How a private equity boom fuelled the world’s biggest law firm

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When he took the helm at a Chicago-based law firm called Kirkland & Ellis in 2010, with the aim of turning it into a world-beater, few in the industry thought Jeff Hammes stood a chance.

For decades, the most lucrative and prestigious careers for ambitious young lawyers were to be found at the “white shoe” set of leading New York firms – long-established, fed by the best Ivy League graduates and nourished by work for Wall Street’s all-powerful banks and Fortune 500 companies.

Mr Hammes took over as chairman of Kirkland’s global management executive committee, at a time when the firm was regarded as a litigation specialist, hired to win corporate disputes and courtroom battles. Perhaps its most famous lawyer was Kenneth Starr, best known as the government prosecutor who investigated president Bill Clinton over a series of scandals, including Whitewater and the Monica Lewinsky affair. William Barr, the current attorney-general, is a Kirkland alumnus.

In the blockbuster dealmaking world, however, the firm was largely irrelevant. One Kirkland veteran says it was “always known as a good litigation firm in Chicago with a decent mid-market private equity practice – but nobody took them seriously on Wall Street”.

They do now. Fuelled by explosive growth in private equity, aggressive poaching of talent and most of all, a business model that resembles a freewheeling investment bank, Kirkland has become the highest-grossing law firm in the world. At the end of 2018 revenues stood at $3.7bn, up nearly 20 per cent on the previous year and more than 130 per cent higher than when Mr Hammes took control.

In the process it elbowed aside its nearest rival, the US firm Latham & Watkins, which posted revenues of $3.4bn last year. After that, the gap widens: the largest global firms, such as Baker McKenzie ($2.9bn) or DLA Piper ($2.8bn), generate big revenues but are far less profitable, while annual turnover at the UK’s “magic circle” elite firms such as Clifford Chance is closer to $2bn.

Kirkland’s 430 equity partners – its highest echelon of lawyers who split the firm’s profits – took home more than $5m on average last year. Of its American rivals, that is second only to the small Wall Street corporate specialist Wachtell, Lipton, Rosen & Katz. In London, the leading City firms do not come close to that sort of remuneration.

This rise reflects the shift in the financial world’s balance of power since the financial crisis. Investment banks, the dominant force before 2008, have been eclipsed by private equity firms, which now sit on hundreds of billions of dollars of investment funds.

Kirkland thrived by hitching itself to this dealmaking activity. “Were we lucky or smart?” asks one US partner at the firm. “Both – lucky in the sense that private equity has become a massive asset class . . . with a demand for legal services that is diverse and deep. But smart because we realised how damn good that business was.”

The law firm declined to comment for this article but interviews with dozens of its past and present lawyers, clients and others close to the firm reveal an organisation with a relentless – many say ruthless – focus on growth, a phenomenal work ethic and a desire to upend what it sees as a lazy hierarchy. Yet the firm also faces questions about whether its winning streak can continue. Will its private equity clients continue to prosper? And can a firm with such a hard-charging culture survive in the long run?

Robert Smith’s Vista Equity Partners, a tech-focused investor, had less than $1bn under management when Kirkland began working with it more than a decade ago. It has since grown to manage assets of about $46bn. That typifies Kirkland’s relationship with rising middle-market private equity groups – others include Chicago-based GTCR and Thoma Bravo – that helped turbocharge its revenues and profits as private capital exploded after the crisis.

Mr Hammes, who will step down as chairman next year to be replaced by Jon Ballis, joined Kirkland in 1985 when the vast majority of its revenues were generated by disputes lawyers. A decade ago, the split between litigation and transactions work had closed to roughly 50:50. Today, three-quarters of its fees are deal-related.

To establish Kirkland as a major player, Mr Hammes turned his attention to recruitment. An early coup was the hiring of David Fox, a specialist in public company mergers and acquisitions and one of the biggest earners at Skadden, Arps, Slate, Meagher & Flom, who jumped ship in 2009 along with his younger colleague Daniel Wolf.

The arrival of Mr Fox put Wall Street on notice that the Chicago upstarts were now targeting all areas of dealmaking. “Hiring Fox and Wolf from Skadden helped us build brand recognition,” says a partner who has been at the firm for more than a decade. “That made it easier to hire new talent.”

The recruitment strategy and the revenue gains fed off each other, allowing Kirkland to penetrate big M&A – advising on recent deals such as Bristol-Myers Squibb’s $90bn acquisition of Celgene and Danaher’s purchase of General Electric’s life sciences unit for $21bn. At the end of 2009, Kirkland ranked around 90th for global M&A business, according to several data providers tracking the industry’s performance. Today, the firm tops almost all M&A rankings.

But, sceptics ask, how will Kirkland cope if and when the private equity boom ends? Some leading figures in the industry such as Jonathan Lavine, co-managing partner at Bain Capital, have sounded warnings over the sector’s mounting debt pile and risks of a crash. If Kirkland is left with a roster of multimillionaire stars, with its headcount heavily skewed in favour of the private equity and M&A practices, it could be exposed if advisory work from those sectors shrivels.

