In 1989, Michael Lewis chronicled the excesses of Wall Street in his seminal book Liar’s Poker, named for a game of chance on which traders gambled thousands of dollars.
But the sums wagered by Lewis’s colleagues pale in comparison to those deployed within the world’s most profitable law firm. Partners at Kirkland & Ellis have invested hundreds of millions of their own dollars in deals done by the private equity groups they advise, say people with knowledge of the firm.
Kirkland’s lawyers have put so much money into their clients’ funds that they have an internal market which enables them, on occasions, to trade their holdings, according to those people. It has been a lucrative sideline for many Kirkland partners, supplementing profit-based remuneration that for top earners routinely exceeds $20mn.
Although other law firms allow co-investment, and Kirkland does not have any control rights over the funds or deals its partners invest in, the marketplace is emblematic of how entwined Kirkland’s fortunes are with those of the $13tn private capital industry. With a leg up from a decade of ultra-low interest rates, private equity helped turn a niche Chicago firm into a profitmaking machine generating billions of dollars of revenue each year.
Industry figures say Kirkland’s singular, aggressive way of doing business is more akin to a hedge fund or an investment bank such as Goldman Sachs and that it has shaken up the traditionally conservative, risk averse world of corporate law.
Last year the firm made over $6.5bn in revenue and around $3.5bn in profit, say people familiar with the matter. That finances above-market packages — average pay for equity partners rose last year by nearly 2 per cent to $7.5mn, according to The American Lawyer data.
But as rising interest rates curtail buyout dealmaking and fundraising, the law firm that built its fortune on servicing private equity faces a reckoning. The co-investing perk, which has drawn criticism for the potential conflicts it creates, has become less attractive for partners. Some of them have been left out of pocket after buyout groups struggled to sell assets this year, some of the people said.
Rivals are also starting to catch up. Earlier this year, US peer Paul, Weiss, Rifkind, Wharton & Garrison raided Kirkland’s offices on both sides of the Atlantic, poaching more than a dozen of its partners. Other big names in corporate law are starting to mimic Kirkland’s partner model and pay structures.
The tactics that made Kirkland revered among its clients are also coming under increasing scrutiny from trade associations and investors, who have raised some of their concerns with regulators.
The firm has also acquired a reputation for a loose, hard-charging culture that can leave bad behaviour unchecked if alleged perpetrators are bringing in enough business.
In response to questions about the firm’s culture and way of doing business, a Kirkland spokesperson says: “Our culture is our most valued asset and our most important priority, which is why our firm attracts world class talent.
“As a part of that, we demand from ourselves excellence, accountability, respect, and collegiality, which our teams across the world bring to their work together each day.”
But after decades as the aggressive, freewheeling challenger, Kirkland is now, as one former partner puts it, “the 800-pound gorilla”. As the buyout boom wanes and competitors adopt its tactics, can it remain at the head of the troop?
Private equity pioneer
Kirkland’s ties to private equity go back almost as far as the industry itself. In the mid 1970s, a young Kirkland lawyer called Jack Levin was summoned to First Chicago bank to advise on a new type of deal.
“Nobody — or almost nobody — had ever heard of venture capital. They were not two words that fit together. Nor private and equity — the phrase hadn’t yet been invented,” Levin, now a veteran Kirkland partner, would later recount. Nevertheless, Levin impressed his clients and completed Kirkland’s first private deal within weeks.
Over the next three decades, Kirkland built close relationships with dozens of buyout firms as the industry grew. But it wasn’t until Jeffrey Hammes, a barrel-chested rainmaker with a taste for flamboyant shirts, became chair of Kirkland’s all-powerful 15-person executive committee in 2010 that the firm really took off.
Boosted by the growth of its private equity clients as the industry boomed after the global financial crisis, Hammes cultivated a less clubby culture than many of Kirkland’s competitors.
Under his leadership, the firm’s revenues rose year after year, with growth really accelerating through the latter half of the decade. Its financial performance was so consistently good that one former partner who sat on the finance committee says he couldn’t believe the numbers were true.
