When the financial crisis hit the City, many expected the fortunes of UK private equity heavyweights Travers Smith and Macfarlanes to plummet. Five years on and the pair – traditionally seen as bellwethers of the London legal market – have bounced back surprisingly well. Anna Reynolds finds out why

With their UK-centric business models and focus on private equity, if anyone was going to be hit hard by Lehman Brothers' 2008 collapse and the subsequent implosion of the global financial markets, it was top 50 UK law firms Macfarlanes and Travers Smith.

Traditionally paired together as tight and conservative partnerships with a heavy transactional bent and a distinct absence of international networks, some rivals predicted the two would struggle to quickly regain the form that – pre-crisis – had set them apart from many of their mid-market peers. As Macfarlanes senior partner Charles Martin puts it: "Before the downturn the firm was more heavily transactional: private equity, corporate and real estate. All of this stopped in its tracks in 2008 – it was as though we were hit by a freight train in the night."

In fact, while profits per equity partner (PEP) fell by more than 30% at both firms in the first chaotic financial year post-Lehman between 2007-08 and 2008-09, the pair's fortunes subsequently recovered well. Travers saw revenues soar by 11.6% in 2009-10 against a 53.5% rise in PEP, with that year's bumper growth helping to ensure that profits in 2012-13 were 5% higher than five years earlier. And while Macfarlanes has yet to regain its boom-time PEP high of £1.1m, at just shy of £990,000 for the last financial year it has come pretty close in far less buoyant market conditions.

Changing tack 

But recovery was by no means guaranteed for either firm. Key to both has been a shift away from their past transactional emphasis towards more counter-cyclical practices. "The consequences of the financial crisis have caused a change in the focus of advice clients require," says Travers senior partner Chris Hale. "Firms that have been able to respond to the new focus have tended to do well."

Martin adds: "Both firms are more adaptable being smaller and in one location – this helps when the market is changing rapidly." However, he concedes that it would be over-generous to say that Macfarlanes had an easy time during the downturn, admitting that "it was tough and we had to do a lot to move forward".

Three key changes in strategy saw Macfarlanes reposition its real estate group; build a hedge funds practice through the takeover of specialist hedge fund law firm D Harris & Co in early 2012; and renew its focus on financial services and investigations work. The firm also shifted further away from its previous stance of making lateral hires only in exceptional circumstances, and in 2013 alone brought in no fewer than seven partners. 

"Our real estate practice has had a complete turnaround," comments Martin. At its peak, the practice used to contribute 25% of the firm's revenue but, with real estate work falling off a cliff during the crisis, Macfarlanes was forced to carry out a redundancy consultation in 2009, resulting in seven solicitors leaving.

While the practice is now responsible for just 9% of the firm's turnover, it has by no means been sidelined, with the firm opting to set itself apart from many City rivals by growing at partner level as it has refocused around high-end commercial property work. Hires include practice head Ian Nisse, who joined in 2011 from Shearman & Sterling, and Anthony Burnett-Scott and Ann Minogue, who joined from Ashurst last year.

Travers, meanwhile, may not have had the same real estate problem to overcome but it was equally challenged by the downturn. In contrast to Macfarlanes, its approach to riding the storm has been less about reinvention and more about shifting emphasis. 

Consequently, its corporate, commercial and financial services group still makes up 40% of overall revenues, compared with 12% for banking and restructuring, 12% for litigation, 10% for tax and employment and 6% for pensions. 

"Five years ago we were more dependent on transactions than we are today," says Hale. "We acknowledged the need to invest in areas of our business in addition to transactional work."

Key areas of growth during the downturn have included financial services, where revenue contribution climbed by 4% over five years, and litigation, which has increased its contribution to firmwide revenues by 6%. Travers managing partner Andrew Lilley also points to the firm's pensions, tax and – perhaps unsurprisingly given his previous position leading the employment group – employment work as strong performers that have shifted how the firm is perceived by rivals and clients. 

Non-private equity clients include names such as CPA Global, Metro Bank and numerous financial intermediaries for equity capital markets work, such as Jeffries, Panmure Gordon and Investec, as well as more than 10% of the top 100 hedge fund managers and alternative debt fund managers. New client wins on the lender side include Silicon Valley Bank, HSBC and Santander.

Private equity leanings

Regardless of progress in other practices, private equity remains one of the core areas most closely associated with both firms. At Travers, despite a dwindling market, the firm's buyout practice has sustained its contribution towards total billings. It has also undergone something of a makeover, including an additional sub-group focusing purely on portfolio companies. 

Far from de-emphasising the practice in response to the declining market, the firm now acts for more than 20 buyout houses – more than ever before. Newer clients include US private equity giant Apollo, with the firm also counting names such as Carlyle, Hellman & Friedman, Bridgepoint, Phoenix Equity Partners and Exponent among its roster. 

Nevertheless, critics claim the firm is still over-reliant on mandates for the management teams in big-ticket private equity and corporate work. As one partner at a rival firm comments: "They are not acting for the real decision makers." 

However, Hale insists the strength of the firm's corporate ties should not be underestimated. "We have continuing relationships with the management teams for whom we work," he says. "These can produce work acting for the companies they are running on both transactional and non-transactional matters."  

Macfarlanes' private equity practice has also had an overhaul, with head of corporate Charles Meek insisting: "It is no longer dependent on pure transactional work." The corporate practice remains the biggest contributor to overall revenue (21%), but since the downturn the firm has started working with a wider range of clients, including JC Flowers, Wellspring Capital Management, Caledonia Investments, Alchemy Partners and Kester Capital. "A lot of our private equity lawyers turned to restructuring portfolio company balance sheets, which helped us maintain relationships with PE houses and intermediaries," says Meek.

