The long read: Can Sidley break out of the beige?

Sidley Austin is nice. The people there are nice. They are decent and hard-working and clever and nice. Everyone says so.

In fact, Sidley Austin has been, at least for those who like their law firms on the saucy side, a bit beige.

For years, it has gently glided along below the radar, doing its deals, hiring the odd partner.

It emerged unscathed, reputationally if not financially, from the financial crisis despite working for credit-crunch flashpoint Northern Rock, a legacy client of Brown & Wood, Sidley’s merger partner of 2001.

Then, in February, Sidley Austin’s London office surprised everybody and announced it was taking a six-partner private equity team from its Chicago cousin, Kirkland & Ellis.

It was like finding out that boring Uncle Colin enjoys illegal bareknuckle boxing at the weekend.

It is no secret that law firms have had to diversify since the downturn, especially a practice such as Sidley Austin, whose pre-crash London office was dominated by structured finance.

For Sidley in the City, this has been an organic process that has mirrored changes and partner hires in the wider firm rather than an orchestrated strategy.

Commenting on the hires, one lawyer said at the time: “For Sidley it’s a really good thing. You talk to some of the private equity guys in the US and they were always keen to expand in Europe but I don’t think anyone was out there saying – we need to be hiring some private equity bods.

“Sidley is the kind of place that if something comes up and it makes sense they will think – here’s an opportunity, lets take advantage of it. A lot of what they do is take advantage of opportunities when they see them.”

“We want to be a global corporate firm and this lightning struck, if you will, here in London”

The Kirkland team coming along really was a fluke. They had also held talks with Gibson Dunn & Crutcher and Latham & Watkins, but Sidley grabbed them.

George Petrow, managing partner for the European region at Sidley and co-head of the global finance practice, says discussions began last year.

“It started in the fall,” says Petrow, “I’d say September-ish. I wouldn’t call it a languorous process, but it was a deliberate process.

“How do I put this, we’re very happy to have this group coming in London but we’d have hired them in Timbuktu.

“We want to be a global corporate firm and this lightning struck, if you will, here in London,” he adds. “But this would have been something we’d have done in the US or almost anywhere with a group like this.”

Now that Sidley Austin has bought in, it appears that the firm will do whatever it takes to accommodate its new recruits.

The question is, at what cost?

How will this team of six partners and seven associates, led by former US Army officer Erik Dahl and his colleague of 13 years Christian Iwasko, integrate in an office where they will increase Sidley’s London lawyer count by nearly 13 per cent?

When will this group, with its estimated annual wage bill of $10m (£7m), begin to make a return for a historically cautious firm in an extremely competitive practice area?

As one lawyer observes: “The business model in London is obsolete and so it’s certainly clever to try and do something like the Kirkland private equity deal, but private equity is not the least competitive of areas.”

Happy April Fools’ Day

Perhaps there is an omen to be found in a phone call The Lawyer received on 1 April. That Friday morning The Lawyer published a story on our website stating that seven associates from Kirkland were joining the partners moving to Sidley Austin.

They would receive a signing-on fee or a sum to match what they would have earned at Kirkland for 2016 – the semantics depend on who you speak to – of up to £100,000 each.

A nervous, anonymous man rang the office to ask if the story was an April Fools’ prank. He was assured it was not.

The call came from Sidley Austin.

It would be impossible to find two firms with such diametrically opposed views on pay than Sidley Austin and Kirkland.

At Kirkland everyone knows who gets paid what. In fact, the whole legal market knows what people at Kirkland get paid – ahem, London chief Stephen Lucas and his $8m pay deal.

In contrast, at Sidley one lawyer says: “There’s more chance of people talking about the colour of their wife’s underwear than talking about their compensation.”

Sidley Austin uses a strict ‘black box’ system so no-one except the management and executive committees know what people are paid.

It is, says a source, “completely counter-cultural to talk about it”.

“We are confident ROI will come and the team will have plenty of time to make it work for us. This is a very long-term play”

Petrow declined to comment on how much the new team is being paid but a number of sources cite the $10m figure.

For the team to ‘wash its face’, experts estimate that it will have to generate $30m a year – a third to cover pay, a third to put back into the firm and a third to generate a profit.

Petrow says Sidley is in for the long haul and insists the firm does not look at the hires in terms of when it will get a return on its investment.

“We have a high degree of confidence that it’s going to come and they’ll have plenty of time to make it work for us,” he says. “We look at this as a very long-term play.”

Dahl, Iwasko et al are bringing client TowerBrook to their new firm (see box, right).

Depending on the private equity house’s dealflow, this should allow the team to hit the ground running, certainly if last year is anything to go by.

In 2015 the Kirkland group worked on at least eight deals for TowerBrook including the sale of AIM Altitude to China’s AVIC International Aero-Development Corp and offloading France’s Autodistribution to Bain Capital.

