Catching Up to Kirkland

A Financial Times feature published earlier this week centered on a group that’s been nearly as impacted as private equity by the slowdown in dealmaking: Kirkland & Ellis.

Originally published in the December 13th edition of Transacted.

Blackstone is growing its AUM with a new focus on wealth management products

Kirkland has become synonymous with private equity legal advisory, riding the wave of alternative asset growth over recent decades to position itself as one of the industry’s largest (and most profitable) firms.

Kirkland’s ties to private equity date nearly to the industry’s inception. Jack Levin, at the time a young Kirkland attorney, recounted an early private equity assignment in a Chicago Daily Law Bulletin article from 2005:

A senior partner got a call from an official at First Chicago Corp. who said, “Hi, could you tomorrow morning send over your best venture capital lawyer…?’’ The senior partners, according to attorney Jack S. Levin, had never heard of venture capital. The term was generally unknown in the early 1970s.

“Somebody said, ‘Send Jack because he doesn’t know much about anything, but he knows a little bit about a lot of things,’ ” according to Levin.

Levin introduced himself to Stanley C. Golder, head of the fledgling venture capital unit at First Chicago Corp., with these words: “Hi. What’s venture capital?’’ “Just my luck,’’ Golder responded, “they send me a dummy for a lawyer.’’

Three hours of negotiations followed between First Chicago and a small firm in which the institution wanted to invest some venture capital. Levin, on orders from Golder, said nothing.

At lunch, Levin told Golder, “This form agreement doesn’t have anything to do with the terms you’re negotiating in there, and you’re negotiating the terms all wrong.’’ Levin added, as a joke, “You must be the dumbest venture capital investor in America.’’ Golder suggested that Levin handle the next round. The deal was completed. “Stan said, ‘OK, you’re my guy,’ ” according to Bruce V. Rauner, Golder’s protege.

Chicago Daily Law Bulletin, Volume 151 No. 147

Stanley Golder would go on to found Chicago buyout firm GTCR, with Bruce Rauner later joining and adding his name to the shingle.

Uniquely Structured

The firm’s ascendancy has been partially fuelled by a structure that had, until recent years, been unique within white-shoe law firms (if you consider rough-around-the-edges Kirkland part of that category). Rather than requiring junior staffers to wait until a limited number of partner seats opened up, Kirkland prioritized promotions based on a more meritocratic system.

That provided an opportunity for aggressive young lawyers to leapfrog older colleagues as they progressed through the ranks, reaping the benefit of early success without having to wait until the end of their careers.

“It’s run like a business and not like a club. A lot of law firms are run like clubs. One of the unique things about Kirkland . . . you don’t have to wait until you are 60. You can be rewarded really early on and it can give you a sense of energy,” recounts a pair of Kirkland partners to the FT.

That gave the firm a platform with which it could easily poach top talent from rivals. Junior and mid-level lawyers could decamp to Kirkland and achieve their payday nearly immediately, rather than sticking it out for an uncertain future chance at the partnership with their current firm.

A clear driver of Kirkland’s topline growth, the approach has, by all accounts, not had a positive impact on firm culture or work-life balance.

You just cannot have anything resembling a life. I billed 3,000+ hours each of my six years as a litigator with Kirkland in Chicago. I did it by arriving at the office by 7 a.m. and staying until at least 10 p.m. five days a week (and then 9 a.m. to 5 p.m. on the weekends). I didn't take vacations, I had few friends outside the office, no girlfriend, and no life. Which is why I left. That and I was sexually harassed by a partner on the firm committee.

A former staffer reflects on their time at Kirkland

Equity Partnership

Those that endure the slog have been rewarded, with compensation packages that previously dwarfed what was on offer at rivals, many of whom struggled to unlock the private equity fee source to the extent Kirkland had managed.

Equity partners are paid based on the number of shares allocated and the value assigned to those shares, which fluctuates each year based on overall firm performance. A single share is currently worth nearly $85,000.

The number of shares held by each partner is negotiated every other year, and partners are able to view a complete list of the stakes held by their peers.

That number varies greatly, though a ten-year veteran was reported to have collected 300 of them—a payout of more than $25 million per year.

As a whole, the firm raked in around $6.5 billion in revenue last year, with $3.5 billion of that booked as profit. Average equity partner packages were said to hover around $7.5 million, per The American Lawyer.

On top of standard compensation, a unique perk of Kirkland’s tight relationships with many of its private equity clients is the extent to which the firm’s senior leadership is able to co-invest. The FT reports the practice is so widespread that the firm operates its own internal secondary market, allowing partners to trade their stakes amongst one another.

This year, however, brought some at the firm back down to Earth, with many participants in the co-investment schemes booking markdowns on their positions for the first time.

No Longer Differentiated?

The firm’s success has, to some degree, put a target on its back. Rivals have restructured their promotional structures to more closely resemble Kirkland’s relative meritocracy, ditching the seniority-focused lockstep model that had been status quo.

Those revamps have lessened Kirkland’s edge. The firm, for the first time, is facing talent loss of its own, with competitors proving successful in luring away top litigators. This year, Paul Weiss poached more than a dozen Kirkland partners in an operation they’d internally dubbed Project Springsteen.

Kirkland is also facing a meaningful slowdown in private markets activity for the first time since the financial crisis. That could pose an issue with many new hires benefitting from guaranteed compensation packages, a potential drag on profitability.

Ask Kirkland, however, and they would tell you that their competitive advantages run much deeper than their remuneration.

Client pitches frequently cite an internal database built from the firm’s past advisory assignments, that, Kirkland says, provides an unparalleled resource to track deal terms and intel. The firm has even gone as far as to hire data scientists from the University of Chicago to build out analytics capabilities to make full use of its proprietary info.

It may be marketing fluff, but it has apparently done enough to catch the ire of market participants.

The Institutional Limited Partners Association, an allocator-focused industry group, released a report earlier this year condemning Kirkland and its peers for their role in securing favorable terms for fund managers, at the expense of their limited partners.

Either way, there’s little doubt that Kirkland will continue as a leading private equity advisor for the foreseeable future.

Sam Hillier

Sam Hillier is a reporter at Transacted covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.