It’s always interesting when Big Law firms take opposing views on a matter of strategy, whether it’s their approach to equity and compensation, or the merits of a particular practice area or geography.
That’s the context behind last week’s move of structured finance partner Lawrence Berkovich from the New York office of one London-based firm, Ashurst, to another, Allen & Overy.
Berkovich was one of six partners let go by Ashurst following a restructuring of its U.S. finance practice earlier this summer. The group’s lawyers weren’t on the market for long: Berkovich was quickly snapped up by A&O, which thanks to a sustained hiring spree, now has 22 finance partners in New York, while the other five partners all joined Chicago-based Chapman and Cutler this month alongside five associates.
But A&O’s announcement of Berkovich’s hire made for particularly fascinating reading.
Berkovich and the other five former Ashurst partners all specialize in collateralized loan obligation (CLO) deals—a type of structured credit typically backed by low-grade corporate loans.
The A&O press release states that Berkovich’s recruitment comes at a “pivotal moment” for the CLO market, which it says has “become one of the most active corners of the U.S. structured finance markets.” The firm backs up this claim with data from Thomson Reuters LPC Collateral, an online loan information platform, which shows that CLO issuance exceeded $52 billion in the first six months of the year—double the amount recorded in the same period in 2016.
Why, then, was Ashurst willing to turn its back on a practice area that, if the above data is to be believed, is currently experiencing high levels of growth?
First things first: Deal data should always be taken with a pinch of salt. As anyone who follows the various annual reports put together by the likes of Mergermarket and Thomson Reuters can attest, results can be skewed quite significantly by differences in methodology and the way in which the data is sliced. With a bit of tweaking, you can usually find data to support pretty much any hypothesis. Caution is particularly advised when the data relates to a market as volatile as structured finance has proved to be since the financial crisis.
But A&O capital markets partner Franz Ranero told The American Lawyer that CLO work is indeed “a real growth area,” thanks in part to higher bank capital charges leading to an increase in nonbank lending.
It’s also a sizeable part of the Magic Circle firm’s core finance practice: A&O’s 50-strong structured capital markets team acted on 16 European CLO deals last year, with a total value of 6.3 billion euros ($7.4 billion)—equivalent to around a third of the entire market in the region.
Ranero said that the practice also has “significant synergies” with the firm’s leveraged finance, high yield and private equity offerings, while a number of its corporate trust partners also work on CLO transactions.
That was once the case at Ashurst, too.
Having established a U.S. finance offering in 2009 with the hire of a 30-lawyer team—including 10 partners—from referral ally McKee Nelson, ahead of that firm’s merger with the now defunct Bingham McCutchen, Ashurst built a formidable trans-Atlantic CLO practice. (Berkovich’s departure means that all 10 of the former McKee partners have now left Ashurst. Alice Yurke joined Jones Day in 2011, Richard Davis moved to DLA Piper in 2013, Scott Faga and Eugene Ferrer headed to Paul Hastings in 2015 and Michael Voldstad retired earlier this year as part of the restructuring.)
But Ashurst chair Ben Tidswell told The American Lawyer that the CLO market has become more volatile, competitive and price sensitive over the past five years. The client base has diversified, with smaller sponsor banks such as Jefferies and Royal Bank of Canada getting involved alongside the traditional bulge bracket names, he added, while investments by the likes of A&O, Cadwalader, Wickersham & Taft and Paul Hastings has heightened the battle for market share. “Inevitably, as other people crowd in on your market, it changes the dynamics,” Tidswell said. “It’s simply no longer as attractive a proposition for us.”
So, when a three-partner CLO team left the firm’s London office last year to join Paul Hastings, rather than seeking to hire replacements to restore the trans-Atlantic axis that is crucial for any leading CLO offering, Ashurst instead decided to wind down the practice. (Ashurst sources who did not want to be identified say its European CLO practice was loss-making in the last fiscal year. The firm declined to comment.)
In a Big Law market of low growth, intense competition and severe pricing pressure, revenue is a prized and increasingly hard-fought commodity. In such a challenging environment, it would be easy for firms to lose sight of their strategic priorities and simply chase revenue wherever it exists and is attainable.
Ashurst and its management should therefore be commended for being able and willing to prioritize firmwide alignment at the expense of a topline hit.
“It’s not as if we suddenly decided we didn’t want to do this anymore,” Tidswell said. “It’s a case of thinking rationally and carefully about where we want to invest, rather than just doing something because we’ve done it for 20 years.”