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He who dares… Mid-market acquisition finance is an overcrowded, if not completely saturated, arena for law firms. All the warning signs read: don’t go there. Firms aren’t listening. A buyout market is too much of a prize. That’s why firms will risk, and spend, so much VANESSA PAWSEY
LAST YEAR, MACFARLANES SHOCKED the market by making not one, but two, lateral hires in its banking department. The news that Tom Speechley of Norton Rose and Bronwen Jones of Kirkland & Ellis were to join the firm was met with both surprise and admiration – surprise that Macfarlanes has surpassed its reluctance to making lateral hires and admiration for the fact that it has taken its first step towards establishing a stand-alone debt practice. Hiring Jones, whose clients are private equity houses, is a great move and bolsters its current capability. The recruitment of Speechley, who has strong relationships with the banks, and has been top of headhunters’ lists for for some time, is an admirable coup. The diminishing number of deals means that it is no longer enough to be in the market solely on the debt or on the equity side. To maintain visibility, firms need to be in both. The result is that the firms historically associated with private equity (think Macfarlanes, Travers Smith Braithwaite and SJ Berwin) want a bigger slice of debt. At the same time, those in a pre-eminent position with the banks are now bulking up their private equity (think DLA and White & Case).
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And deal sizes are increasing. Private equity houses have realised that you spend the same amount of time on large deals as the small ones and therefore it makes sense to opt for the former. Breaking into the market is only possible at the lower end and the move towards bigger deals makes the challenge more difficult.
THE MID-MARKET PLAYERS Firm
Key partners
Mid-market clients
Addleshaw Goddard Ashurst Berwin Leighton Paisner CMS Cameron McKenna
Karl Woolley Nigel Ward, Mark Vickers John Hayward John Naccarato
Denton Wilde Sapte
Chris Fanner
BoS, HSBC, Barclays RBS, BoS, Barclays, BNP Paribas, Cinven, CVC, Candover, Electra Barclays, RBS, Close Brothers Private Equity Lloyds TSB, RBS, Lloyds TSB Development Capital, ABN AMRO, Bridgepoint Capital, Legal & General RBS, BoS, Barclays, Babcock & Brown, Fortis Bank, SocGen Barclays, RBS, BoS, Lloyds TSB, Montagu, West Private Equity, Phoenix, Gresham, Lloyds TSB Development Capital Barclays, CIBC, HBOS, Mizuho, SocGen, 3i, Advent International, Charterhouse, HgCapital RBS, Candover, HBOS, GSC Partners Europe, Alchemy, 3i, PPM Ventures, Clayton Dubilier & Rice, Kleinwort Capital, Pernod Ricard, Energis, Virgin, Sony, Global Treasury RBS, BNP Paribas, SocGen, WestLB, HSBC, Royal London Private Equity, STAR Capital Partners HSBC, Bridgepoint Capital, Lloyds TSB, ISIS Equity Partners RBS, Graphite Capital, Hermes Private Equity, Bridgepoint, Permira, Cabot Square RBS, BoS, 3i, Apax Partners, ING Rothschild, Primary Capital, Bridgepoint Capital, Phoenix
The market DLA John Cutler, There has also been a shift in Philip Butler control at the banks. According to Tim Jones, joint head of securities at Freshfields Bruckhaus Lovells Matthew Cottis, Deringer, there is much more Adam Freeman focus on financing in the Macfarlanes Tom Speechley current market, where the catalyst for nearly all M&A is private equity. ‘Straight M&A is often a simpler operation than Norton Rose Philip Whale the complex structures in private equity deals,’ he says. Pinsents Martin Lane ‘In the past, the M&A people would have called the shots but SJ Berwin Jeremy Cross now that the focus at an early stage is on the financing, there Travers Smith Braithwaite Neil Murray has been a role reversal.’ Inevitably this has made firms focus on their financing capability. firms are noticeably absent The firms that compete consistently in because, apart from White & the middle and upper mid-market (deal size Case (which is on the Barclays £50m-£300m), advising the UK clearing panel), they don’t tend to target banks, are Ashurst and Lovells at the top the UK clearing banks. end, followed by DLA and then, to a lesser It is in the banks’ interests to extent, Norton Rose, Denton Wilde Sapte prevent too much consolidation and CMS Cameron McKenna. In the current – it is important for them to market, Allen & Overy, Clifford Chance and Linklaters, which once operated exclusively in the upper echelons of the market, also accept instructions on some mid-tier deals. Firms making a serious play for this market are Macfarlanes, Travers Smith Braithwaite and SJ Berwin, which are strong in private equity and want to redress the balance on the debt side. Berwin Leighton Paisner, which is strong in property finance and PFI, is looking to broaden its finance practice. Finally, the national firms that are currently confined to the lower mid-market in London, but which often have a much stronger presence in the regions, include Addleshaw Goddard, Osborne Clarke, Wragge & Co, Pinsents and Eversheds. US Jones: providing private equity focus for Macfarlanes
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keep favoured firms on their toes and to stave off complacency. Realistically, they also have their hands tied and it would be a risk for them to branch out without reason. ‘We have a responsibility to our clients,’ says one banker at a UK clearing bank. ‘We have to make sure the deal is painless and the legal aspect is fundamental to that. It must not hold up the process.’ The banks say that acquisition finance is difficult for new entrants. Unfortunately the success of these firms lies with them. If the firms can’t convince the banks to use them for contract volume work, there is little chance of success. So what are the banks looking for?
