trading on lower overheads, national and top regional firms managed above-trend performance for the second year in a row, cementing claims this group is becoming accepted as credible competition in the City mid-market.
As can be seen from a six-year breakdown of results at top 20 UK firms, comparing 2007 to the last boom year in 2001, most major firms have struggled to sustain above-trend growth within the cycle. However, a group of star performers, including Linklaters, SJ Berwin, BLP, DLA Piper and Addleshaws, have manifestly improved their financial position since the last boom. Conversely, Norton Rose, Dentons, Lovells and CMS Cameron McKenna are seeing their position come under mounting challenge.
The international view
Taken internationally, these trends will be seen as bolstering the hand of
Aided by the strength of sterling, the magic circle has matched or outpaced profits at most comparable US law firms such as Skadden Arps Slate Meagher & Flom. The only firms still to clearly outgun the elite London firms’ PEP rankings are top Manhattan ‘boutiques’ such as Wachtell Lipton Rosen & Katz and Cravath Swaine & Moore.
“The
Leverage levelling out?
As expected, the results show leverage between equity partners and fee earners continuing to grow, up from 6.3:1 in 2006 to 7:1.
However, in contrast to the ‘financial engineering’ of recent years in which equity numbers have fallen and utilisation has been pushed, City firms appear to be again expanding in earnest, with total fee earners up from around 37,000 last year to just over 40,000. Likewise, partnerships have started expanding modestly once more, with total partnership up by 4.7%. Equity promotions were more modest, however.
It is expected that City firms will come under growing pressure to target less aggressive profit margins after a year in which it is conceded that considerable costs have been passed to clients and diminished partner prospects have damaged associate morale.
Problems associated with leverage have also been evident at
As suggested by last year’s results, current trends in the
Set against that,
Firm by Firm 2007 - In Numbers
Can the magic circle sustain their bid for world beater status - or will the next downturn prove their undoing? Join the debate with the Legal Week Top 50 Talkback special.