“In the banking world, size matters.” More a statement of fact than ambition but the observation by Jason Fox, Herbert Smith’s head of finance, recognises that it takes plenty of bodies to be taken seriously in the clubby world of banking.
So far the top 10 City firm has been true to that logic, channelling considerable investment into its finance practice over the last three years.
That decision came after David Gold took on the mantle of senior partner from Richard Bond in 2005 and marked something of a sea change at the firm.
As such Herbert Smith’s twin pillars of corporate and litigation both saw new heads appointed, in the shape of Michael Walter and Sonya Leydecker respectively.
That year also marked a period in which Herbert Smith’s unspectacular programme of international expansion was to move up a gear, especially with regard to offices in emerging economies.
It was against this backdrop that the softly spoken Fox assumed the helm of the firm’s little-noticed banking team from Clive Barnard with a mandate from Gold to “do something different”.
That brief would mean turning the practice around from what was essentially a support team focused on servicing the finance needs of Herbert Smith’s corporate clients into a fully fledged, bank-driven practice.
A challenge enough, many would say, given that Herbert Smith was attacking the finance market well after corporate-heavy firms like Ashurst and Linklaters had successfully broken into the market.
Even worse, the last five years has seen substantial investment in European finance practices from
Many also questioned whether a firm with such a reputation for conservatism could pull it off, or even if it was worth the hassle given Herbert Smith’s respectable position in litigation and M&A.
Neither was it promising that Herbert Smith had form for talking up its finance practice well before it had much of a practice to speak of.
In the meantime, there has also been the small matter of a global banking crisis to contend with.
Yet, undeterred, Gold set the goal of taking banking revenues to 20% of its firm-wide revenues within five years. And roughly half way through its dramatic drive it is evident that the firm has had more success than many gave it credit.
The practice has grown by 83% in revenue terms to account for £40.5m in 2007-08, equivalent to 9.6% of Herbert Smith’s current £421.8m turnover. During that period the low profitability of its banking practice has also been substantially improved, roughly doubling over the three-year period, though it still slightly lags the firm-wide average of £1.036m.
Just as important, Herbert Smith has been added to many of the key banking panels including, it is believed, the formal rosters of ABN Amro, Lehman Brothers, Lloyds TSB, Bank of Ireland and Standard Chartered.
The firm is also known to have made substantial in-roads with key institutions such as Royal Bank of
This has greatly expanded a finance practice that was once heavily reliant on a handful of institutions such as UBS and Credit Suisse First Boston.
A once borrower-driven practice has been transformed during that period, with seven out of 10 of the key clients of its finance team being institutional (although, ironically, key Herbert Smith client Tata Group remained the team’s largest client in 2007-08).
Fox is admirably candid about the challenge of securing places on bank panels, even for a solid City brand like Herbert Smith, conceding that the firm had to assiduously market itself and its key partners, often simply to get its foot in the metaphorical door. And even then getting on the panel is only the first step, the challenge was to get something substantive under the firm’s belt.
Fox (pictured) comments: “We always find that when we get that first piece of work from a bank we would get more — our partners have to enjoy the business development side of things as well as being strong technicians, otherwise we will struggle to achieve our goals.
“Banks can be very brand-conscious. As a new player in this market we have to offer a better service than the longer-established players.”
But he adds: “We have had a fantastic run for three years — the wind has really been behind us.”
But while the firm could count on a buoyant debt market in the first two years of Fox’s term, Herbert Smith’s task was further complicated by the scale of practices it was trying to build, with the firm’s ambitious growth spread across a range of practice lines.
Herbert Smith was already operating its finance group across five sub-teams, all of which were targeted for substantial growth. Fox’s arrival also saw the firm shift the sub-teams into something more substantive, which led to the appointment of team heads to drive through practice-line growth.
Leveraged finance is led by Ewen Fergusson, property finance by Gary Hommel, Kevin Pullen is in charge of corporate recovery, structured lending is run by Jake Jackaman and David Wyles leads the project lending team.
Given the firm’s growth needs, senior recruitment was essential. Fox freely admits that he spends most of his non-client time scouring the market for potential hires, a focus that has so far delivered seven partners since 2005.
Perhaps the most significant of those recruits were Chris Fanner and Ian Yeo, who joined the firm from Denton Wilde Sapte and are seen as having been vital in helping to build up the firm’s immature leveraged finance practice.
Others partner hires include projects specialists Alexander Currie from Linklaters and Andrew Newbery from Norton Rose, the Paris-based acquisition finance lawyers Jacques Bertran de Balanda and Regis Oreal, both from Lovells, and respected Islamic finance specialist Nadim Khan from Norton Rose.
Finance has been furthered bolstered by promotions, including Malcolm Hitching, who was hired as an associate from Norton Rose in 2004, and internal promotions like Adrian Cheng (project finance), Alex Aitken (real estate finance) and Kristen Roberts (acquisition finance).