Criteria ‘It comes down to individuals,’ says Barclays head of acquisition finance, Gordon Watters. ‘We want at least two or three experienced leverage finance partners before we consider using a firm. Track record and back-up are important; we need to know that they can cope with more than one deal.’
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Fees also count for a lot (an obvious advantage for UK firms with capable operations that can be managed outside London), but the consensus is that you get what you pay for. As well a sizeable team, the banks are also looking for optimum partner contact, strong project management and clear leadership. ‘If we go to the large firms for a midmarket deal, we are down the list on their priority scale,’ says one banker. ‘Whereas there are other firms that are very good at giving us partner coverage for mid-tier work.’ In the past firms have tended to grow debt capability internally. Take, for example, Mark Vickers, who is known among the UK clearing banks as the doyen of mid-market acquisition finance. Vickers is now at Ashurst, where his candle has burned so brightly he made it to the management board in December, after just four years at the firm. But he built his practice at DLA, where he developed, according to one banker, a ‘tremendous reputation’ with the banks. ‘He set out stall to act for the banks in a way that no one else did,’ says the head of legal at a UK bank. He also backed the right players, getting in close with The Royal Bank of Scotland and Barclays, two banks that have consistently been active players in the market (unlike, for example, HSBC, which has dipped in and out). At the time it was an unusual strategy and most firms that weren’t already hinged on the debt side were more interested in targeting private equity, where the fees are higher. But DLA’s strategy paid off and, despite Vickers’ departure, the firm is now streets ahead of regional competitors that have so far failed to move their local relationships to London. But bankers say this strategy won’t work again. Now that the market is mature and relationships have been consolidated, new entrants will need a fresh approach. ‘I’m not sure any firm could copy what DLA did. Firms are having to do it differently and it’s much harder,’ said one source. The answer in today’s market is to recruit. But as one banker points out: ‘The top deal-doers are unlikely to move to somewhere relatively unknown.’ Macfarlanes got lucky. But it won’t be that easy for the others.
Speechley: major coup for Macfarlanes
According to Macfarlanes’ head of acquisition finance, Julian Howard, the firm has been looking to bolster its debt practice since 1997. ‘We used external recruiters the first time but we failed. Since then we’ve built a more credible base and this time we attracted better quality people,’ he said. PEP has risen steadily over the last five years (despite falling 1% in 2003) and is now at £735,000, making it the third most profitable UK firm. This can’t but help improve the quality of laterals available. Few others can compete.
