The dominance of the Magic Circle in the City of London is as much an institution as the pin-striped suit. But time is unforgiving, and traditions and fashions are eventually challenged and dispensed with. It is only a matter of when. But has time now come for the circle’s magical powers?
As big and powerful as they are, the Magic Circle’s economic fortunes have always been tied to those of their cousins in the banking industry. After the Big Bang in 1986, London’s banks grew to what some thought were unassailable heights. And Magic Circle law firms dutifully piggy-backed off their success. But after the financial crisis broke in 2007-8, London’s banks retreated to lick their wounds and the Magic Circle found itself short of a prize sow.
Mike Goetz, London managing partner for US law firm Ropes & Gray, told City A.M.: “Historically the Magic Circle firms relied very heavily on the banks because they were massive users of legal services. So when the banking crisis hit and the amount of work that the banks threw off reduced significantly, it put a lot of pressure on the finances of the Magic Circle firms. As a result, they had to spend a lot of time inwardly focused on how to manage their businesses with significantly reduced revenues from the banks.
But one man’s loss is another’s gain, and with the banks on the sidelines other players have stepped forward to offer their services.
And to the glee of US law firms, those new players also happened to be their core client base. As a result, firms such as Kirkland & Ellis, Ropes & Gray, Weil, Gotshal & Manges and Latham & Watkins have taken up the baton dropped by the Magic Circle, exploiting the reigning popularity of their bread and butter: high yield and private equity.
“At the time, not very many US firms were that heavily dependent on bank work, so as a result they were able to take advantage of a couple of things: they were able to retain more of an outward focus because they weren’t being required to shrink like the UK firms, and also as the banks became less active other players like the hedge funds, credit funds and alternative lenders stepped in. And they were more of a client set to the US firms than the Magic Circle firms.”
Revenues for US firms in the UK have steadily been on the rise since. According to data from The Lawyer, in 2009 combined UK revenues for US firms stood at just over £2.5bn; in 2013, that figure had inflated to £3.5bn. Furthermore, in Thomson Reuters’ legal advisor rankings for 2014, a record-breaking 10 US law firms secured places in the Top 25 table, with Simpson Thacher, Weil Gotshal and Davis Polk securing first, second and third respectively.
But Magic Circle law firm Freshfields refutes Goetz’s hypothesis. Will Lawes, Freshfields’ senior partner, said: “We continue to have some very strong relationships in the banking sector and our revenues from this group of clients have held up well since the financial crisis. We also benefit from a very broad range of clients from different sectors and geographies.”
Who’s right? Only time will tell.
Clifford Chance, Linklaters, Allen & Overy and Slaughter & May all declined to comment.