A dramatic shake-up in Allen & Overy led to partners’ profits falling by almost 10 per cent last year, Britain’s fourth-largest law firm discloses today.

In February the London-based firm began one of the biggest restructurings undertaken by a City law firm, shedding about 450 salaried employees and 47 equity partners at a cost of £46 million.

However, despite a fall from £1.1 million, Allen & Overy’s profits per equity partner (Pep) — a key measure of law-firm performance — stayed above the benchmark £1 million level and within touching distance of Freshfields Bruckhaus Deringer and Linklaters, its “magic circle” rivals, which had Pep of £1.4 million and £1.3 million, respectively. Allen & Overy’s most senior partners earned £1.35 million, down from £1.65 million in 2007-08.

The firm’s turnover for the year to April 30 rose 7 per cent to £1.1 billion, in part because of the strength of its billings in eurozone countries, Wim Dejonghe, its managing partner, said. More than half its fee income was generated outside the UK.

Unusually for a law firm, which typically release only limited financial information, Allen & Overy published excerpts from its financial statements. Operating profits were £432.1 million, down from £445.1 million, while cash fell by more than £30 million to £52.5 million. Partners’ capital stood at £91.5 million.

Mr Dejonghe said that the results were “solid”, given deterioration in the market in the second half of the year, after the meltdown of several of the world’s leading financial institutions.

Allen & Overy did not pick up the sort of headline-grabbing mandates won by Linklaters, which is involved in the European administration of Lehman Brothers, or Slaughter and May, which advised the Treasury on the banking bailout. However, Mr Dejonghe said that it had been involved in many crisis-related deals out of the public eye. Lehman’s collapse alone led to instructions for Allen & Overy by more than 300 counterparties to the bank.

Allen & Overy was also the top-ranked law firm for banks arranging debt finance in 2008, advising on 433 issues worth $274.5 billion, according to Thomson Reuters, the data provider.

Mr Dejonghe said that Allen & Overy expected a difficult year ahead but would continue to invest in international growth. It opened offices in Munich and São Paulo last year, taking its total to 31 worldwide, and promoted 20 new partners to replace some of those shed from its senior ranks.

“We’ve looked at our strategy and I don’t think there’s a reason to change it,” Mr Dejonghe said. “It’s fair to say we’ve slowed down, but there’s still quite a bit of opportunity around.”

Allen & Overy is the last of the top City firms to report full-year results, capping a tough year for the legal services sector. Several firms reported rises in revenue but only one leading firm, Freshfields, matched the record profits of 2007-08. Partners in Ashurst, Clifford Chance and Herbert Smith saw their earnings fall below £1 million. Clifford Chance’s profits fell 37 per cent.

More than 10,000 lawyers could be out of work by the end of the recession, according to some estimates, and several firms said that the market was likely to get worse before it got better.

• RollOnFriday, a legal community website, and LawWorks, a legal access charity, launch a scheme today to harness unemployed lawyers’ expertise to assist charities and social projects. Backed by the Law Society and 25 leading City law firms, it is intended to provide £10 million of legal advice free.

Legal high-flyers

Leading City law firms by profit per equity partner 2008-09

1 Freshfields £1,440,000 (flat)
2 Linklaters £1,302,000 (-10%)
3 Allen & Overy £1,000,000 (-9%)
4 Herbert Smith £862,000 (-17%)
5 Clifford Chance £733,000 (-37%)
6 Ashurst £673,000 (-35%)
Source: Times research

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