It is every corporate partner's nightmare. You target a sector and cultivate a client only to find that the instruction goes to a larger firm come the make-or-break deal.

For Berwin Leighton Paisner (BLP) that deal turned out to be the most high profile float to hit the City for years – the upcoming £5bn initial public offering (IPO) of online gaming group PartyGaming. Enter Freshfields Bruckhaus Deringer.

It is a familiar story. Another recent example saw the RAC overlook its roster of advisers that includes BLP and Wragge & Co to instruct Herbert Smith on its £1.1bn acquisition by Aviva, thanks to a recommendation from Lazard.

And even when a smaller firm does retain the big deal, as Macfarlanes did for French spirits giant Pernod Ricard on its £7bn bid for Allied Domecq, the knives were out, with some rivals questioning the firm's resourcing of the deal.

The debate about the merits of transactional machine versus relationship adviser will continue. But what is generally accepted is that, while there are certain kinds of big-ticket deals that are the preserve of a small band of international firms, a number of instructions that smaller advisers are perfectly able to handle go to the magic circle. In short, horses for courses is a mantra more recited than practised.

PartyGaming appears to be in this class. BLP, which had pressed to handle the float before Freshfields was brought in at the end of 2004, is obviously disappointed not to have received the nod.

The headline number of the deal may make that sound like wishful thinking, but the float's main complexity relates to the legal status of online gaming in the US. Here BLP can point to a track record as one of a handful of advisers to have actively targeted the online gaming sector. And thanks to the legal uncertainty in the US, the float is not expected to have the US placing that top 10 London firms typically use to sell their one-stop securities offerings.

In comparison, the case for a single-site firm the size of Macfarlanes leading a £7bn deal with substantial cross-border and competition issues looks less compelling, at least on paper.

Rivals opinions vary with one partner at top 10 London firm arguing that Macfarlanes' relatively small public M&A team would stretch to handle such an instruction.

However, BLP corporate chief John Bennett speaks for many when he says: "Can Macfarlanes handle a deal like that? Sure. It is in the interests of some firms to talk what they do down."

And while Macfarlanes' role attracted sniping from rivals, there is little concrete evidence the firm, which also advised Pernod in 2000 on its £5bn acquisition of Seagram, struggled either with resources or logistics.

Pernod general counsel Ian Fitzsimons says: "There may have been some people who were not happy but it was not the client. We were entirely happy."

Fitzsimons also goes out of his way to praise Macfarlanes' co-ordination of competition issues, which were handled by Gide Loyrette Nouel in France and Debevoise & Plimpton in the US, stating that the UK firm had 10 partners on the deal at one point.

It is easy to see why partners outside the magic circle are cynical about why they are prone to losing the major instructions. They argue that the reason many deals migrate to larger firms has more to do with the cosy relationships between banks and the magic circle than ability or size.

Certainly, claims that firms the size of BLP, SJ Berwin and Macfarlanes struggle to handle major deals are hard to square. These practices have more than 20 transactional partners – more than enough to handle M&A deals outside the very top of the market.

All law firms have to deal with utilisation issues and can over-trade; indeed, magic circle firms, which are geared towards volatile, resource-intensive instructions are as vulnerable as any.

And while larger firms can divert more people to a transaction, their tendency to leverage their deal teams with junior lawyers brings its own risks – particularly if they are replacing a relationship adviser with in-depth client knowledge. Anecdotes of general counsel forced to bring in a big firm only to get junior lawyers and indifferent service have certainly not become less common in the City in recent years.

Schroders general counsel Howard Trust says clients should think carefully before ditching their relationship advisers. "If you have a firm the size of a Wragge & Co that has represented you for years, why should you automatically use Freshfields?"

Lack of international capability is more of an issue and there can be little doubt that some clients want to move towards firms with an international profile independently of pressure from banks.

But it is not clear that inherent complexity is always the decisive factor. Take IPOs, the point when growing companies often 'trade up' by ditching a relationship firm for a magic circle brand. Much of the documentation for IPOs is drawn from the well-established due diligence process, which does not differ greatly on the full list from the Alternative Investment Market (AIM).

As BLP's Bennett argues: "It is certainly not a competence issue. An IPO is an IPO is an IPO."

Even the issue of a US securities placing, that larger City firms will often handle in house, seems something of a red herring. Few contend the process for a 144A private placement is unduly complex and, as Trust points out, underwriter counsel will typically conduct independent due diligence.

"We can certainly handle a float," says Travers Smith corporate chief Chris Hale, arguing that it is an established path to refer 144a aspects to US counsel.

What makes the difference is the attitude of US banks, who, as one magic circle partner puts it are "still rather huffy about who they will instruct".

While top 25 UK firms with strong client links or with a strong track record in a specific sector can make the banks' recommended list, Linklaters and Freshfields have something of a stranglehold in Europe when it comes to getting the banks' vote for securities and cross-border M&A work.

In part this is a reflection of the success in the past 10 years of London firms in adding US securities capability to complement their core capital markets teams. The days are long gone when US banks would balk at instructing a London firm on a 10b5 – the comfort letter relied upon by banks ever wary of US litigation.

The current dearth of fully-registered US deals post-Sarbanes-Oxley has only tightened the grip of this small band of London firms on the upper echelons of the market.

Freshfields' London head of corporate, Tim Jones, who is heading the team on PartyGaming, argues that London firms are reaping the benefits of their greatly improved US practices.

He says: "There used to be a time when you almost had parallel teams operating, so maybe you might as well have instructed two firms, but things have improved a lot. Why should the client pay for two firms when they can get one?"

The bottom line is that in Europe, capital markets work has never been so dominated by a small band of firms. And this situation is unlikely to change without a major revival in the IPO market.

All the evidence, then, suggests that mid-tier advisers must reconcile themselves to playing on an uneven playing field. But does it really matter?

Perversely, the answer appears to be 'not really'. This is because the mid-tiers are outperforming the market, profiting not only from a tougher attitude to performance but also, if somewhat accidentally, a shift in the deal market.

Crucial has been the rise and rise of private equity, which many attribute to the success of firms such as Travers Smith and Macfarlanes, which were in on the ground floor. Almost as significant is the more recent explosion in AIM work.

These developments have given mid-tiers their own institutional client base in the shape of private equity houses and brokers – the equivalent of the investment banks to the magic circle. As can be seen from Legal Week's mid-market deals round-up, these relationships have proved more lucrative than chasing a handful of blue-chip clients (see page 67).

The trend towards formal legal panels has not hurt either, as underlined by Barclays recent review, helping mid-tier firms secure strong positions with major commercial banks.

Arguably, it is the lack of the privileged status enjoyed by the magic circle that has kept the best of the mid-tiers hungry and responsive to new opportunities – not something that can always be said about their larger rivals.

Bennett sums up the mood. "It is always disappointing to lose out, but the truth is that there are some deals that the investment banks reserve for a very small group of firms. There are plenty of opportunities out there for us."

And the future looks even more promising. Having survived a sustained period of competition in their own markets from larger rivals, any uptake in big ticket deals should see top 10 London advisers vacate the mid-tier's natural hunting ground. This should bolster charge-out rates, while offering new opportunities to catch premium work.

They might even start holding on to some of those floats.