Let’s start 2022 with this question: can anything stop the juggernaut that is Kirkland & Ellis?
In recent years, the company has defied expectations, with revenue doubling since 2016 to approach $5 billion and average profit per financial partner doubling over 10 years to $6.2 million. dollars. It has achieved double-digit revenue growth for five consecutive years. If it continues at this pace, the company will soon be ranked #1 globally in both revenue and PEP.
It was all done on the back of a creeping private equity market. The company rode the buyout wave better than any other. In fact, outside of its Chicago base, its offices are almost entirely focused on this area. In London, a Kirkland partner estimates that around 70% of partners are focused in some way on private equity.
This violates all the rules of reasoned management of a law firm. Most law firms want to be well protected to thrive in any market environment. But this consistent strategy rarely delivers stratospheric returns, and as one Kirkland partner puts it, the company wants to “turn off the lights.” In the UK, Travers Smith and Macfarlanes were once known as private equity specialists, but both have branched out from being so dependent on practice area after being hit hard by the financial crisis. Within both firms, litigation is now an important area of practice.
Kirkland had many opportunities to branch out, but chose not to. A Kirkland partner said the London office had been approached in the past by highly regarded public mergers and acquisitions teams but rejected them on the grounds that it wanted to remain narrowly focused. The associate describes the business as a “scale boutique”.
This has obvious advantages. The value and volume of private equity deals reached record highs in 2021, pushing global mergers and acquisitions to new heights. Globally, the private equity industry has over $2 trillion in capital ready to invest. Kirkland is right in the middle of a booming market.
But, in theory at least, there are downsides to putting all your eggs in one basket, even if that basket is lucrative. Slaughter and May, perhaps the UK’s most prestigious firm, arguably missed out on the private equity boom by putting all of its focus on public mergers and acquisitions.
Private equity advisers are all aware that at some point the market could turn and redemptions could slow. Bear markets tend to happen about every seven years on average, and the next one is long overdue. It’s not a foregone conclusion, but there is certainly a risk. In developed markets, inflation is on the rise and interest rates are expected to rise accordingly. The era of cheap debt cannot last forever. Corporate default rates are currently near all-time lows, but there is a general sense of unease that the year ahead could be difficult as government support for the pandemic begins to wane. . A private equity partner says the more sophisticated buyout firms have been net sellers in this market.
After the 2008 financial crisis, many private equity firms suspended their investments for some time. Buyout companies can easily afford to limit transactions for about six months. Kirkland too, but not if he wants to maintain his rapid growth.
The company is not really ready for a bear market. Her restructuring practice is decent, but she is so allied with all financial sponsors that she can only really advise borrowers, rather than lenders, due to conflict issues.
Kirkland insiders dismiss those concerns, of course. They believe that something is unlikely to stop the growth of private equity – that it will constantly provide work, even if it is through other types of private capital, such as infrastructure funds , real estate investments, distressed debt opportunities, private debt funds, etc. .
Yet even if this is true and the world of private capital manages to provide so much work in 2022, where will Kirkland’s new growth come from?
2021 will undoubtedly prove to be an exceptional year for the company. Repeating that level of growth will be tricky, not least because the company already acts for such a large share of the world’s largest private equity clients. In London, he is already a regular adviser to companies such as Blackstone, EQT Partners, Advent International, Cinven, Warburg Pincus, Carlyle and BC Partners, and many others. There aren’t many big customers left to win.
Kirkland may well become a victim of its own success. Simply put, it’s hard to see how the company’s rate of revenue growth is sustainable. The business will undoubtedly remain busy and prosperous, and only a brave person would bet against it in the long run. But it would also take an optimistic Kirkland watcher to expect it to go on forever.
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