There are also hopes they will carry on doing work for HIG European Capital Partners as well as Oaktree Capital Management, a client of Sidley’s overseas and where Sava Savov, who is part of the new team, was vice-president in the private equity group from 2012 to 2015.

One insider claims the team was generating close to $30m at Kirkland. However, he questions how much of that can be snapped off and transported to Sidley and how much came from Kirkland clients or internal department referrals.

In terms of providing all the components private equity clients need to execute a deal, banking and debt finance partner Bryan Robson is also moving from Kirkland to Sidley.

However, Petrow admits the London office will have to recruit in high-yield, although it is not looking for someone.

He says: “We’ve been told by the group that it’s not imperative so we’re going to let the group gather themselves a bit here and then take a look. I’d be surprised if we don’t look at it in earnest fairly soon but not today.”

“I think [the private equity team] would agree that, as capable as Bryan is, he’s not a lone critical mass for the group’s needs so we’ll probably look for more leverage finance.”

20:20 hindsight

There is no doubt that Sidley is taking a gamble in London.

However, it tallies with the firm’s private equity hiring spree over the past 18 months spanning Dallas, Houston, Los Angeles, New York and Singapore, and includes Dan Clivner, the former managing partner of Simpson Thacher & Bartlett’s LA office.

The firm has diversified in the past five years, since the smoke from the financial crisis cleared.

It has moved into the insurance sector and, like a great many other firms, fund formation, with significant practices in Chicago and New York.

London managing partner Matthew Dening says the firm’s fund formation practice is “significant” in Asia, and London is “an extension of that desire to have a global funds practice”.

Bruce Gardner was hired from SJ Berwin in 2008 to build the practice in London, and was joined in 2013 by Stephen Ross, former general counsel at Man Group and previously a senior private equity partner at Clifford Chance. Gardner left Sidley last year and Ross is global co-leader of investment funds, advisers and derivatives with Michael Schmidtberger in New York.

In London, where the vast majority of its work was in structured finance – sources claim 90 per cent, though Petrow says that figure is too high – it has also changed.

Petrow says structured finance is now “roughly a third”.

Of the remaining 65 per cent the majority is made up of corporate, followed by dispute resolution, restructuring and regulatory – a four-partner team co-led by Leonard Ng and John Cassanova.

London needed to change. Which is not to say it hadn’t been successful.

While Sidley had a presence in the capital for years it was not until the latter part of the 1990s that it decided to transfer its expertise in the budding structured finance market from the US, where it had been working with clients such as Citibank and the First National Bank of Chicago, to London.

As securitisation mutated and spawned ever-more complex financial products such as collateralised debt obligations, Sidley became one of the leading firms working for financial institutions such as key clients Morgan Stanley, Deutsche Bank and Barclays.

Powered by human dynamo Graham Penn, co-leader of Sidley’s global finance practice, the London office was motoring by 2002 and the momentum continued all the way into 2007. Then Northern Rock happened, before Lehman Brothers struck its hammer blow the next year.

Sources say that, during that golden period, some partners in London began to suggest that Sidley should start looking at diversifying the practice.

One lawyer says: “In retrospect, that to me was the single biggest failing in those years. All that happened was that deal after deal was cranked and, like every law firm, the senior guys took out a lot of cash.

“What should have been going on is diversification. If the private equity thing had happened in 2002-03 what happened afterwards wouldn’t have necessarily occurred.”

In 2007 revenue in London rose by 22 per cent to $123.7m. The next year it fell to $107.9m, by 2009 it declined to $75.4m and barely budged at $75.9m in 2010 before growing again.

“Everyone’s human,” says one lawyer. “With 20:20 hindsight you can’t blame people for these things but the focus was on pumping out more deals and because Graham was focused on that area, that was the focus of the office.

“So even guys who were not CMBS [commercial mortgage-backed securities], the guys who did the RMBS [residential mortgage-backed securities] for Northern Rock – everyone else was kind of second class.”

A different class

‘Second class’ is a term Petrow and Dening neither like nor agree with, but the label had been applied to Sidley’s corporate for years – not in terms of the work the lawyers were doing in London, but rather its importance in the office.

One person close to the firm says: “The corporate guys were definitely second class – just the body language, interactions, that sort of stuff. It wasn’t the right way to behave.”

Dening says: “It certainly wasn’t the poor cousin. I always felt corporate did a number of significant transactions for which they didn’t receive the credit they deserved in the press or in the market. So I wouldn’t describe them as a poor cousin per se, but clearly with the Kirkland recruits, this is going to help them.”

Between 2012 and 2013 Sidley recruited in corporate first by hiring Stephen Blackshaw from Linklaters, then with Mark Thompson, a former partner with King & Spalding.

Corporate was responsible for one of Sidley’s key deals last year when Blackshaw acted for Heineken, a client from his days in Linklaters’ Amsterdam office, on a complex asset swap with Diageo.

