Jonathan Blake is a pioneer of private equity law who, in the early days of his career, defied the sceptics to create a limited partnership template that has since been replicated around the world.
This week, Blake, founder of the private equity funds practice at King & Wood Mallesons, announced his move to O’Melveny & Myers. He was the latest in a long line of partners to leave the firm, whose European arm is on the brink of bankruptcy.
KWM issued a second notice of intention to appoint administrators on Tuesday having racked up debt in excess of £30 million.
Here we revisit Private Equity International’s exclusive interview with Blake in May 2014 on the eve of SJ Berwin’s merger with KWM.
It’s not often that we interview lawyers in this slot. But then, there aren’t many private equity lawyers who’ve had a career like Jonathan Blake’s.
Blake is arguably the most influential lawyer in the history of private funds, at least in Europe. He more or less invented the private equity limited partnership model, personally persuading the taxman to treat carried interest as capital gain in the process. Later, he wrote the rules for UK venture capital trusts, as well as leading the European Venture Capital Association’s tax and legal efforts for 15 years. Often referred to as the ‘father of fund formation’, he was the first adviser elected into the British Venture Capital Association’s ‘Hall of Fame’.
At the same time, Blake played an instrumental role in transforming his firm SJ Berwin from scrappy start-up to global player, initially through his funds work, then as head of Corporate, and, from 2006, as senior partner. Although he stepped down from that role in 2012, he’s been heavily involved in the firm’s recently-completed merger with Asia-Pacific powerhouse King & Wood Mallesons, a relationship he instigated personally.
He also turns 60 this year. But if you think that sounds like a good list of reasons to start thinking about hanging up the legal pad and retiring to the country, think again. Far from slowing down, Blake is doing the opposite: as head of the combined group’s global funds team, he’s busily flying around the globe trying to bed in the new regime.
Not everyone is convinced by the logic of the tie-up. SJ Berwin made at least two serious attempts to join forces with a US firm before switching its attention eastwards, and there have been suggestions in legal circles that this is a sub-optimal merger for all concerned.
However, Blake seems to be a genuine believer in its potential. And if he succeeds in proving the doubters wrong, it wouldn’t be the first time.
FIRST EDITION LP
Blake joined SJ Berwin in 1982, the year it was formed by the legendary Stanley Berwin – a redoubtable M&A lawyer who’d already started one firm (Berwin & Co., now Berwin Leighton Paisner) before leaving to become a director of Rothschild. “Stanley was a formidable leader,” says Blake. “He was God … We all looked up to him.”
Berwin was very clear that his new firm had to be dynamic and client-focused – the kind of outfit that the merchant bankers he’d been working with would love. “He always said: ‘Get your advice out within 24 hours of being asked, and it should be no longer than two pages’.”
Blake’s first introduction to private equity – or venture capital as it was then – came in 1983 when Berwin asked him and his wife to dinner. Blake’s initial delight at being invited out by his boss was tempered slightly when Berwin’s secretary informed him of the catch: there would be clients present, and Blake was expected to give them the low-down on the Business Start-Up Scheme (a tax break introduced by the Conservative government of the time).
The dinner turned out to be with the management team of the lithium battery division of Eveready, who had been informed that their parent company wanted to shut them down and were exploring the idea of a buyout, backed by Advent International and Electra Partners. And while Blake claims he’d never heard of this start-up tax scheme, he obviously did a pretty good job of boning up – because he went on to represent the management team in the buyout. Everyone else involved eventually became clients too.
He felt he had finally found his calling. “I just loved it. The people involved were all people of my generation – I was used to dealing with people much more senior – and they talked a language I could understand.”
Blake resolved to get more involved in venture capital. And not long afterwards came the episode that would eventually cement his reputation. A friend of Berwin’s called Gordon Dean came into the office, looking to set up a £2 million biotech VC fund. But he had one unusual stipulation: unlike most funds of the time, he wanted it to be onshore.