The firm's funds practice has been particularly busy and now stretches across a broader asset range including debt, special opportunities, real estate and hedge funds. And with more debt now available in the market, Meek is optimistic about the future: "We were confident the market would recover and it has – if on different terms and not yet to the same pre-crisis levels."

Click here to view a larger version

Home games

Another area where Travers and Macfarlanes take a similar approach is international policy, with both opting for variants of Slaughter and May's best friends strategy. Both maintain close relationships with leading independent firms worldwide rather than operating their own global offices, with the exception of a small Paris office for Travers. 

Despite this they insist they should not be viewed as UK firms. "The shape of the practice now is fundamentally international. It is a myth that we are a UK practice – in reality we are a hell of a long way from that," says Martin. "The majority of our litigation, private client and corporate work is cross-border."

Martin feels strongly that he could not hire the same quality of lawyer abroad and says that having everyone in the same place maintains quality. 

"We don't need systems for everything: things happen by osmosis, which is efficient," he says. "We would be giving up too much if we had an international network. Our objective is to find other effective ways of working; however, if there was strong client demand we wouldn't have a phobia about opening an office or two."

Lilley adds: "Most, if not all, of the lawyers at Travers are here because we are independent and we treasure the professional life that comes with our model – essentially, control of your own destiny. There would have to be a very strong reason for us to dilute that. If the global legal market changes you have to review your strategy, but at the moment we don't feel pressure to."

One transaction that demonstrates the success of this strategy so far is Macfarlanes' role on the £79.9bn Vodafone-Verizon mega-deal, which the firm secured through its close ties with elite US firm Wachtell Lipton Rosen & Katz. Such was the scale and profile of the mandate that, over at Travers, partners insist they are genuinely happy for Macfarlanes, even though they would have loved the mandate themselves, because it celebrates the approach of both firms. "Macfarlanes has done a good job selling its product to overseas firms and getting work on big-ticket deals, which is something we are fighting to do as well," says Travers' head of corporate, Spencer Summerfield.

It is an area that Travers is keen to improve on, with charismatic former senior partner Chris Carroll now charged with driving the firm's international strategy. He has recently returned from a trip to South Korea and is also helping to develop the firm's presence in Africa, while continuing to form links with firms across the US.

A senior partner at a magic circle firm comments: "Both firms have plotted a similar approach internationally and it seems to be paying off. They are offering high-quality services and the nature of their strategy means they can offer clients more choice in jurisdictions where they don't feel obliged to cross-sell a network. The Verizon mandate was an endorsement of this. They are maintaining a culture and an identity, which is also motivating."

Click here to view a larger version

The same but different

With Macfarlanes and Travers taking similar approaches, it is all too easy to lump them together. After all, even the pair's websites look almost identical at first glance. As one magic circle partner suggests: "I think it is still fair to think of them as a clutch – Macs may have stepped slightly ahead with an increased profile in people's perceptions, but both are doing fine and deserve to."

However, while the pair may have a similar international approach, position in the market and private equity leaning, there are several crucial differences. In addition to a broader practice base at Macfarlanes, which has a significant private client business, the biggest difference is in partner remuneration. Most fundamentally, while having a distinct partnership culture is equally important to both, Travers operates a traditional lockstep model, whereas Macfarlanes' remuneration structure is based on individual partner performance.

Macfarlanes has also shown a greater willingness to change its strategy and shake up its internal culture, as witnessed by its lateral partner hires, with Martin keen to introduce a culture of change through new names. 

What is true of both firms, according to Lilley, is that they "have been ruthless about focus and recognising the dangers of running after every fad – we aim to be the best at what we do or we don't do it". Martin agrees and, while Macfarlanes – in common with Travers – has often been seen as a prime merger target, he says these days the firm is not approached as much: "We are very clear about what we want to do; most people know that we are seriously committed to independence."

Independent streaks aside, it seems wrong to compare the two on a like-for-like basis. As one partner at Macfarlanes puts it: "Travers are more comfortable in their own skin – we are constantly challenging what we do. You could say we are tougher on ourselves."

However, some are not convinced of the duo's performance in the market. "Both firms have very low-cost bases with just one office," notes one former Macfarlanes partner. "At the moment they look like they are doing well, but in a recession having one office focusing on a domestic market means it is going to be easy to preserve profitability."

Similarities and differences aside, both firms have proved their doubters wrong and performed well in extremely challenging financial conditions, to the extent perhaps that it is no longer relevant to label them as bellwethers at all. Rather than tracking the economy, both firms have outperformed it and look likely to remain just as visible in the market as ever. 

As Lilley concludes: "Over the years, people have often thought that Travers would have to merge to survive. We disagree and, for as long as we can continue to attract the right mix of quality international and domestic clients as well as, crucially, top-quality talent to service them, we don't see the position changing."

Click here to view a larger version

————————————————————————————————————————————–

Key statistics – Macfarlanes

2012-13 revenue: £114.2m
2012-13 PEP: £989,000
2007-08 revenue: £110m
2007-08 PEP: £1.1m
Total partners 2012-13: 70
Total equity partners 2012-13: 50
Five-year revenue growth: 3.8%
Five-year PEP growth: -10.1%

Key statistics – Travers Smith

2012-13 revenue: £86.2m
2012-13 PEP: £790,000
2007-08 revenue: £81m
2007-08 PEP: £755,000
Total partners 2012-13: 65
Total equity partners 2012-13: 45
Five-year revenue growth: 6.4%
Five-year PEP growth: 4.6%

• Charles Martin and Chris Carroll are speaking at Legal Week's Global Independent Law Firms Forum in London on 20 March. For details, email [email protected].