How US law firms shook up the UK’s ‘magic circle’

When Neel Sachdev left a top British law firm to work in the London office of a US rival 20 years ago, he was warned by an older colleague that he was doing a “deal with the devil”.

If so, then Sachdev has arguably had the last laugh. He is now one of the UK’s most high-profile and best-paid private equity lawyers. Last year he moved from Kirkland & Ellis, his first American employer, to become co-head of the London office at his second, Paul, Weiss, Rifkind, Wharton & Garrison. Annual partner remuneration at the New York-headquartered firm can run into tens of millions of dollars.

“It was historically seen as a high-risk move to go to a US firm in London,” says Sachdev, sitting in the firm’s new offices in Soho that were once home to Twitter.

“The myth that US firms won’t be here for the long term and wouldn’t provide training or win deal flow has been dispelled,” he adds. “Firms like Paul Weiss have the culture, expertise, work and talent to dominate in London.”

Over the last two decades, US law firms have been growing their presence in order to leverage their American client bases in Europe. While outfits such as White & Case and Cleary Gottlieb have been in the City since 1971, the pace of new arrivals has picked up since the 1990s, when English law changed to allow foreign lawyers to form multinational legal partnerships, and has accelerated further in recent years.

London was for many years regarded by US firms as a jumping-off point to serve clients across Europe. But in recent years, the city has been the focus of a significant expansion by US private equity firms. The legal support they have required, combined with other work, has helped the UK offices of US law firms become powerhouses in their own right. In some cases, they now rival their American headquarters; White & Case’s London office is only about 5 per cent smaller in headcount terms than New York.

“I would frame this in the context of larger tectonic changes occurring in the London market . . . the fallout from Brexit has made London more of a standalone market and less of a gateway to the continent,” says Bruce MacEwen, president of New York law consultancy Adam Smith, Esq. “These are not ‘satellite’ offices by any stretch.”

The influx of US rivals has had a profound effect on how the UK’s traditional “magic circle” law firms — names such as Linklaters, Freshfields Bruckhaus Deringer, Clifford Chance and A&O Shearman — operate in areas such as recruitment, pay and working culture.

This has been most visible in remuneration. A small group of partners in London, working mainly in the private equity space, now earn as much as $20mn a year at top US firms while average partner profits are $5mn or more, putting pressure on the “magic circle” to respond.

“The $20mn comp figure is a fairly new phenomenon in London and it’s come to be perceived as top of the market here now,” said Siobhán Lewington, a partner at legal recruiter Macrae.

“Figures like that were unheard of five years ago in London and show how the industry has become more analogous to investment banking.”

At entry levels, salaries for newly qualified lawyers [NQs] at US firms have reached £180,000 in the last year, forcing domestic incumbents to also raise pay. “Magic circle” firms have increased starting salaries to £150,000 in recent months to try and remain competitive, marking a jump of 50 per cent in five years at some for their most inexperienced lawyers.

“Top law graduates would have previously had their eyes set on joining a ‘magic circle’ firm, with US-founded firms down the pecking order,” says Stephen Kensell, managing partner of Latham & Watkins in London. “That’s changed now.”

As they try to hold on to their top performers, London-founded firms have also moved away from traditional lock-step pay structures, in which partners move up the equity ladder based on years of service, and towards the US model of payment by results.

“Over the past 18 months the law firm partner hire market has remained red hot despite a relatively soft market for legal services,” says Scott Gibson, founder of legal recruitment consultancy Edwards Gibson.

He attributes this largely to US firms expanding their UK operations. “It is not just hires in transactional private equity,” he says, referring to roles in areas such M&A, leveraged finance, private credit, antitrust and tax law, “but, thanks to private equity’s bankrolling of litigation funding, contentious lawyers too”.

Working life at a US-founded law firm is not for the faint-hearted.

Associates are expected to bill close to 2,000 hours a year at most top US firms to receive their bonuses. That equates to eight billable hours every working day of the year and does not include the many non-billable hours worked. Magic circle firms demand about 1,700 hours, according to legal recruiters.

“People just need to have their eyes open to what working in a US law firm involves. It’s a different deal,” says one managing partner of a UK firm. “You don’t find those hours at 11am on a Wednesday. Those extra hours really hurt.”

One associate who has moved from a UK to a US firm in London in the past year says the change meant a 25 per cent increase in billable hours and a 50 per cent increase in pay.

However, the sacrifices people have to make for the job are also higher, the person says. If someone consistently exceeds hourly targets at the US firm it is seen as a positive, whereas it might have been identified as a problem at the UK one.

In an annual survey of more than 2,000 UK trainees and junior lawyers by trade publication Legal Cheek, US law firms occupied the top eight spots for hours worked last year.

Kirkland & Ellis, the world’s biggest law firm by earnings, was number one for the fourth year in a row. Lawyers there worked an average day of 12 hours and 28 minutes and typically finished work at 10.01pm.