Initially, Blake was stumped. “So I was scratching my head … Then Stanley popped his head around the door, and when he heard that his friend Gordon wanted to set up an onshore fund, he said: ‘Why don’t you use a limited partnership?’ Then he walked out the room. To this day, I’ve no idea where he got the idea from. I didn’t really know what they were, so I thought this was a completely stupid idea – but I didn’t dare tell him that, so instead I spent weeks in terror working out how you might do it.”
Blake finally came up with a plan that passed muster internally, and SJ Berwin formed the UK’s first ever private equity limited partnership.
PERSUADING THE REVENUE
At the time, there was plenty of opposition to his new wheeze. “Lots of people said they couldn’t possibly work; that we should go back to offshore structures.” Several larger firms – who were acting for some of the investors in the funds Blake was setting up – directly challenged the idea.
However, Blake soon gained a powerful new ally. The government’s Department for Trade and Industry had started to take an interest in venture capital – but it didn’t like the optics of supporting an asset class that relied on offshore funds. So it started talking to the British Venture Capital Association – then a relatively new association, led by Apax Partners co-founder Ronald Cohen et al – about whether an onshore equivalent was possible. Having heard about Blake’s work, the BVCA asked him to get involved.
As part of this process, Blake agreed to open up all his structures to the scrutiny of the taxman. “It was terrifying – because if they said they didn’t work, I had five or six clients who could have suffered. And I didn’t have to open up my structures; I was only doing it to help the BVCA.”
Happily, the Revenue liked what they saw, with just one exception: the treatment of carried interest. Under Blake’s new structure, carry was capital gain; but the taxman thought it should be treated as remuneration. (Blake is, incidentally, just as vehement today as ever that carry is capital gain and should be treated as such).
In the end, Blake and the BVCA went in to see Norman Lamont, the future Chancellor of the Exchequer who was then Chief Financial Secretary (the number two position in the UK Treasury) and the Inland Revenue to debate the point.
“It was going back and forth – the Revenue was saying [carry] should be seen as remuneration; I was saying it was capital gain. So I plucked up my courage and said: ‘Look, if you’re not going to agree to this, why shouldn’t we just go back and use offshore structures again?’ Lamont looked at me and said: ‘Are you saying, Mr Blake, that if you use offshore structures, it will be taxed as capital gain?’ I said yes, and explained why. So he looked at the Revenue, and asked whether I was right; they agreed. Then he asked me to leave the room. Ten minutes later, the Revenue came out and said: ‘I think we can do business together’.”
Together with the Revenue, Blake then wrote one of the most significant documents in the history of European private equity: the ‘statement on the use of limited partnerships in venture capital funds’, which was issued by the BVCA (on SJ Berwin headed paper) on 26 May 1987. “I wrote it, so it’s not a law – but it’s something the Revenue blessed. And it’s still the basis on which limited partnerships are used today.”
Indeed, current limited partnership agreements still owe a lot to Blake’s work during this period.
“When I set out the limited partnership structure, I set out some sample terms and conditions … What’s astonishing is that what we cobbled together then has become the industry standard. When I look at competitors’ LPAs, I can still recognise whole chunks that I wrote nearly 30 years ago.”
And not just in the UK, either. Although the US LPA looks very different (it developed totally independently), Blake’s model has since been widely exported and replicated both across Europe and further afield.
“The model has been used more or less intact in various countries round the world, and it’s been embraced by other asset classes like infrastructure and debt. It has stood the test of time; it’s often criticised, but it’s still by far the most common.”
Is he surprised it’s still so prevalent? “I’m not surprised, because I think it’s a pretty good structure that works well. Although I’m perhaps a little surprised that we haven’t got to the stage where there are four or five different structures being used equally, of which the limited partnership is just one.”
Even Blake’s rivals are quick to admit the extent of his influence. “Jonathan was instrumental in devising the approach to fund structuring that is still followed to this day, which is quite a legacy,” says Sam Kay, head of investment funds at Travers Smith. “Over the last few years, you get the sense that the focus has shifted to the next generation – a large number of whom he trained – but his influence is still pretty pervasive throughout the industry.”
SCALE AND ANTI-SCALE
Not surprisingly, Blake’s central role in these negotiations made his firm the go-to place as more and more private equity managers looked to move onshore in the subsequent years – and this helped to propel the upstart SJ Berwin up the legal ranks, even after the untimely death of its founder in 1988.