Junior partners, who don’t share in the firm’s equity, are an important driver of that growth. They can build their own books of business and charge higher hourly rates than associates.
“They are incredibly motivated to make equity [partner] and that’s a real engine room for profits,” says John Markland, a former Kirkland partner.
Unlike other, stuffier firms, if you are good enough you rise through the ranks fast rather than waiting for existing partners to retire or die, he adds. “It’s run like a business and not like a club. A lot of law firms are run like clubs.”
Another longtime partner says the promotion prospects are “one of the unique things about Kirkland . . . you don’t have to wait until you are 60. You can be rewarded really early on and it can give you a sense of energy.”
Andrew Calder typifies this approach to hiring, developing and rewarding legal talent. Now in his mid-forties, Calder grew up in the Scottish Borders and had already risen rapidly through the ranks of Simpson Thacher & Bartlett’s New York office, becoming a partner in 2011 while still in his early thirties. But a move to Kirkland to head its Houston office in 2014 was the chance to make transformational wealth.
Hammes’ tactics for hiring stars like Calder were simple: offer them huge sums of money and the chance to enter the ranks of Kirkland’s fabled equity partners.
Those who have worked with him say Calder quickly gained a reputation for billing more than 3,000 hours a year and building out headcount in Houston to more than 200 lawyers, before expanding his fiefdom to include offices in Austin and Dallas.
They add that both Hammes and his successor Jon Ballis supported Calders’ rise through the ranks, and that he has an impressive ability to navigate the firm’s sometimes complex internal politics.
He was also well compensated. Equity partners at Kirkland are paid according to how many shares they are allocated and the value of those shares, which fluctuates relative to the firm’s revenues, according to people familiar with the matter. The number of shares each partner holds is negotiated every other year and partners are allowed to review the list to see how many their colleagues are getting.
A single share is currently worth around between $80,000 and $85,000, the people say. Less than a decade after joining Kirkland, Calder has amassed 300 of them, some of the people said, making him one of the best-paid partners in corporate law, earning around $25mn a year. In this period, the value of a share more than doubled from around $33,000 in 2015.
The firm declined to comment on remuneration. But it has been able to afford such largesse because of its fee income from the booming private equity industry. Instead of targeting only household names such as Blackstone, KKR and Apollo, Kirkland has developed a deep bank of relationships from the biggest firms down to hundreds of smaller mid-market players.
It has been adept at picking winners, developing close relationships with groups like Thoma Bravo and Vista before they became the giants with over $100bn in assets under management that they are today.
To justify its fees, Kirkland guarantees a better service than its peers, and achieves this by getting as close as possible to its clients. Vista Equity Partners is one example; David Breach, a former member of Kirkland’s management committee, joined Vista’s top team in 2014.
As Vista grew, so did the fees Kirkland billed, which in some years topped $100mn. The firm advised Vista on matters ranging from negotiations with investors over buyout funds to the agreement that shielded Vista’s billionaire chair Robert Smith from prosecution for his part in one of America’s biggest tax evasion scandals. Vista declined to comment.
Kirkland’s ruthless emphasis on profits and blockbuster pay packages spawned an internal culture that readers of Liar’s Poker might recognise. Colleagues would routinely let off steam after long working weeks by going out together and drinking heavily. Client entertainment was lavish; one champagne soaked ski trip to Zermatt got some private equity clients in trouble with their own compliance departments due to the excessive spending, people familiar with the matter said.
In Asia, two partners were reprimanded for not reporting relationships with junior staff, say people familiar with the firm’s operation. Relationships between senior lawyers and more junior colleagues or support staff are not uncommon in other offices, they add.
A London-based partner who took at least one vacation scheme student back to his residence after a work event was fined, according to those familiar with the details. Another partner in London who had a relationship with a junior staffer also received a large fine. Relationships between more senior lawyers and their junior counterparts have come under scrutiny from the Solicitors Regulation Authority.
