Money talks

Unprecedented turnover and profit saw the magic circle continue to dominate the UK legal market in 2005-06. But the most profitable firm in the country was not based in London. By Matt Byrne

The publication of The Lawyer UK 100 Annual Report 2006 in September confirmed what anecdotally everyone already knew: 2005-06 was a bumper year for most law firms.

UK firms beat all records, with unprecedentedgrowth in both turnover and profit. Revenues for the total market broke through the 10bn barrier for the first time, while the average profitability of UK partners in the top 100 edged closer to 500,000. It achieved that target in the top 50.

Linklaters leads the way in terms of financial performance among the UK’s larger firms. Although the magic circle firm is neither the most profitable in the UK, nor the largest on revenue, it arguably put in the strongest financial performance during the year. Linklaters’ average profit per equity partner (PEP) rose by 26 per cent from last year’s 843,000 to a stunning 1.06m.

Slaughter and May retained its traditional position as the most profitable firm in the City, although Linklaters appears to be closing in fast. But, incredible as it might seem, Slaughters lost its crown as the most profitable firm in the UK.

Out of nowhere a two-partner Warrington- based group litigation firm called Avalon Solicitors trumped every firm in the top 100 with a PEP of 7.75m. The firm had rewritten the rulebook with an off-the-scale performance.

Only five years old, Avalon’s practice is 100 per cent based on group litigation, effectively ‘class actions’. All its work is handled on a contingency fee basis, which, in the context of insurance claims, usually means a long ‘tail’ of work done before the bills get paid. In the words of the firm’s senior partner Andrew Nulty: This was the year the work in progress came in.

Avalon, which made most of its money last year from litigation on behalf of former miners, posted revenue of 21.2m last year and is projecting a figure upwards of 30m in 2006-07.

More impressively, with just two equity partners, the firm has a 73 per cent profit margin, meaning Nulty and his partner Anthony Chorlton shared 15.5m between them last year (with Nulty believed to have taken the lion’s share at around 13m).

However, the shine was somewhat taken off Avalon’s year when The Lawyer revealed it was under investigation by the Law Society for allegedly taking fees from the miners’ compensation awards.

Only a handful of firms failed to post improved figures in last year’s bull market and predictably most of these were litigation-heavy outfits such as Clyde & Co, Barlow Lyde & Gilbert and Reynolds Porter Chamberlain.

Struggling regional firm Cobbetts also saw no growth in its PEP last year. Indeed Cobbetts’ PEP of 190,000 was the lowest in the top 50, trailing the second-lowest, Beachcroft, by 80,000

Among the poorest performers in terms of turnover were Denton Wilde Sapte (down by 4 per cent), Barlows (down by 1 per cent), Richards Butler (up by 1 per cent) and Salans and Norton Rose (both up by 3 per cent).

And of those firms posting the biggest rises in PEP, several had recovered from disappointing performances in the previous couple of years, putting their significant rises into context.

Hammonds, for example, increased PEP by 61 per cent, but that was from a low base to start with. Stephenson Harwood, which has been quietly restructuring, had a PEP increase of 45 per cent to 407,000.

However, this year’s UK 100 Annual Report was not only about the headline turnover and PEP figures. For the first time it dug deeper under the skin of the top 100 firms to reveal the extent to which the equity is shared out between a firm’s ‘partners’

The quote marks are deliberate. Equity partners have a financial stake in the firm and co-own the business. Non-equity partners do not. So beware; partners are mnot always what they seem

Most firms effectively operate two tiers of partners, and there are only a few firms left that are all-equity. These include Slaughter and May, CMS Cameron McKenna and Wragge & Co.

For years, anecdotal evidence suggested that the largest firms were reducing the size of their equity partnerships proportionately by growing the ranks of fixed-share or salaried partners.