A couple of years ago, the firm was forced to formally address — and dispel — an expectation shared by some senior individuals internally that there was an annual billing target of 2,500 hours and even that wasn’t enough, according to one former Kirkland partner.

Kirkland declined to comment.

The high remuneration is supported by significant revenue growth, particularly at the top private equity firms. Kirkland, one of the key drivers of escalating pay in the City, reported revenues of $7.2bn last year, becoming the first firm to break through the $7bn barrier.

Firms such as Kirkland also allow partners to co-invest in the deals done by the private equity groups that they advise, further boosting their overall earnings. Average pay for equity partners at Kirkland last year came in just shy of $8mn, according to industry publication The American Lawyer. That figure does not include any profits partners make from co-investing in client deals.

A pick-up in dealmaking, helped in part by lowly valued UK companies becoming takeover targets for larger US groups, has also helped stoke a war for legal talent. The number of senior moves in the London market reached the highest-ever last year with 510 partner hires, which includes non-partners joining the partnership, according to Edwards Gibson, of which Kirkland & Ellis chalked up the most at 18. The trend has continued this year, with 265 partners recruited in the first half of 2024.

The traffic is not just from UK to US-founded firms, either. American firms poaching partners from each other in London has also become a growing trend in recent years. Since the start of 2022, 178 partners have moved laterally — partnership to partnership — between US firms in the City. That includes 49 who did so in the first six months of this year, the largest number of such moves in a half year period since 2020.

Linklaters, Freshfields, Clifford Chance and A&O Shearman all declined to comment on the impact that growth of US firms in the City has had on their businesses.

Not all clients are on board with the high-pay plus long-hours strategy espoused by US firms, even if it’s notionally to their benefit. “Obviously, many US firms are writing big cheques for talent in London,” says Richard Price, legal and corporate affairs director at mining conglomerate Anglo American.

“You’ve got to wonder what impact this trend might have on the culture of certain firms and work-life balance. That matters to us.”

Higher remuneration also makes for higher charge-out rates. US firms now charge more than $2,000 an hour at the top end, according to recruiters and people at US firms.

This has spilled over to UK outfits. When the hourly charge-out rate crossed £1,000 (about $1,275) a few years ago it was a “Rubicon moment”, according to one UK managing partner. British-founded firms can now charge more because their US rivals do.

For private equity clients, which have been the mainstay of the elite US firms in London, the legal fees are viewed as something of a footnote on large and usually very profitable transactions, according to partners and one general counsel at a private equity firm.

However, there is not the same tolerance in the market for the kinds of fees charged by firms like Kirkland and Paul Weiss on smaller deals, the GC adds. The legal work on those transactions is more likely to go to mid-market UK firms with lower hourly rates. General corporate work at blue-chip listed company clients is also more sensitive to fees and largely remains the bread and butter of the “magic circle”.

Still, outfits such as Latham & Watkins have decided to make a wider play and started to punch through, winning panel appointments — a company’s preferred list of advisers — at FTSE 100 companies including Vodafone and Anglo American.

“It’s very easy to think that one of the reasons that the US firms don’t try and take over public M&A work is because it’s less profitable, says Jason Glover, managing partner of New York-headquartered Simpson Thacher & Bartlett’s London office.

“That would be wrong,” he adds. “The reality is that ‘magic circle’ firms have done a fantastic job over decades in advising on those types of deals. They have got very close links with both clients and the investment banks.” 

The decline of the “magic circle” has long been predicted by market commentators.

Even as US firms have grown their footprints in the City and the industry has battled economic ructions including the global financial crisis, Brexit, the Covid-19 pandemic and Russia’s invasion of Ukraine, the UK’s leading law firms have confounded expectations of their demise for more than a decade.

But the accelerating growth of US-founded firms in London over the past few years, coupled with the merger of UK law firm Allen & Overy with New York’s Shearman & Sterling in May, has changed the landscape and highlighted the lack of progress made by UK firms in the other direction.

“I think the US firms over the last couple of decades have had so much more success penetrating the London market than the other way around,” said Anglo’s Price.

The A&O/Shearman merger, along with investments by Freshfields and Linklaters in hiring heavy hitters in the US, are the first signs of potential UK success in America — the world’s most lucrative legal market. Freshfields, the product of an Anglo-German merger, now has almost as many partners in the US as it does in Germany, according to the firm’s website.

For US firms in London there are no signs of things slowing. In the latest salvo at its British rivals, Paul Weiss announced this month that it is going to offer a UK training contract — a placement for trainee lawyers to qualify — and pay its NQs the top market rate of £180,000. The move will place further pressure on domestic firms to compete for talent.

A number of US law firms have also recently signed office leases and moved into expensive premises in the City in a sign of their long-term commitment to their London investments. Just over half of the 40 legal sector property deals concluded for more than 20,000 sq ft of space in the capital since 2020 have been with US law firms, according to an April report from real estate group CBRE.

Glover, at Simpson Thacher, says he expects US firms’ investment in London to continue for some time.

“I don’t see it as maxing out at all. I think there is significant growth still to come.”