How the wheels came off Kirkland & Ellis’s attempt to conquer Asia

Kirkland & Ellis plundered the senior ranks of rival law firms in Hong Kong, peeled off work advising the world’s largest buyout groups and prioritised China over other countries.

The aggressive push over the past decade turned Chicago-based Kirkland into one of the largest global law firms in Asia, with 115 lawyers and 39 partners.

But in the past 12 months, the wheels have come off, according to current and former staff and other people familiar with the situation. Sexual affairs between some staff sparked an internal investigation that probed partners’ behaviour during client events. The return on investment of the Asia growth strategy is also being questioned.

Kirkland opened its first Asia office in Hong Kong in 2006, but for five years it was heavily reliant on a tiny number of clients, including Boston-based Bain Capital, and employed fewer than 20 lawyers while its competitors built teams 10 times its size.

In the US, Kirkland had prospered by hitching itself to a boom in private equity deals. But it was behind the curve in 2011 when Hong Kong saw record buyout investment and its stock exchange beat London and New York for initial public offerings for the third year in a row, including the $2.1bn listing of Italian designer Prada.

As it played catch-up, Kirkland launched a lightning raid in 2011 of eight senior corporate partners from three of its biggest rivals, including Nicholas Norris, who was poached from Skadden and became the centre of Kirkland’s Asia funds practice. Norris helped to prise away private equity firms from rivals such as Simpson Thacher & Bartlett, which enjoyed a near monopoly on big KKR and Blackstone deals.

In 2017, Kirkland lured another Skadden star, Daniel Dusek, who led the firm’s work on the $8.7bn take-private deal of China’s largest online classifieds marketplace, 58.com. This year, it recruited China M&A veteran Peng Yu from Ropes & Gray, whose key clients include Jack Ma’s Alibaba, and Brian Ho, who previously ran the corporate finance division at the Securities and Futures Commission, the Hong Kong financial regulator.

“From a relatively late start, Kirkland did a good job catching up,” said a partner who left this year. It quickly overtook its peers, focusing on hiring in its private equity practice and the business lines that supported it, such as debt finance, capital markets and restructuring.

Key to the past decade of supercharged growth had been bringing to Hong Kong Kirkland’s “eat what you kill” pay model, which rewards performance over hierarchy, to attract fiercely competitive star lawyers. Lavish client entertainment, a global tactic of Kirkland, proved particularly successful in Hong Kong, where the Chinese notion of “guanxi” prizes close personal relationships in business, and where conducting deals at private clubs or on corporate pleasure cruises — known as “junks” — is still the norm.

That culture, however, drew scrutiny in a probe by management after a partner’s wife posted a message on LinkedIn in October that referenced a number of office affairs. The post, which was deleted hours later, quickly went viral in Hong Kong’s village-like business community.

Suddenly, Kirkland was forced to confront consensual sexual relationships between certain high-ranking male and more junior female staff in its key private equity practice, where partners are responsible for some of the most valuable clients.

Two partners involved were reprimanded by the firm for not disclosing intra-office relationships. One left this year while another remained at Kirkland. A third partner involved has also since left in connection with the episode.

Kirkland’s management examined partners’ behaviour at prestigious client events, such as a ski trip in Niseko, Japan, and at the Singapore Grand Prix, after concerns that they had been used by some to facilitate the workplace affairs.

The ensuing spotlight on the firm upset some who had previously raised concerns about the relationships, according to several people close to the matter.

Some raised concerns about a “boys’ club” of heavy drinking and “intense” entertainment of clients. On one occasion, clients were taken to a “private lounge” in Hong Kong’s Lan Kwai Fong nightlife district called “The Boardroom”, according to a person with direct knowledge.

“I thought this was a thing of myths from the 1980s or ’90s; I didn’t think it happened anymore,” said a person close to the matter. “A very insular group of people made [this behaviour] OK.”

Andrew Horowitz, a partner at US firm Obermayer who handles employment claims at professional services firms, said: “Every equity partner is an owner, so in many ways it is their show and no one is ever going to tell them ‘no’.”

Global law firms are already on notice about the risk of sexual harassment at work after a string of widely reported incidents in the industry. The question of where to draw the line on relationships between colleagues has become more sensitive, particularly where there are nuanced issues around power.

A former partner said: “If you’re a senior partner at Kirkland, everyone is more junior than you in seniority and influence. It’s the nature of the place, the imbalance in earnings that brings.”

Kirkland said: “Respect and collegiality are central to the culture of our Hong Kong office, which is committed to fostering that environment. Beyond noting that the firm and those involved disagree with the inferences in your inquiry, we do not comment on our policies or personnel matters.”

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The highest-grossing law firm in the world, Kirkland had a record year in 2021, with revenues climbing to over $6bn, meaning its 490 equity partners earned an average of $7.4mn. In Hong Kong, some partners received close to $10mn, according to people close to the firm.

Yet, despite having grown a far larger Asia partnership than most of its rivals — and having won the mandate to advise international bondholders on the bankruptcy of Evergrande, China’s largest corporate restructuring — Kirkland has failed to grab the headline spot on the region’s biggest deals.

Kirkland advised on 12 deals worth $3.5bn in Asia in the first half of this year, and nine deals with a similar value in the same period of 2021. Its work was dwarfed by Simpson Thacher & Bartlett, which holds a leading relationship with private equity giant Blackstone in Asia and advised on deals worth $21bn in the first half of 2022, and by Latham & Watkins, which advised on deals worth $14.7bn.

Kirkland is still considered the “number two” option for some of the world’s largest funds in Asia such as KKR, Carlyle and Blackstone, according to some of the firm’s partners. One described the strategy as being “diversified”, meaning its key relationships were spread across several buyout groups and the firm was not “desperately trying to maximise our revenue”.

“The secret sauce of our global success is doing a lot of private equity deals that aren’t necessarily the biggest deals, but the clients pay and the deals are complicated,” the person added. “Rather than doing a $10bn deal which is straightforward and making $500,000, we do the $100mn deals where they pay $5mn.”

Like all large US corporate law firms, Kirkland does not break down its revenues and profits by region. Partners at the firm said that it prefers to measure its financial performance by sector: more than three-quarters of its fees globally are deal-related.

The Hong Kong office is profitable, according to several people close to it, but the Asia hub, like its Europe offices, is dwarfed by Kirkland’s immense US practice, where its biggest mandates are typically corporate bankruptcies. The firm’s single global balance sheet means its Hong Kong partners benefit from this success.

But they are also operating in increasingly uncertain waters. Kirkland is heavily exposed to China; unlike most of its rivals it does not have offices in Singapore, Seoul or Tokyo. And now, just as some of its biggest clients are forced to pull money out of China amid escalating geopolitical tensions, Kirkland’s Hong Kong office has to prove its efforts have been worth the costs.

“The problem for Kirkland in Hong Kong is . . . they may be profitable but proportionately it is so small,” said one of the former partners, who added that “even in our strongest billing year, where we billed tens of millions” the office only reached number nine in the firm’s list of highest-earning global assignments.

Another of the firm’s former partners said: “Ten years is a long time, [the leadership] is no longer seeing it as an investment, they want to see results.”