Private Equity partner David Higgins’ reputedly $10 million move from Freshfields to Kirkland & Ellis announced in December 2017 grabbed market headlines and proved to be the catalyst for top lawyers becoming the new investment bankers of our time. The move kickstarted a new era in the war on PE talent in the legal market. With the Magic Circle no longer the top payers, could they retain their top talent, and would they remain the top players?
Well, since that momentous deal was struck, there have been some 50 PE partner moves in London and the US law firms have dominated the hiring in a trend that has not yet abated. Partner salaries have reached unprecedented levels in the UK. An Americanisation of the market has particularly taken hold in private equity, with discussions around compensation, guarantees and signing-on bonuses taboo no longer.
The macro environment is also contributing to the scramble for PE capability. Whilst private equity has been outperforming almost all other asset classes, there seems to be some urgency to closing deals in the short-term. The period between the Brexit referendum in June 2016 and the General Election in December 2020 was protracted and hugely uncertain; many PE houses were executing on short-term strategies only. Now that the uncertainty has lifted, PE firms who have shored up dry powder are investing. The pound has been devalued against the dollar meaning there have been, and will continue to be, bargains to be had.
Furthermore, fund raisings are working at break-neck speed in order to close and invest before the US election on 3 November 2020. This means there is huge competition in order to get the best deal makers advising on investments, divestments, bolt-ons, exits, and of course secondaries as that market opens out further.
Economic trends will have a major impact on the sector in 2020. We’re already seeing signs of a global downturn exacerbated by Covid-19 with uncertainty as to how long it will last. It will therefore be essential to have powerful and expert legal representation who can help support private equity houses proactively manage both their portfolios’ performances as well as cashflows.
So what can the Magic Circle and other UK private equity driven law firms do about the seeming pilfering of talent from US firms? Few will break their existing lockstep and risk upsetting the partnership in order to buy in stars. Whilst the compensation at these firms is not too shabby, they will have to come up with innovative ways to make working life better there than at the competition, if they want to retain the top talent.
In short, demand outstrips supply and, as the well-trodden economic mantra goes, when demand exceeds supply, prices rise. This may turn out to be an enormous bubble that pops at some point but, for the moment, there is plenty of “stretch” left in expanding the balloon.