Conventional law firm thinking is still driven by M&A, of course, despite City law firms’ prolonged post-Big Bang drift towards the investment banking community. Finance teams have grown, splitting into product lines at the larger firms and, aside from Slaughter and May, increasingly give priority treatment to banking clients over corporates that spend the same money on legal bills. But in their hearts law firms remain culturally wedded to M&A, which produces their biggest fees, best margins and is more resistant to commoditisation than finance (paradoxically, because corporate is a less innovative practice area than finance). Cosying up to banks is often mainly about getting the nod on M&A too.
But, as Ashurst head of corporate Adrian Clark points out, such a stance is looking a little outdated. Of course, banks still want the corporate work, but these days they are as interested in putting together the M&A advisory role with financing duties and as many other value-addeds as they can dream up, not to mention getting directly involved in deals via their own buy-out-style acquisition funds. Likewise, trading and broking lines have become more important at the expense of highly-erratic M&A revenues.
The good news
Such shifts will create opportunities for the fleet of foot and Ashurst believes it has found one of the most interesting openings: prime brokerage. It is not hard to understand the firm’s enthusiasm. Prime brokerage has exploded as a revenue source for investment banks in the past five years in response to the rise of the hedge funds that form brokerage teams core clients. Back-of-the-envelope estimates are that a top 10 investment bank will often achieve 15%-20% of its revenues from prime brokerage. It is also phenomenally profitable in comparison to traditional institutional broking, with Deutsche Bank and UBS among those recently estimated to derive at least 25% of their profits from the sector. In short, the banks really care about it.
Ashurst started to look at the area seriously two years ago, partly in response to a secondment by corporate partner Nicholas Holmes with a bulge bracket bank, which identified a robust demand for external support in the area.
Building a small team around Holmes and associate Jonathan Haines (newly promoted to partner this year), the firm believes it has carved out a lucrative niche in a market that has gone so far largely unnoticed by rivals.
During the past 18 months the firm has built up a host of clients in the sector including Goldman Sachs, Lehman Brothers, Deutsche Bank, Dresdner Kleinwort and Bank of America.
Despite nipping in ahead of most rivals — firms such as Simmons & Simmons have approached the same area mainly from the hedge fund side — Ashurst concedes that the move has largely been about connecting the dots.
To a certain extent, Holmes’ team has replicated the kind of debt product work that would traditionally be handled in a structured finance team but for equity derivatives. The team is also active on the regulatory side, since a major part of prime brokerage is giving hedge funds exposure to exotic emerging markets that ban direct securities ownership.
Likewise, by approaching the practice from a corporate rather than finance perspective, the firm has benefited from improving its investment banking links (a near-obsessive goal for Ashurst in recent years). Obviously it is early days, but if the firm’s hunch is right, the question may soon be: how bothered are law firms about M&A?
alex.novarese@legalweek.com
