City law firms are tightening access to equity partnerships to protect profits, increasingly reserving the equity pool for top performers. As the Big Four giants dominate headlines with internal changes, firms are seeking to regain control of their expanded equity pools amid profitability concerns.
These giants are looking to mirror what the legal sector has been quietly doing over the years. The LLP model, which law firms are structured as, requires people to invest their capital in exchange for a share of future profits and losses. However, the more people in the pool, the more crowded it becomes when profits are shared out. Typical lawyers, often called boomers, enjoyed a career path from associate to equity partner under the all-equity partnership model. But this system has been in slow decline at major City law firms for some time. UK firms have now adopted the system that US law firms have long operated under, a system English lawyers once scoffed at.
Kirkland & Ellis Paved the Way
Kirkland & Ellis led the way in tightening the money pool. Christopher Clark, director at Definitum Search, said, "Years ago, you might hear people say that Kirkland's non-share partners are not proper partners, while many firms were losing talented lawyers they couldn't promote. But the reality is that they gave those who were good enough the title and freedom to build their business while executing on the equity partners' business. If they can do both, they get rewarded with full equity."
US firms in London, such as Kirkland & Ellis and Latham & Watkins, have since the 2000s used a salaried partnership as a level-up or level-out stage, with only a tiny fraction reaching the lucrative senior equity level.
Why the Shift?
"As equity partners divide a firm's profits among themselves, the smaller the equity pool, the less thinly those profits are spread," explained Charlie Harvey, partner at Harvey and Partners. In the last financial year alone, Kirkland & Ellis's average profit per equity partner (PEP) was $11.1 million (£8.2 million), while Latham & Watkins' average equity partner took home $8.7 million from its profit pool.
The non-equity partner tier has now been adopted by Skadden, Freshfields, Sidley Austin, Paul Weiss, and Debevoise & Plimpton, among others. An outlier is Linklaters, which operates with a nearly 100 per cent equity partnership, making it one of the few Magic Circle firms to retain a primarily pure equity structure. However, buy-in stands at around £1 million. In its latest financial results, Linklaters PEP stood at £2.2 million.
Competition Between Firms Is 'So Fierce'
The legal sector is booming as profits and PEP surge, so much so that the money top lawyers are pocketing makes bankers jealous. But the race for law firms to keep adding to the top line and staying competitive means PEP, a key metric of firm performance, needs to continue rising. "Competition between law firms is so fierce in London that firms have become laser-focused on keeping their PEP figure as high as possible," Harvey explained. Unsurprisingly, firms are increasingly selective about who gains access to equity.
Nick Woolf, partner at Woolf&Co, said, "Firms know they have a small number of true rainmakers and a larger group of service partners, so equity is being used much more sparingly and managed tighter." This trend is not limited to top firms; "equity is often even tighter and more deliberately controlled in firms in the 35–100 bracket."
The success of US law firms in London has put pressure on UK firms, both elite and mid-level, as a surge in junior salaries strains their ability to attract and retain talent. The top starting salary in the City currently stands at £180,000, following the increase in NQ pay by US firms Gibson Dunn and Quinn Emanuel last year.
With these hefty wages to pay at the bottom level, law firms are now more eager than ever to have plenty of rainmakers. "Firms are far less willing to dilute the pool unless someone is demonstrably moving the dial," Woolf said. He added that firms now recognise not everyone needs to be in the equity, so they are "building more stable, well-remunerated non-equity tiers."
Ultimately, gone are the days of automatically entering a partnership that grants a share of the law firm. Firms' drive to protect profits and remain competitive means only the most exceptional, all-rounded lawyers can get a seat at the equity table.