One partner referred to a junior lawyer’s temporary return to Nigeria for national military service as “pursuing a career with Boko Haram” in emails seen by the FT. He was later handed a large pay rise, say those familiar with the incident, rather than being reprimanded for twice making tasteless references to a violent Islamist terror group.
As rising interest rates bring the private equity boom to an end, market conditions are becoming more challenging in the ecosystem that serves the industry.
Lawyers at Kirkland say the business is set up to weather a downturn, as the firm’s well-regarded restructuring practice steps in to help bail out clients’ less successful acquisitions. Hammes, for instance, advised Bain Capital on its $6.6bn acquisition of Toys R Us in 2005 — and Kirkland was on hand again in 2017 when the toy retailer filed for bankruptcy, billing the struggling company more than $50mn.
But while takeover activity has slumped this year, bankruptcies and restructurings are still way below where they were in the aftermath of the global financial crisis.
Rival firms are also copying Kirkland’s approach and pay structures. Cravath recently established a non-equity partner tier and in 2021 overhauled its pay structure, abandoning the “lockstep” model that rewards partners based on seniority rather than performance.
In response, Kirkland has had to offer partners even more money to stay, according to people familiar with the matter. Many of its newer hires are on guaranteed packages that will be hard to justify unless deal making picks up.
“The model works as long as they are growing,” one former partner observes. The company declined to comment.
As well as raising pay levels, rivals are increasingly looking to poach Kirkland’s star lawyers. Over the course of a few weeks in late summer, rival Paul Weiss poached more than a dozen Kirkland partners in an operation dubbed “Project Springsteen” internally.
“Up until now, Kirkland was the final place of rest for a partner as no one could pay more,” says Melinda Wallman, a partner at legal recruitment firm Macrae. “[The Paul Weiss raid] has disrupted the myth that once you have reached Kirkland, you can’t go anywhere else.”
The ambush exploited rising tensions within Kirkland’s top ranks. As chair, Hammes had kept lawyers’ big egos in check but under Ballis, who took over in 2020, disputes between factions began to simmer.
A decision led by US-based partners, including Calder, to hire Alvaro Membrillera from Paul Weiss’s London office without consulting their own colleagues in the city, ended with Roger Johnson and other London-based partners decamping to Paul Weiss as part of Project Springsteen.
Investors and trade associations are also taking a closer look at Kirkland’s modus operandi. Because it works on so many deals — it has advised on more fundraisings than any other firm in every year since 2008, according to data provider Preqin — it collects reams of data about fees and other terms. The firm invested heavily in using this data to its advantage, even hiring data scientists from the University of Chicago to track deal terms.
It uses this data to get better terms for its own clients, making life difficult for less well-resourced investors such as public pension plans. “They have the largest market share,” says the head of private equity at a large US public pension plan. “They will pick a few terms each year and insist they are [the] market”, rolling them out across most of the private equity funds they advise.
“It is one of our selling points,” a person familiar with the firm’s workings says. “Our market knowledge is better than our competitors.”
The concentration of market share in the hands of a few large firms, including Simpson Thacher and Proskauer, has attracted criticism from the Institutional Limited Partners Association, a Washington-based industry body representing private equity investors. In a report earlier this year, it highlighted the role that lawyers play in helping fund managers negotiate better terms at the expense of investors.
Investors say they are accused of collusion if they try to band together with peers to get better terms, with Kirkland among the most aggressive law firms at rebutting any pushback.
Senior executives in the restructuring industry say Kirkland also played a leading role in eroding protections given to the lenders that finance private equity buyouts. This has allowed acquirers to heap debts on to the businesses they buy while keeping creditors well away from their best assets, leaving them with less collateral if the businesses later run into trouble. The firm declined to comment on covenants or its use of data.
The combination of reinvigorated rivals, deteriorating market conditions and growing investor pushback against tactics that many regard as aggressive represents the most serious challenge to the Kirkland money machine in more than a decade.
“[Kirkland] believes that its size means it will continue to pick up some more of its work and the platform will throw off business,” says one former partner.
But he also predicts that the one-time Midwestern upstart “will never be as dynamic as the firm it once was”.