Blake himself became a prominent figure within the industry as it grew. As well as his continued work with the BVCA – as part of which he sat on the BVCA council and developed the rules for UK venture capital trusts and– he also spent 15 years chairing EVCA’s tax and legal committee (which in recent years has, inter alia, been leading the industry’s fight-back against the worst excesses of the Alternative Investment Fund Managers Directive).
“I’ve always seen myself as part of the industry, part of the market – not just a lawyer to the market. And I’ve always encouraged my team [to do the same]. So we’ve been very involved with EVCA and the BVCA, openly promoting the industry and supporting it when it was challenged. Other firms were much more measured about doing that.”
Over the years, his firm also started to follow its clients out of the UK and into Europe. “As I saw the likes of Apax and 3i and Bridgepoint develop big offices across Europe, it occurred to me that it wouldn’t be a bad thing for SJ Berwin to do the same. So we’ve tried to grow with the industry.”
Typically, the firm would be invited to work on a fund by a GP who knew of Blake’s team by repute – and eventually, it would get to a point where a dedicated local presence seemed necessary. “We’d be doing funds in those countries alongside local lawyers, and we’d start doing transaction work as well, and over time, we’d do enough to make us think that we should have our own office there.”
One market the firm has never managed to conquer, however, is the US, despite all its dealings with North American investors. To make matters worse, a number of US firms have been rolling their tanks onto Blake’s lawn in Europe in recent years, sometimes with conspicuous success.
“Yes, tell me about it!” Blake smiles (or maybe grimaces?). “It still surprises me that US firms put two or three people in London and say they’re competing with us. But one of the features of US law is that US clients will follow these guys. European firms just don’t do that. If they want to do business in the US, there’s no way they’d use two or three people we had in New York; they’d use an American firm.”
To address this, Blake and SJ Berwin started thinking about a US merger – particularly after the post-financial crisis lull hammered the firm’s profits.
“I’ve always been anti-scale,” he insists. “I’ve always liked this idea of a small firm establishing itself alongside the bigger firms. So for many years I was quite against scale for its own sake, and mergers. But I came to realise over time that this was about a merger, not a takeover – getting together with like-minded people who are already in these markets and already large.”
But why did the firm have to merge with anyone? Couldn’t it have just kept its focus closer to home? “There’s always room for one or two firms that are excellent in their local markets. But it wasn’t what we wanted to do. We’ve always felt very much part of global industry.”
The firm reportedly explored a tie-up first with Orrick, Herrington & Sutcliffe and then with Proskauer Rose; later, there were rumours of exploratory conversations with Meyer Brown. But ultimately, it all came to naught. Was this failure to find a like-minded US partner down to culture or economics? A bit of both, Blake concedes (though he declines to discuss any of the specifics, on the grounds that the negotiations were confidential).
FROM WEST TO EAST
Instead, the firm switched its attention eastwards, not least because of Blake’s own growing interest in emerging markets. “Emerging markets feel a bit like venture did in the old days here: there’s a feeling that everyone has to support each other and promote the asset class to get it established as something in which investors would invest. So getting investors used to the idea of investing in Africa, say – and we’re currently doing 15 Africa funds – I find that very exciting and rewarding.”
Ultimately, this would lead to the idea of an Asia-focused merger. “On my travels after I became senior partner, I met someone doing Chinese funds, a very senior lawyer at King & Wood. And we got talking, and started doing lots of transactions together, and in the end it led to this combination.” Most firms lose money trying to grow organically in Hong Kong and China, he says. “The model of putting people there and expecting it to develop … We didn’t feel that was credible.”
King & Wood completed its own merger with Australian firm Mallesons Stephen Jaques in March 2012. But according to Blake, this actually helped to facilitate the subsequent deal announced in July last year: for the newly-formed King & Wood Mallesons to merge with SJ Berwin (the group uses a Swiss verein structure, so technically SJB became the fourth ‘member firm’, alongside the Australia, Hong Kong and China members). When the deal completed in November, the combined Hong Kong-based group became one of the biggest 25 law firms in the world – and the largest to be headquartered outside the US or the UK – with more than 2,700 lawyers and 550 partners globally.
