Private equity lawyers are taught to eat what they kill

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If a reminder were needed that we are living in a material world, it emerged this week in the once-stuffy profession of corporate law. The US firm Paul, Weiss, Rifkind, Wharton & Garrison raided its larger rival Kirkland & Ellis for several top private equity partners, the kind of people who get paid up to $20mn a year.

It is another nail in the coffin of loyalty, which used to keep lawyers at elite firms in London and New York in place for their entire careers. They advanced steadily in lockstep, being paid more as they got older and more senior. It was an intricate exercise in deferred financial and psychological gratification that has fallen apart in the past decade as partnerships have splintered.

It is also a function of the inexorable growth of private equity finance, despite recent setbacks as interest rates have risen. When your clients are constantly raising new funds, acquiring companies, and structuring deals to deliver rewards for them, their investors and corporate executives, it feels natural to start seeking a bigger piece of the action yourself.

This pains the leaders of law firms trying to retain prized partners, who can not only defect and be paid more elsewhere but see no moral reason to resist temptation. “Loyalty used to mean something but then pay started rising dramatically and, one by one, the lockstep systems broke,” says one senior lawyer, rather sadly.

Firms now poach partners from others by offering guarantees of higher pay, rather than relying wholly on promoting juniors from within. These lawyers bring business with them, although they are barred from soliciting for it before they leave. One says before switching firms he hired his own lawyer to advise him on what he could tell clients.

One culprit for lawyers becoming so footloose is Kirkland & Ellis, which turned itself into the world’s highest grossing law firm by rejecting tradition and poaching partners from others. Kirkland’s rivals are rude about it behind its back (“You’re just a cog in a machine there,” says one) but money talks: its 505 equity partners took home an average $7.5mn last year.

Nor has the old guard’s scorn for Kirkland stopped it from adopting similar tactics. Hence, the rumble that has erupted in London between it and Paul Weiss, a New York firm founded in 1875, which this week hired four private equity partners from Kirkland’s London office. That followed Kirkland’s poaching of the head of Paul Weiss’s London office.

As the spat shows, private equity partners are now the most valuable of recruits. Making such deals happen is a less glamorous job than advising the boards of famous public companies, but it is a rewarding business. Private equity firms such as Blackstone, Bain Capital and CVC Capital Partners offer lawyers a constant flow of transactions. 

First, they raise multibillion funds for buyouts of companies. This keeps plenty of lawyers busy in itself: US private equity firms spend more than 4 per cent of commitments to funds on legal costs, on one estimate. Given that CVC has just raised a €26bn buyout fund, these are rich pickings.

Then the funds start to acquire companies. Lawyers on all sides must not only pin down each deal’s terms, but how the rewards from each company’s future growth will be split among investors and executives. More billable hours than an innocent would believe are spent on ensuring they are all financially “aligned” and will be wealthy if the business flourishes.

Much of this haggling is now allocated to external lawyers by private equity firms because they are experienced at it. “I am getting older but my clients are getting younger,” says Ramy Wahbeh, co-leader of private equity for Sidley, the US law firm. He has only been in that job in London since June, having been hired from Paul Weiss, where he had worked for 18 years.

The key is to be trusted by one of the world’s top private equity firms: the rest flows from that. The most important bond of loyalty used to be among partners of top law firms; now, it is between private equity dealmakers and the individual lawyers they favour. That has not only broken lockstep, but electrified the transfer market.

This is familiar in other industries, from entertainment to sport. As businesses expand globally and technology allows top-tier individuals to extend their reach, more rewards are taken by stars. Employment traditions that entrench team loyalty and cohesion get swept away: as with football players, so with lawyers.

The twist is that private equity lawyers imitate clients’ behaviour as well as obeying economic incentives. CVC is known as a firm where financiers “eat what you kill” by keeping a slice of the deals they make. The US lockstep partnerships rose by serving companies such as IBM and General Motors and were equally staid; these lawyers exist by the transaction.

This all has dangers for law firms: having to compete for the most valuable talent pushes up costs and makes partnerships fragile. It also has risks for individuals: if the deals dry up, other partners will not rally round. But it is how lawyers have been taught to behave.

john.gapper@ft.com