Leveraging
However, SJ Berwin and Berwin Leighton are included on the Barclays panel for business banking, lending and finance, whereas Macfarlanes and Travers Smith are not. Eversheds, Wragge & Co, Osborne Clarke, Hammonds and Pinsents are all also on the list. (This is partly because the Barclays panel is general finance, where as the RBS £100m+ panel relates strictly to acquisition finance.) Private equity is the obvious route in to the market, given that these firms have both the visibility and a necessary level of debt expertise. Travers Smith Braithwaite has a reputable property department and now has a seven-partner finance team, led by Neil Murray, with four partners focusing on acquisition finance. In the last few years it has made good inroads into the banking side, particularly with RBS and Bank of Scotland, but it still has some way to go before it achieves regular instruction from the banks. Berwin Leighton Paisner and SJ Berwin recruited from Osborne Clarke. Early last year, London partner John Hayward joined Berwin Leighton Paisner; in November, Bristol partner Jeremy Cross joined SJ Berwin. Hayward and Cross advise banks and borrowers and their appointments mean that both firms now have three partners active in leveraged finance. In May, BLP is taking on Michael Ewart from Richards Butler, and he and Hayward will focus purely on acquisition finance. While Macfarlanes has tended to advise the borrower (although it does do some work for RBS), Speechley’s recruitment is likely to change that. He has strong relationships with RBS and NIB Capital Bank and if he can convince them to follow him,
Firms are making a play for acquisition through their strength in private equity, general finance or the regions. Looking at panel advisers, RBS has rewarded the private equity bias, whereas Barclays still works in favour of the regional firms. Macfarlanes, SJ Berwin and Travers Smith have all secured positions on the RBS £100m+ panel, Tim Jones, joint head of securities, Freshfields Bruckhaus Deringer as has Berwin Leighton Paisner.
‘In the past, the M&A people would have called the shots but now that the focus at an early stage is on the financing, there has been a role reversal.’
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> he could be the catalyst to propel the firm onto the banks’ radar. Gordon Watters of Barclays says that the regional firms are in a strong position because they can potentially leverage off their relationships with the regional banks. Addleshaw Goddard and Eversheds have solid reputations in Leeds and Manchester, while Wragge & Co and Pinsents hold their own in Birmingham. The potential is there, but these firms need to build up business in London. Addleshaws’ London office is being closely scrutinised since its merger, while the market is waiting to see what Pinsents, Wragges and Eversheds do next.
side in London. Eversheds has two partners in private equity and David Boyd and Indraj Mangat do some acquisition finance work, but it still lacks visibility. Similarly Wragge & Co has relocated a couple of private equity partners from Birmingham but the London office is still very small and has yet to make any advances in recruiting banking partners.
Slippery slope
Howard: credible base boosts recruitment
Even for firms that have succeeded once, it’s easy to be knocked out of the fray. As long as acquisition partners are in demand, poaching is a foreseeable danger. For Norton Rose, the loss of banking partner Tom Speechley, who was the only full-time acquisition finance partner following the departure of four others to Allen & Overy, represents the end of an era. The firm claims to have four partners left – Philip Whale, Lucy Wolley Dod, Michael Ings and Stephen Parish – but, in reality, none of them focus on the banks in the same way as their predecessors. It is not the first firm to fall from grace. Sarah Coucher, who moved to Bingham McCutchen a year ago, was the last in a long line of departures from Denton Wilde Sapte which left the group a shadow of its former self. Chris Fanner, who took over from Coucher as head of the practice, has spent the last year rebuilding the team and, in October, succeeded in hiring senior associate Ian Yeo from the Frankfurt office of Clifford Chance, where he headed the English leverage finance team. Denton’s efforts have been helped by long-standing relationships with RBS and Bank of Scotland, which continue to instruct the firm. It also struck it lucky when it picked up an instruction from ABN AMRO on a bid for Safeway after Allen & Overy was conflicted out. Having a background in finance is an advantage, but even Dentons is finding it difficult to recruit. Fanner says he would jump at the chance to recruit a partner of the right calibre.
