Can London’s legal ‘magic circle’ fend off the threat from America?

WHEN I studied law at university many moons ago there was the “Magic Circle” of City law firms. Remarkably, given the time that has elapsed, there still is.

The only difference between now and then is that there were six practices in this elite group: Slaughter and May, Linklaters, Freshfields, Allen & Overy, Clifford-Turner and Coward Chance. These last two merged, so today there is the original four with the addition of Clifford Chance.

If that’s not a case for a monopoly inquiry — we’re talking of a charmed bunch sitting at the top of the profession and dominating City legal business over many decades, back to when I was an articled clerk and long before — I don’t know what is. It’s similar in accountancy, of course, where the “Big Four” rule.

How safe, though, are the lawyers, could their prestige be under threat? What prompts the question is a paper, “The Magic Circle — where to next?” from Christopher Saul, himself a former senior partner at Slaughter and May.

In it, Saul suggests the firms are at an inflexion point. “How can they avoid being a training service for the leading US firms, gradually surrendering ‘brand charisma’ in the process?”

Four of the five, Allen & Overy, Freshfields, Linklaters and Clifford Chance, have taken similar paths of aiming to become global one-stop shops, merging with foreign firms and opening offices overseas. His own Slaughter and May chose a different route of loose associations with independent foreign outfits.

As a result, the four have built global networks — Allen & Overy is in 43 cities worldwide, Clifford Chance in 30. But they’ve not been able to conquer the US, home of the mighty dollar and the world’s biggest legal market. A US corporation involved in a major domestic deal will tend to turn to a US firm for advice.

At the same time, while the Brits have not made a splash over there, the Americans are making waves here. Kirkland and Latham each have more than 300 lawyers in London, and the likes of Skadden, Weil and White & Case also power ahead. Some of their recruits have themselves come from the Magic Circle.

Where once the Magic Circle were the most profitable, that is no longer so. As Saul points out, Allen & Overy has gone from profit per equity partner or PEP, of £1.2 million in 2015-16 to £1.95 million in 2021-22. But over the same period, Latham’s PEP has climbed from $3.75 million to $5.7 million and Davis Polk has seen its PEP leap from $3.75 million to an eye-watering $7 million. As the top-tier Londoners strive to hang on to their best people, sterling’s weakness versus the dollar does not help either.

What’s occurring carries the hallmarks of the experience in investment banking when Bank of America, Citi, Goldman Sachs, Morgan Stanley, JP Morgan shook up the industry in London in the late 1990s and early 2000s.