All of Big Law’s best-known private equity practices have a compelling origin story.
There’s the tale of Simpson Thacher & Bartlett’s former chairman Richard Beattie, as a 33-year-old associate in the late 1970s, working with the founders of KKR & Co. before they had even started the place. Ropes & Gray chairman R. Bradford Malt’s dealings with Mitt Romney and Bain Capital date back to the mid-1980s. Jack Levin of Kirkland & Ellis reportedly had to ask his first client what a venture capital deal even was in the late 1970s. The Carlyle Group’s Bruce Rosenblum, who joined the buyout giant’s management committee in 2000, is a former executive committee member at Latham & Watkins.
It’s hard to overstate the importance of those stories. As the biggest private equity shops have boomed in the past two decades they have propelled their favored lawyers and firms to new financial heights. It is no coincidence that two firms with some of the busiest private equity lawyers, Kirkland and Latham, are also No. 1 and No. 2 in the Am Law 100.
Even so, there is a more pressing story to tell about the relationship between buyout firms and law firms: a growth story.
Private equity is pushing past its pre-recession heights and it is not expected to slow down. Mergermarket states that the value of private equity deals struck in the first half of 2018 set a record. PricewaterhouseCoopers expects that the assets under management in the private equity industry will more than double from $4.7 trillion in 2016 to $10.2 trillion in 2025.
With twice as much dry powder to spend on deals, private equity firms will play a large role in determining the financial winners and losers of the Am Law 100 over the next five-plus years. It amounts to a power shift from traditional Wall Street banking clients and their preferred, so-called white-shoe firms to those other outfits that advise hard-charging private equity leaders.
And as more money flows into the coffers of private equity firms, they are expanding their services. Increasingly, they act as their own investment banks. KKR, one of the largest publicly traded buyout shops, reported last year that it generated $440 million in fees related to taking companies public, underwriting new deals or syndicating debt and equity. That figure was up roughly two-and-a-half times from the prior year.
“What you’re really talking about is money, and a change in the form of money that has shifted the power base for private equity lawyers,” says Kay Hoppe, a veteran legal recruiter based in Chicago. “Private equity lawyers used to be nice to have, and they are now lawyers who are viewed as essential. They are fuel for the machine.”
It is hard to find law firm managing partners who don’t acknowledge the attraction of private equity clients. Their deals act as a lure, catching work for a variety of practice groups: tax, M&A, finance and employee benefits. And lawyers often end up handling legal work for the very companies they help private equity holders buy. Then, of course, there is always the sale of that business. A single private equity deal for one of the big buyout firms can generate fees ranging from $1 million to $10 million, sources say.
“It’s kind of like there’s a perfect storm taking all those things into consideration that makes private equity a big driver in the success of many firms, and an aspirational growth priority in many more firms,” says Kent Zimmermann, who does law firm strategy consulting at The Zeughauser Group.
So, who will win the competition for this lucrative practice over the next several years? It’s hard to tell for certain, but there is a group of firms with an embedded competitive advantage, and they are bulking up on talented lawyers to solidify their relationships with the biggest funds. Those top-end funds are also where much of the future growth in assets will be. Still, there is opportunity in new and smaller funds for enterprising lawyers.
It’s worth noting that a similar doubling in private equity assets already took place from 2007 to 2016, according to PwC. So there is something to be learned from the winners of that time period, a group that includes, roughly, Kirkland, Latham, Simpson Thacher and Ropes & Gray. All four firms are ranked in the top two bands for private equity by Chambers and Partners.
Judging by league tables that track deals (somewhat imperfectly, as they are self-reported by firms), Kirkland has a leading position in the practice. According to Mergermarket, the firm handled 1,184 private equity deals from 2013 through this June. Latham is closest with 609. Ropes & Gray handled 323, while Simpson Thacher signed up 319. Below, a look at how those firms have grown their practices and what they plan to do to stay on top.
Kirkland’s recent financial performance has eclipsed most of its peers. The firm’s gross revenue doubled from 2007 to 2016, from $1.3 billion to $2.6 billion. Its profits per equity partner also grew from $2.48 million to $4.1 million.
The Chicago-founded firm, which declined to comment for this article, is something of a departure from its competitors in that it has long been known as an adviser to “middle-market” private equity firms. Kirkland did not get its start via a close-knit relationship to buyout giants that became power players, such as Apollo Global Management, Carlyle, KKR and The Blackstone Group.
Lately, however, Kirkland has made inroads with the dealmakers at some of those big firms, including KKR and TPG Capital, which the firm now advises as part of its first European panel of legal advisers. Kirkland has lured some of the most well-regarded private equity lawyers to its highly profitable machine.
Through August, Kirkland has hired 22 private equity lawyers. Seven of those lawyers had titles as co-leaders or leaders of practice groups at their former firms, which included DLA Piper, Latham, Freshfields Bruckhaus Deringer and Morrison & Foerster, all of which are also leading advisers to private equity firms.
Latham’s leaders often say that the firm has spent the last decade or so acquiring talent across the globe and they are now “unlocking” its benefits. Private equity is perhaps the best example of that strategy at the firm, according to the practice’s global chairman, Paul Sheridan.
And, indeed, Latham has grown alongside its most successful private equity clients. Consider the growth of Carlyle, which in 1990 raised $100 million for its first fund for U.S.-based buyouts. This year, Carlyle’s latest and largest U.S. buyout fund raised $18.5 billion. Sheridan says that doesn’t necessarily mean the number of deals closed for that fund will be drastically larger. But the size and complexity of the deals—and their legal needs—will be.
“As they’re doing larger deals, they end up requiring more out of their law firms,” Sheridan says. “These larger deals have more complexity and businesses that are subject to more regulation. So that works to the advantage of law firms that are doing that type of work day in and day out.”
Ropes & Gray employed just under 400 lawyers in the mid-1990s when the firm first began representing private equity companies. Today, it has nearly 1,200 lawyers, thanks in large part to strong relationships with such buyout giants as Advent International Corp., Bain, Kohlberg & Co. and TPG.
Like Kirkland, Ropes & Gray’s gross revenue doubled from 2007 to 2016, from $733 million to $1.5 billion. And among Kirkland, Latham and Simpson Thacher, Ropes & Gray has increased its head count during that time span by the greatest percentage—nearly 50 percent. Will Shields, co-chairman of the firm’s private equity transactions practice, says Ropes & Gray’s international growth has been aimed at “hubs of PE activity” in London, Seoul and Tokyo.
“Serving the private equity industry has been fundamental to our strategy forever, or at least over the last two or three decades,” Shields says. “And we are happy we’ve made that bet. Looking forward, we continue to feel very bullish about the fortunes of law firms serving private equity, because we think the industry’s growth has been tremendous and we think it’s continuing to go that direction.”
Simpson Thacher’s private equity practice has represented KKR and Blackstone, more or less since the creation of those businesses. A profile of the firm’s private equity practice by The American Lawyer in 2006 said those two clients alone accounted for anywhere from 9 percent to 15 percent of the firm’s gross revenue for the past 20 years.
In the period from 2007 to 2016, Simpson Thacher’s gross revenue grew 35 percent, the least among the four firms cited here. Simpson Thacher, which declined to comment for this article, still has strong ties to Blackstone and KKR. Through the first six months of 2018, the firm led all law firms in the value of private equity deals it had advised on, according to Mergermarket. If Simpson Thacher can close out the year with that distinction, it will be the first time Kirkland did not finish atop the rankings since 2012.