Next in our series on a taxonomy of law firms are the capital-markets centric firms.
If you think this moniker roughly translates to the classic New York white shoe elite, move to the head of the class.
But, as much in our world at the start of the 21st Century, it’s not exactly that simple. Here’s what’s different about these firms.
First, recall that we’ve hypothesized seven primary species:
- global players
- capital-markets-centric specialists
- corporate-centric (non-global) firms
- category killers
- traditional boutiques
- the hollow middle, and
- synergistic super-boutiques
My theory is that what’s exceptional—indeed unique in our taxonomy—about the capital-markets specialists is that the Great Reset mattered less to them than to any other category, and indeed to some of them it only reinforced their ability to go from strength to strength. Indeed, if you want to detour with me for a moment into how the Great Reset hit each of our categories, I’d say it hit ##1, 3, 4, and 5 “normally” in our industry, which is to say quite hard. It hit #6 with a couple of torpedoes below the waterline, which is to say very hard indeed, although the damage may not be entirely evident as yet to the naked eye, and #7 is the new category emerging largely in response to the Great Reset.
But the Great Reset’s impact on our topic du jour, #2? Not bad; maybe even half-good.
A result, not the only one but a conspicuous one, of the Great Reset has been a flight to quality coterminous and simultaneous with a flight to value. Our capital markets heavyweights represent quality incarnate, so they’ve come out by and large winners. If you doubt me, look at the AmLaw 2012 results reported so far. Let’s use “Value per Lawyer” as our rough and ready proxy, which AmLaw defines as a measure of “how much money, on average, each of a firm’s lawyers contributes to overall partner compensation.” Let’s set aside quibbles about methodology and focus impressionistically on the firms at the top of this particular food chain. Tell me if you see a pattern:
- Cahill: $730,000
- Cleary: $415,000
- Cravath: $630,000
- Davis Polk: $495,000
- Milbank: $610,000
- Paul Weiss: $540,000
- Simpson Thacher: $590,000
- Sullivan & Cromwell: $755,000
- Wachtell: $1.580-million
If you wonder whether these numbers are impressive or mid-pack, because it’s not a familiar metric, here are a few comparables if you’d like (random selection):
- DLA: $235,000
- Baker & McKenzie: $195,000
- SNR Denton: $230,000
Here are a few other AmLaw metrics, this time change in gross revenue in 2012 vs. 2011:
- Paul Weiss: +12.4%
- Wachtell: 11.2%
- Sullivan & Cromwell: 6.4%
- Cravath: 6.2%
- Davis Polk: 4.4%
- Simpson Thacher: 2.0%
In a “growth is dead” market, these are by and large impressive numbers, and Paul Weiss’ and Wachtell’s are shockingly good. If our pie, as an industry, is relatively static (adjusted for inflation and global GDP growth), it looks as though many of these firms are expanding their market share. They must be doing something right.
So are these firms “golden,” having found an incredibly fit-to-purpose sweet spot in the market? Do they have anything to worry about?
As a New Yorker born and raised, I should be the first to cheer them on and wish the answer were no. But I can’t say that.
The good news is that these firms are (still) on a roll, and they have been for a long time. The bad news is that New York’s share of global capital markets activity has almost certainly peaked, and having 85%—100% of your lawyers in Manhattan may not be the one and only real decision you need to make to thrive as one of these firms.
In other words, though the Great Reset seems hardly to have mattered to these firms—indeed, may have played to their “flight to quality” strengths—the global tectonic shifts taking place as capital increasingly focuses on the East and the South and less on the West and the North, may mean their fundamental footprints need revisiting. (10% of Harvard Law School students in the class of 2015 are foreign-born.)
To answer that question requires looking quite a ways out, and having plausible forecasts about such things as the velocity of globalization, the probability of enduring regional conflicts or intermittent paralysis-by-terrorism, the long-run demographic trends on various continents, and more.
Since few possess that crystal ball, permit me to suggest where we seem to actually be in the market right now. I sense a potential generational divide. It’s not complicated: If I were 55 or 60 years old and a partner in one of these firms, I would instinctively, roundly, and rightly (so far as my own future is concerned) dismiss any of these worries. My effective time horizon is five or ten years, and all should be smooth sailing for at least that long (reputational markets are extremely sticky, if nothing else).
But if I were 40, with a time horizon of a few decades? Wouldn’t I be wondering, “what’s the plan here, guys?”
I don’t know about you, but that’s exactly what I would want to know. The problem is that the answer is far from obvious, but a bigger problem by far—if true of any of these firms—would be if they’re not thinking as hard as they can about answering that question.