Profits stall at London’s ‘magic circle’ law firms during US expansion

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Profits have flatlined at the UK’s elite corporate law firms as they reach a crucial stage in their battle to grow in the US, with higher costs and a deals slowdown hitting bottom lines.

Clifford Chance, Allen & Overy and Linklaters, three of London’s “magic circle” law firms, all increased revenue in their most recent financial years but saw partner profits stall amid higher staff costs and lower demand.

The slowdown comes as two of the “magic circle” reach a pivotal moment in a bid to secure a foothold in the US market, with Allen & Overy planning a $3.4bn merger with Shearman & Sterling, and rival Freshfields Bruckhaus Deringer having invested in new offices, including in Silicon Valley.

Freshfields was the only firm in the group to nudge up its partner profits, by 1 per cent, with its equity partners taking home just over £2mn each on average in the year to the end of April.

In contrast, equity partners at Allen & Overy saw their average profit shares drop by almost 7 per cent, to £1.82mn each, while Linklaters’ equity partners took home £1.78mn each on average, almost 5 per cent less than the previous year. Clifford Chance’s profit per equity partner was flat.

The slowdown in growth follows a boom in demand for corporate law firms in 2021, as a deluge in mergers and acquisitions triggered by pandemic-era financial stimulus boosted their coffers.

Tony Williams, principal at legal consultancy Jomati, said firms had seen a drop-off in M&A work since then, and rising costs due to higher salaries.

“Firms in the early part of the year had to dramatically increase their salaries because of the hot labour market,” Williams said, referring to last year’s cut-throat competition to recruit junior lawyers. Allen & Overy said its partner ranks had grown too, diluting the profit pool.

Pre-tax profits at Linklaters dipped by 2 per cent from the previous year to £854mn, excluding exceptional items, while Allen & Overy’s fell to £892mn, from £900mn. Clifford Chance’s profits declined marginally to £781mn and Freshfields did not disclose its own figure.

Rising costs and a tougher economic climate come as the magic circle seeks to gain traction in the lucrative US market. Williams said the group was currently generating only about 15 per cent of their revenue in that region.

“If you want to be a truly global firm, you have to have 25, 30, 40 per cent of your revenue in the US,” Williams said.

Freshfields and Allen & Overy have made recent strides in the US. Allen & Overy is hoping to put its blockbuster transatlantic merger to a vote in October, and Freshfields has poached a number of partners from leading law firms in the past three years, including to launch a Silicon Valley office to target tech work.

But industry watchers warned that expansion would mean more investment in a difficult economic climate.

“US expansion will significantly impact law firms’ bottom lines, so the next year is pivotal,” said Chris Clark, founder of legal recruiter Definitum Search. “Inflated salaries and costs outstrip underlying revenue growth — hence lower profits. So some [expansion] plans may get put on hold.”

Williams said, however, that the magic circle still had enough resources to invest, especially in the US, where they saw further growth as a business imperative.

Although profits stalled, the magic circle generated increases in revenue, with Allen & Overy and Clifford Chance making more than £2bn for the first time.

Linklaters’ managing partner Paul Lewis acknowledged that higher inflation and pay pressure had increased costs but said that pressure had “slowed down somewhat”. He said tougher economic conditions were likely to continue in the current financial year, with demand for some services strong but well short of last year’s boom.


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