‘There’s no point flipping a profitable firm into something else that might not be so profitable.’ Neil Murray, Travers Smith Braithwaite
The news that Pinsents is about to lose its head of private equity, Alan Greenough, to White & Case is likely to hasten the firm’s decision to do a London merger (so far it has been linked to Nicholson Graham & Jones, although talks have fallen
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through). Greenough’s departure will be hugely damaging to the national practice – he was seen as a talisman, bringing as he had commercial successes to Pinsents’ Birmingham and Leeds offices before moving to London. Certainly, it highlights the firm’s need to invest more in leveraged finance. As well as its regional reputation and relationships, Pinsents has built visibility in the London private equity market and it would do well to look for a merger partner with strength in either debt or equity funding. Eversheds and Wragges also need to bolster their debt
Cherry picking It’s hard for most UK firms to recruit from the Magic Circle or US firms for one simple reason – money. The firms generally targeted are those just below the top. In the
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Weil, Gotshal & Manges at the acquisition finance market, partners at the end of 2001. (Ashurt’s failed likes of Lovells, Ashurst and DLA are the merger talks with Fried, Frank, most vulnerable. Head of acquisition Harris, Shriver & Jacobson, finance at Lovells, Matthew Cottis, which were supported by the acknowledges that the firm gets plenty of banking department, could also calls from headhunters but says ‘people amount to a risk.) don’t tend to leave unless they’re unhappy’. DLA’s four-partner team is, There is little reason for unhappiness in like Lovells’, home-grown but Lovells’ banking department. The team has continued to gather momentum; the banks now WHO’S USING WHOM consider it a strong upper midmarket player and a viable alterPanel Firms native to the Magic Circle in large European deals with a UK, French or Italian component. RBS (acquisition finance £100m+) Addleshaw Goddard The team has been grown Allen & Overy organically and Penny Angell Ashurst and Adam Freeman were made Berwin Leighton Paisner partner in May 2002. Clifford Chance Ashurst has built its team CMS Cameron McKenna through lateral hires; therefore, Denton Wilde Sapte statistics say its partners are DLA more likely to be prised away by Freshfields Bruckhaus Deringer other firms. Mark Vickers, who Herbert Smith was recruited from DLA, is one Linklaters of the strongest players in the Macfarlanes mid-market but there is speculaNorton Rose tion that his practice is at odds SJ Berwin with the rest of the firm, which Travers Smith Braithwaite increasingly focuses on highBarclays (business banking Addleshaw Goddard value, multi-jurisdictional lending and finance) Allen & Overy deals. Although Ashurst will be Barlow Lyde & Gilbert keen to hold on to Vickers and Berwin Leighton Paisner he was recently elected to its Bond Pearce management board, he must Boyes Turner also be high on the wish list of Clifford Chance any firm looking to recruit. Davenport Lyons Solicitors Helen Burton is the firm’s most Denton Wilde Sapte recent signing – she joined from Dickinson Dees DLA Eversheds Fennemores Solicitors Hammonds Linklaters Lovells Osborne Clarke Pinsents Richards Butler Rollits Simmons & Simmons SJ Berwin Taylor Walton Solicitors Ward Hadaway Solicitors White & Case Wragge & Co Vickers: strongest player in the mid-market?
the fact that it punches above its weight in deal size means that it is target prey. The challenge for all these firms is to hold on to their partners.
Chances of success In a downturn it’s all about maintaining visibility in the market. For a firm like Macfarlanes, which has achieved massive profits on the back of private equity, making a foray into banking work through such highprofile lateral hires is uncharacteristically audacious. Neil Murray at Travers Smith Braithwaite points out that ‘there’s no point flipping a profitable firm into something else that might not be so profitable’. Therein lies the challenge. The fact that Macfarlanes has hired Speechley is testament to the influence held by the banks across the disciplines. As Murray notes: ‘Every self-respecting banking lawyer wants to act for the banks.’ But getting the agreement of a profitable corporate partnership to start targeting banking clients must make the decision strategic. Even corporate lawyers are reflecting the change and beginning to acknowledge the power wielded by the banks. It is a turning point in the market. The banks Legal Business spoke to agree that Macfarlanes, SJ Berwin and Travers Smith Braithwaite have partners who understand bankers’ needs. ‘It isn’t rocket science, acting for the debt funders,’ says one. ‘Knowing the expectations of vendors and management helps give fuller and more allround advice.’ However, he also recognises that some firms, particularly the regional ones, tend to oversell their capabilities. ‘There is a danger that people think they can represent all the parties in a deal but you can’t suddenly leap in at a high level,’ he advises. Banks are open to change, but their requirements are a tall order and the market is defensive. Patience is vital, as is not underestimating the power of the individual bankers. ‘Personal history is much more important than people ever think,’ says one head of legal. ‘Really, it’s all about relationships and who you like.’ Speechley is very likeable, but he’ll only become really popular at Macfarlanes if his practice makes them still more profitable. No easy task, that one. LB vanessa.pawsey@legalease.co.uk
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