The firm seems unfazed. “Dry powder” in private capital – money raised but not yet spent or committed to deals – hit $2tn at the end of 2018. As long as there is the appetite to buy and sell companies, it believes there will be demand for top-end legal services.

Furthermore, beyond the buying and selling of businesses, private equity clients create a bounty of other legal work. Some lawyers specialise in negotiating buyout contracts while others draft the financing papers for leveraged loans and junk bonds. Portfolio companies themselves create their own pool of work when they make additional acquisitions or themselves are sold.

One former Kirkland partner says there are hundreds of private equity outfits “that no one has ever heard of” collectively generating tens of millions of dollars in fees. Today, Kirkland says it works for more than 450 private equity firms.

The litigation practice has grown more modestly but remains a core part of Kirkland’s business. It has also built a dominant practice in restructuring – advising companies in financial distress or facing bankruptcy – that takes advantage of its relationships with private equity firms. Those fields are the pillars on which Kirkland’s empire is built – in sharp contrast to the biggest “full service” global firms, which cover every area of law that affects a business and have offices across the globe.

“Full service doesn’t make much money,” says a UK-based corporate law veteran. According to New York-based ALM Legal Intelligence, profit margin in 2018 was 58 per cent, up from around 40 per cent before the financial crisis.

To entice the best lawyers to join its ranks, Kirkland managed to exploit a structural rigidity in its more traditional white-shoe and magic circle rivals.

A dwindling but still significant number of elite firms remunerate equity partners using a “lockstep” model. At its most basic, that means all first-year partners earn the same, as do second-year partners, and so on up the food chain, regardless of how much money they make for the firm.

Kirkland sought rising stars in their late thirties who were at the bottom of this ladder, stuck in the queue for the highest share of profits. Part of its pitch was money – “With compensation, we can go as high as we want,” says one partner – but the other part was an almost unprecedented level of autonomy.

A former partner describes the Kirkland deal thus: “They say, ‘here’s an office, here are your phones, hire who you want, good luck and don’t screw up’. You have to back yourself. Of course, if it doesn’t work out you face the consequences.” With the executive committee taking all the key strategic decisions, very few partners are distracted by management duties.

Kirkland’s hunger for new hires shows no sign of abating. In recent years it has lured partners from the venerable US firm Cravath, Swaine & Moore as well as the likes of Simpson Thacher, Skadden and Weil, Gotshal & Manges. In March, it plundered 20 Los Angeles lawyers in one go from Proskauer Rose.

Growth in the UK has been similarly explosive. When Mr Hammes became global chair, the London office was tiny. Today it has more than 300 lawyers, including former partners from Linklaters, Freshfields Bruckhaus Deringer and Allen & Overy. In December 2017 it rocked the London market with the $10m-a-year hire of David Higgins, a private equity lawyer from Freshfields, its main UK rival in that sector.

The deal for more junior lawyers is similarly entrepreneurial, though possibly more challenging. Kirkland promotes associates to partner after six years, at least a couple of years quicker than most other firms. This, however, is a salaried position, rather than a place at the profit-share table – in other words, you get “partner” on your office door and two to four years to show what business you can attract. One associate called it “the first cull”. Success leads to the riches of a share of equity. Failure leads to the exit – or “the second cull”. The firm is also not shy about showing the door to equity partners who lose their drive or touch.

“I was attracted to Kirkland because it’s a fast-growing firm with a lot of opportunities for young people,” says one recent hire from a rival firm. “During the recruiting process I really got a sense that they are committed to that. And that’s only borne out, like 300 per cent of what they promised me since I got here.”

Such rapid growth has made enemies along the way. A former US partner branded Kirkland “the Donald Trump” of law – a comment on its willingness to take on the establishment but with an edge of chutzpah.

A rival lawyer with over 40 years’ experience in takeover battles says with disdain: “Kirkland is a business, not a partnership.” At Kirkland, the slight is taken as a compliment. “That attitude is what Mr Hammes and co wanted to disrupt a decade ago,” says a senior partner. Another says: “The hustle, the go-get-’em aspect . . . runs through our veins.”

Some find Kirkland’s culture difficult to handle. Lawyers with proven intellect but who stay inside their offices instead of hustling for new clients are not tolerated, nor is anyone who arrives thinking the new and improved pay is a licence to coast towards retirement.

Retaining talent has certainly been an issue for Kirkland as it tries to shrug off a reputation for what its detractors call an environment of “churn and burn”. A former partner says: “The high level of turnover is . . . concerning. I don’t think people leave because they don’t like the firm but many feel that they just can’t take it any more.”

Some partners admit this has been a problem but counter that the career proposition is now made clear to every new recruit. “If you know what is being asked of you and you subscribe to it, it’s on you,” says a senior UK partner. “We know what we’re in for – it’s not for everyone but if you are that kind of person [we] allow you to flourish.”

But others say the tough environment and the outsider ethos is what gives Kirkland the edge. “They don’t like the kind of person who belongs to a club,” says a former partner. “They like people from the wrong side of the tracks because they’re hungrier.”

They add: “They might be more successful if they were a bit more pluralistic . . . but other firms should learn from the way Kirkland has adapted to the modern world.”