The result of this — by the firm’s standards — hiring spree is a 28-partner practice, with 62 associates, a considerable expansion on the 18-partner practice Fox inherited.
In practice terms, the firm is regarded as having made particular progress in structured finance under respected operators like Jackaman and Jane Borrows. Property and energy finance, the latter Fox’s own area of focus, are also regarded as strong areas.
Given the need to bring in credible names, Herbert Smith has made substantial investment, with half the partner level recruitment understood to have been made at senior equity-partner level (more than half of the firm’s partnerships are salaried). The firm also operates a low leverage that reflects a self-conscious move to sell a partner-driven service and the decision to avoid the more commoditised areas of capital markets and loans work that is dominated by the big three of Clifford Chance, Allen & Overy and Linklaters.
Herbert Smith has managed to belie its staid reputation to foster an entrepreneurial culture in the finance team that, combined with its brand and respectable profitability, has so far proved an effective draw for potential recruits.
Assessing external views to judge the firm’s progress is trickier as the finance world tends to be slow to acknowledge new entrants. While the big three finance practices still maintain a dismissive air towards Herbert Smith, more generous-minded rivals concede that the firm has made progress.
Hitching argues that the firm has made “huge strides” in the four years since he joined: “I joined because I felt there was a real opportunity to build a quality business, and that decision has been more than vindicated.
“We are not seeking to build a monolithic finance practice, but to develop a strong business in key segments of the finance market.”
The firm’s apparent progress has also defied expectations that growth would be held back by lack of support from other practices, an understandable claim given that Herbert Smith does not have the greatest record for cross-team co-operation.
Yet there is so far little evidence of internal grumbling regarding investment in finance and some corporate partners concede an underweight banking practice had on occasion stopped the firm securing big-ticket M&A mandates.
Corporate partner James Palmer comments: “Practice growth over the last three-to-five years has been exciting to watch and I and others outside finance are particularly pleased to see the practice developing high-quality capability, building top-tier work rather than a second-level practice. Although everyone wants the practice to continue to expand, we support the fact they have been very focused on building quality and reputation with real depth in some of the specialist practices.”
Aside from a supportive partnership, Herbert Smith’s international investment programme, which has focused largely on key emerging markets, has also complemented the finance push.
Not only are jurisdictions like Russia, the Middle East and Asia key finance markets but as less established jurisdictions they offer the potential for Herbert Smith to vault the established order in a way that is impossible in the City.
John Balsdon, the respected energy finance specialist recruited from Clifford Chance’s
Balsdon says: “We are still evolving but the key is not to rush and to build out on the areas where we are strongest.”
Although internationally finance was only responsible for some £8m worth of revenue last year, growing that is a key priority for the firm. The firm’s finance practice currently extends to its offices in
Likewise, the firm is quick to cite work for clients like Renaissance Capital in
But while growth opportunities in foreign climes are not hard to see, a key question for the firm will be whether it has the stomach to keep investing in finance in the middle of the most sustained turmoil in the banking world since the Latin American debt crisis a generation ago.
Does the firm — traditionally not the most investment-minded — have the patience to follow through on its commitment to finance?
On one level the current market should provide a golden opportunity to pick up the kind of talented partners that have been in scarce supply until recently. On the other, this will stretch the firm’s resources in the short term and Herbert Smith has been an uneven financial performer in recent years.
Although its turnover rocketed in 2007-08, there are some indications that this was in part due to a handful of big-ticket mandates rather than across-the-board performance and some partners are downright pessimistic about the current financial year.
Nevertheless, current indications are that Herbert Smith intends to maintain its course, with the firm in talks to bring in a partner in both structured finance and property finance, as well as its aforementioned plans for
Choppy times ahead, Hommel believes, will play into the firm’s hands: “There are opportunities out there. Our clients tell us we are entrepreneurial and tenacious; that, together with the fact that lawyers here have the background and flexibility to turn their hands to new, innovative products, means we are well placed to exploit new openings — as well as to help existing clients through the market quagmire.”
Fox concedes that Herbert Smith has no prospect of hitting its 20% of firmwide revenue for finance within the original five-year timeframe, not least because firm-wide turnover has risen considerably in the last three years.
Nevertheless, he remains hopeful that the 20% target could be managed in five years. Many would say that, providing the firm is maintaining the right quality of mandates, 15% would be a very credible performance over five years.
It does remain, of course, relatively early days. Building a mainstream finance practice at this level is a 10-year project and, as Balsdon points out, a firm like Herbert Smith will have inevitably been constrained by its partnership culture, which will never accommodate too much growth.
The firm is still a way off from regularly securing the quality of work that would really match its ambitions.
Yet it has moved a considerable distance in a short space of time. If Herbert Smith has the courage of its convictions, now should be the moment for its finance practice to shine.