But Petrow admits: “To be fair, our corporate complement before the Kirkland hires, even with the hires of Steve Blackshaw and Mark Thompson, we’re talking three partners and for a credible M&A presence in London and in any big city that’s not critical mass.

“We were able to do pieces of deals from the US and smaller deals but it’s hard to compete with the magic circle and even the silver circle with that small complement.

“Poor cousin? No, but small.”

Still, while many marvel at Sidley Austin’s uncharacteristic chutzpah with the Kirkland haul, it could have gone down an even racier route – a merger with Ashurst.

In 2013 the two firms talked about a tie-up which, for Sidley, would have given it a strong corporate practice as well as a European network. For Ashurst, it would have given it America.

Petrow says talks did not progress very far.

“By and large, what prompted us to talk to Ashurst was their ‘European footprint’ if you will, and their strong presence in London.

“Corporate did a number of significant transactions for which they didn’t receive the credit they deserved in the press or in the market”

“We’re happy with what we have in London. At the time we had 125 lawyers. But the idea we could be considerably bigger in London as well as in Europe was something we had to consider.”

Ultimately, it did not go ahead and the approach to change at Sidley has been inch by inch as opposed to mile by mile.

Looking back to the crash, Petrow says: “In hindsight, do I wish we were a bit more diversified than we were? Absolutely, and we have diversified some since, so the strategy, if you will, is to try and compete in this market where we’re strong – where we’re strong here and strong globally.

“We have taken, with the exception of the recent Kirkland recruitment, a pretty incremental approach. A partner here, a partner there where we think we can strengthen our complement.”

The Munich experiment

A measure of how much Sidley wanted this team is the fact that the firm reopened in Germany just a few years after shutting down its office there.

Dahl has a long-established practice in Munich, where he has acted for HIG European Capital Partners, OpCapita, Sun European Partners and TowerBrook.

As part of his joining, Sidley is setting up an office in Munich for Dahl to lead, some two years after it closed in Frankfurt. A presence in Munich is mainly to accommodate TowerBrook which, aside from London and New York, has an office in Germany’s third-largest city.

The firm opened its German office in 2006, in part to accommodate Deutsche Bank. Sidley had been working with Hogan Lovells in Germany before hiring the firm’s Oliver Kessler and Jens Rinze.

“If the Kirkland deal works out it is kudos for those at the top. If not, the buck stops with them”

Fast-forward six years, via the global financial crash, and Kessler left for Oppenhoff & Partner, later to be joined by corporate partner Jerome Friedrich. In 2013 tax chief Werner Geisselmeier left for Pinsent Masons.

The next year Rinze departed for Squire Patton Boggs and Sidley pulled down the shutters.

So now Sidley is back, albeit it in a different city. But this does not mean the firm is set for a wave of expansion.

“Today, Matthew and I aren’t getting much pressure from the US,” says Petrow. “It’s a ­conservative firm and we typically go where our clients lead us, and not enough have insisted
that we be in Germany, France, Spain or Italy.”

Instead Sidley will stick to its ‘best acquaintances’ network which includes Gleiss Lutz in Germany, De Pardieu Brocas Maffei in France, Chiomenti in Italy and Cuatrecasas Gonçalves Pereira in Spain and Portugal. Gleiss, Chiomenti and Cuatrecasas are themselves in a best friends relationship, but Sidley’s network does not extend to the French member of that group, Gide Loyrette Nouel. Coincidentally, Sidley lost a group of London partners in 2007 to Gide’s City office.

Nice and nicer

While Sidley and Kirkland are complete opposites in terms of pay transparency, culturally there may actually be some crossover in terms of how both firms’ partners work, at least under the old system at Kirkland before Stephen Lucas took over running London and introduced a more collaborative way of sharing out work.

At Sidley, one lawyer says: “It’s individualistic in the sense that the client calls about something that is within the relevant partner’s capability then that partner will do the execution.

“He may bring in other partners depending on how he assesses the situation but he will generally take primary responsibility for the execution.”

“It’s almost like a group of nice people who are focused on what they do, but don’t necessarily work as a cohesive business unit”

While it might not sound particularly inclusive, a lawyer says: “Because they are decent people it is not aggressive individualism. It’s not like people are criticising each other or being mean to each other or trying to stab each other in the back. It’s not like that, but it is individualistic.

“It’s almost like a group of nice men and women who work a lot and are very focused on what they do, but don’t necessarily work as a cohesive business unit.”

In fact, partners and associates are left to get on with fee-earning while, in the same vein as a corporate, management take the business decisions so a lot of trust is placed in the powers-that-be.

Which means that if the Kirkland deal works out it is kudos for those at the top. If not, the buck stops with them.

“The model is that as a partner you basically say that management is not your responsibility – it’s not your thing,” says a lawyer. “That’s a well-defined part of the culture and it works because the people who manage Sidley are, by and large, a) very good and b) very nice.”