In some quarters, fending off a high profile raid on two of your top rainmakers would be viewed as a draw if not an outright win. Unfortunately for Clifford Chance (CC), London’s gossip-fuelled legal market is a tough audience to please.So for corporate lawyers, the spectacle of Weil Gotshal & Manges coming within a whisker of securing the services of Matthew Layton and James Baird, widely regarded as the twin engines of CC’s much-vaunted private equity practice, is judged as highly unsettling.
“If you were compiling a list of partners that CC could least afford to lose right now these two would be at the top of it,” says one ex-CC partner, summing up the consensus.
Still, understanding the importance attached to the pair requires context. The practice is the legacy of Clifford Turner’s pioneering move into the sector at a time when the blue bloods of London’s legal scene did not want to know.
Such commitment has translated into Europe’s best private equity team, boasting an unsurpassed client base and enviable strength in both equity and debt. And while CC has talent to spare, notably in the shape of David Pearson, Layton and Baird are clearly established as the top names in the practice.
Client favourite Layton in particular wins plaudits across the board having built his practice around clients of the calibre of Permira and PPM Ventures. In comparison, the older Baird is viewed as less accessible, but with key relationships with clients such as CVC Capital Partners, winning over this “austere Scot” would be a major coup for any firm hoping to break into the European market.
“Matthew is basically a superb lawyer with a real client following,” says one former CC man. “In a sector where there are a lot of abrasive idiots, he is the guy that clients want.”
Given this pedigree it is no surprise that the pair — and they work very much as a team — appeared on rivals’ shopping lists, not least because private equity remains one of the few City markets where partners still take clients with them.
Attention was also focused on the pair because of persistent reports that the team was unhappy. Conflicting reasons have been given for this unease, although concerns about CC’s current profits are widely cited. Given the fact that the firm’s average partner profits are expected to fall below £600,000 this year and that the team is widely viewed as London’s most lucrative practice — “I would be surprised if that team was not averaging partner profits of more than £1.5m,” one rival says — this is understandable.
Others point to a more general concern with the support and recognition that CC has given the practice at a time when the firm wants to stress its credibility as a public M&A player.
Notably, rumours have persisted that the pair were talking to US firms since late 2003. Unconfirmed reports had Layton moving in-house with Permira, while Baird had been linked with Freshfields Bruckhaus Deringer. But it is a mark of how pre-eminent CC is in the sector — particularly at a time when many clients of arch rival Ashurst are relatively quiet — that few believed the two would quit for a rival, let alone one with a relatively slim European network and City finance team.
What turned heads — and raises worrying questions for CC— is how close Weil Gotshal, which has long wanted to extend its City offering further beyond core client Hicks Muse Tate & Furst, came. Last month Layton and Baird apparently accepted a verbal offer from Weil Gotshal, which believed the deal was secured after three months of seriously wooing the pair. Clients are believed to have been discreetly sounded out and Layton had even been assigned a secretary. In the interim, and before the pair formally resigned, CC’s management persuaded them to stay.
Understandably, CC remains highly reluctant to discuss any concessions or assurances it has given to the pair, although it is believed the firm is considering creating a new management role for Baird, who is currently global head of private equity. Layton, meanwhile, has agreed a fivemonth sabbatical, longer than the usual three-month paid leave allowed to partners.
All the signs are that CC essentially turned them around by asking them to keep the faith, notably promising that concerns over profitability and partner performance are being addressed.
That CC appears to have convinced them with a plea to loyalty rather than making embarrassing concessions will be some comfort.
But there is no doubt that the firm has taken a knock. Indeed, many rivals question whether the pair — and in particular Layton — will want to remain with the firm in the long term now that news of the talks has gone public. At the very least, CC will have to move quickly to reassure clients that the partners are committed to the firm.
Not that CC’s City rivals shouldbe too smug, as the affair highlights the continued ambivalence among top London firms towards private equity. As one former magic circle partner puts it: “Three years ago M&A liquidity dried up except for private equity and the big firms decided to trumpet how supposedly big they are in the sector.”
But despite the new found enthusiasm for the sector, many private equity lawyers still feel that corporate heads lack the nerve to stick by a sector that is more risky than public M&A.
“The truth is that big firms are still ambivalent to private equity. You have to be ready to invest and take risks on the bids and some firms do not have the stomach,” says one partner.
This seems dangerously shortsighted at a time when US firms — often following key clients into Europe — are eager to pick up partners with serious books of business. It was certainly telling that just as Legal Week revealed how close Weil Gotshal was to bagging a top London team, Milbank Tweed Hadley & McCloy was finalising its hiring of a large chunk of Freshfields Bruckhaus Deringer’s much-vaunted German private equity practice.
And, given the ample supplies of equity and senior debt in the market — notwithstanding recent wobbles in the high yield market — there is every sign that private equity will continue to grow in importance and prove a fertile hunting ground for US firms.
But for CC the consensus is that the main issue is not fending off predatory US rivals but basically getting its own house in order. On this front the signs are better than some rivals give credit. After what the firm concedes was a low-key start, managing partner Peter Cornell is reported to be slowly bringing its troublesome New York practice on board.
One ex-CC partner comments: “Peter has been spending a lot more time in the States. A few more partners will go, but they have dealt with most of the 800lb gorillas now.”
And while defections in New York have attracted plenty of bad press, German rivals concede that CC is discreetly and successfully stripping down its German partnership.
It should also be remembered that the firm has had to swallow considerable short-term investment costs at its London and New York offices — factors that have clearly hit profits.
With the firm’s ducks apparently now in a row, CC will have to make good on its ambition of taking average partner profits up to £1m within three years. One seasoned CC-watcher predicts the firm will wait until then to address profit distribution, possibly by introducing country factors to account for different international markets. “It is much easier to talk about how you slice things up when you have a bigger cake.”
In the meantime, the challenge is persuading high-billing partners in London to keep the faith. Even CC, which has a history of being written off too quickly, cannot afford too many more episodes like this.