As for Blake’s funds group, it previously had 33 partners in Europe and about 65 other lawyers; it now has 68 partners, plus around 175 others across the network. The group is still one of the market leaders in Europe; it worked on 50 funds last year, totalling £25 billion. But the hope is that its expanded platform, with its added Asian angle, will serve as a point of difference and source of competitive advantage both for clients in the West looking to raise money in Asia, and for Asian clients looking to raise money in the West.
Will it work? Not everyone’s convinced. “I would say that SJB still has a strong team but they have struggled to maintain their dominant position,” says one rival lawyer. “I don’t see the merger with KWM addressing the fundamental issue because they still do not have the US piece: they are neither a UK/European specialist nor a global platform.”
It’s certainly a novel tack, and it might take a while to judge its success. But if nothing else, this eye-catching deal has at least put SJ Berwin back on the global map again after those US disappointments.
And what of talk that revisiting the US merger idea will be the next step? “Look, this is clearly something that’s global … [But] there are no plans at the moment or in the foreseeable future [to merge with a US firm]. There’s too much to do; we have a huge amount to bed down in order to take advantage of what we have here.”
A ROSE BY ANOTHER NAME?
There’s only one catch: as part of the deal, the SJ Berwin name is going to disappear (after an unspecified transitional period). That must be pretty hard for Blake to swallow, after all these years? “Yes, that’s the only sad bit. This is a merger of equals, and name changes are associated with takeover… It’s not a big issue, but it’s a sort of pride thing. I’m proud of what we’ve done here, and I see this as a continuation of SJ Berwin – we’re not being swallowed up. But you can’t go round calling yourself [the full name]; it’s a huge mouthful. They had merged first – and they’d put a lot of effort into developing the firm’s name. So there was no obvious solution. It is sad, but as Shakespeare says, a rose by any other name would smell as sweet… This is not about a name, it’s about people and culture.”
So what else has changed as a result of the merger? “For me a huge amount [has changed] – I’m constantly sitting on a long-distance flight.”
And what of the firm’s culture? SJB has been criticised in the past for being a little too ‘sharp-elbowed’, a little too much of a hot-house – but it has also won praise for its entrepreneurial drive and client service. Can it retain its strengths as part of a larger group? “Culturally we moved from being Brits to being Europeans, now we’ll move to become more multicultural. But we’ll still be us.”
There will certainly be plenty of interested onlookers as Blake and co. attempt to make this merger work: SJ Berwin alumni are dotted throughout the legal world. As Bridget Barker, head of investment funds at Macfarlanes, puts it: “Jonathan has been responsible for training so many of the very good private equity lawyers in the city. If you look at a lot of the firms now, especially the US ones, many of the funds partners are ex-SJ Berwin people that were trained by him.”
“We’re the university of fund lawyers – or at least some firms unfortunately regard us as such,” Blake admits, ruefully. “We keep most of them, but some of them do get pinched.” He pauses and thinks for a moment, then adds pointedly: “I’m more passionate about private equity than I am about law firms!”
Remarkably, it’s a passion that seems undimmed by 30 years of forming private equity funds; of sitting on long-haul flights; of arguing with politicians and regulators; and of dealing with the machinations of the legal world.
“I really enjoy being part of the industry. I’m a passionate believer in private equity and venture capital: as Europe comes out of its problems, capital of that kind being applied to growing companies is completely essential. And despite all the criticism, governments haven’t changed things that much because they can see the industry is clearly doing a lot of good. People tamper it with it at their peril.”
So he’s planning to fight the good fight for a while yet? “I don’t have any plans to retire, because I enjoy what I do. It’s very varied, very exciting – and there’s still lots to do.” ?
BY THE NUMBERS
27 – Years since Blake wrote the memorandum that clarified the legal status of a PE LP
£2m – Size of the first limited partnership fund Blake created
50 – Number of funds SJ Berwin worked on last year, raising a combined £25bn
33 – Partners in SJB’s fund group prior to KWM merger
68 – Partners in global funds group post-KWM merger