This week we’re all talking about… the magic circle

This week were all talking aboutthe magic circleYou wouldnt think it to look at their current average partner profits of over a million, but five years ago the magic circle was having a terrible time. All the running was being made by highly profitable, London-focused silver circle firms such as Macfarlanes, Travers Smith and SJ Berwin. Clifford Chance and Linklaters were indulging in internal culling and getting rid of partners left right and centre. Freshfields was temporarily afflicted with a dithering management and Allen & Overy(A&O) was, frankly, going off the boil.

How things have changed. As The Lawyer reported this week, the UK big four are not just beating their Wall Street competitors on revenues (all four have turnover of over a billion sterling) but even in profitability, which is where the US firms were always stronger. As The Lawyers figures show, all four have now caught up with their transatlantic rivals, with Freshfields and Linklaters bettering many of them.

But lets take the long view. Which of the four elite firms has made the most strides in the last five years?

A first glance at the figures shows the clear winner to be Linklaters, which has increased revenue by 79.6 per cent and average profit per equity partner (PEP) by a staggering 96.2 per cent. Meanwhile, Freshfields managed to get a PEP increase of 106 per cent on a 47.3 per cent increase in turnover no mean feat.

The fact that all four firms are making serious money out of globalisation is vindication of a decade of investment. The corporate bull market of 2005-07 benefited firms with huge London practices, because all the corporate and private equity action migrated to the City from around the globe. This bull market underpinned the success of the more domestic silver circle firms. So funnily enough, it actually masked international firms achievements. With work within London slumping, the biggest opportunities are in the Middle East, Eastern Europe and Asia all places where the big four firms have been investing in building up capability.

Even at A&O, which has always been the most cautious of the four, more than half of its revenue now comes from outside the UK.

Within the Sweet Sixteen group of transatlantic elite law firms identified by The Lawyerthis year, Freshfields and Linklaters both with average partner profits of 1.4m – are the ones turning heads. The needle match between the two will determine the direction of the magic circle, and as long as their average PEPs are beating the best of the Yanks, then US firms will take the UK legal model seriously. It looks like the Brits may have won the argument for now.