Institutionalizing a Legendary Venture Capital Practice

Let's do some free association. What comes into your mind when we say, Kirkland & Ellis?

One headhunter thinks of a firm culture that's a "constant primeval struggle" for survival, one in which partners can go off on vacation and return home to find they're not partners anymore! Another headhunter, though, calls it the best firm in Chicago, and maybe the best litigation firm in the country. They just practice law better.

"Lawyers I send over there are anxious to go. They know they'll make money, and it's a tribute to the firm that it doesn't try to soft-pedal how demanding a place it can be. Other firms are just as tough, but without the rewards, and without being so honest about themselves."

One Chicago lawyer points out that Kirkland's win record is no better than any other firm's, while half the best litigators in Chicago - Max Wildman, Don Reuben, Fred Bartlit, Reuben Hedland - "couldn't stand it" and departed for less contentious if not necessarily greener pastures. Yet another local lawyer says the firm is often described as "arrogant" by people who just aren't good enough to practice there.

One consultant doubts how long any such "flat" and "stressful" culture can last. "Their clients love them, but these [kinds] of self-sustaining cultures don't endure in the long run unless they induce some leadership." But another consultant depicts Kirkland as a study in "dynamic tension," a world in which "extraordinary creativity" erupts on a constant basis. It's a "democracy that isn't supposed to work, but it does work, so don't knock it."

"I don't know what holds the firm together," says a local marketing director. "It must be the money. They'd better keep making it!"

Yet ask any of these sources about Jack Levin, who heads up the private equity/venture capital practice at Kirkland & Ellis, and they strike a different tone. The marketing director acknowledges that, even while Levin is said to be one of the firm's leaders, the same carnivorous associations don't quite apply. The headhunter quoted observes that Levin has managed to play "a leadership role at a firm that resists leaders."

Outside of litigation (which, in the June Of Counsel 700, the 525-lawyer firm reported to be only 33 percent of total practice), "Levin is Kirkland," adds one source. He commandeers some 100 attorneys who contribute significantly to his venture capital practice, and draws on another 100 corporate practitioners who likewise "eat off his plate." The private equity group sends a lot of work to the rest of the corporate department, if only because Levin's clients create or invest in companies that are eventually spun off or go public. Levin himself spends 20 to 25 percent of his time in general corporate practice.

This source, who has worked with Kirkland in the past, describes what Levin has accomplished as "one of the great stories of the legal profession...He doesn't get [personally] targeted, not like many of the litigators have gotten targeted." The other top partners would do well to "emulate his personal style if they want to [solidify] the Kirkland empire into the 21st century," particularly since he's inspired so much loyalty from the firm's rising young corporate practitioners.

Resonant Themes

Yet Levin's success has relevance beyond Kirkland, as it has sounded many of the themes of leadership, governance, and practice development and management that preoccupy the profession today. His young partner Kevin Evanich says there are five lawyers in the country still active today who have truly created "something out of nothing" on a grand scale: Joseph Flom of New York's Skadden, Arps, Slate, Meagher & Flom; Martin Lipton of New York's Wachtell, Lipton, Rosen & Katz; Richard Testa of Boston's Testa, Hurwitz & Thibeault; Larry Sonsini of Palo Alto's Wilson, Sonsini, Goodrich & Rosati; and Levin.

Levin's practice underscores the dynamic growth of venture capital practice, not only as a species of M&A and LBO work, but as a full-service legal area encompassing tax, SEC, corporate, public offerings, ERISA, environmental, and sometimes bankruptcy. Yet Levin also emphasizes that there are not two separate firms operating under Kirkland's roof. The corporate and litigation areas are well integrated, they both contribute lawyers to coherent practice teams, and they both effectively cross-sell.

It's one thing for a litigation powerhouse to say it wants to grow a corporate practice; many try, but the critical mass that corporate clients demand never develops. Kirkland's success is proven, not only by the sheer size of Levin's practice, but by the fact that he's now the firm's top shareholder and its most highly compensated partner, according to a reliable Kirkland source.

Levin is chairman of Kirkland's finance committee and a member of the "firm committee," similar to an executive committee. In 1998, he will become the first lawyer to serve, by request, on that committee for an extra year beyond his 60th birthday. There is also an age 65 limit for equity partners, but Levin points out that lawyers can still work beyond that point and get the same compensation as what their full shares would have provided.

There is, however, a compensation cap in terms of the total shares anyone can hold. "We've never wanted a giraffe here," says Levin, or a situation where the compensation of one or two partners cranes conspicuously skyward. That limit further underscores the democratic instinct at Kirkland, which Levin passionately defends. He does not regard his own practice as some sort of counterculture to the rest of Kirkland, which he calls pure "meritocracy." The proverbial depiction of the firm as a shark tank is a "caricature," he adds, inspired in part by jealousy and encouraged, perhaps, by lawyers who may not have been good enough to succeed at the firm.

Like most Kirkland lawyers - as well as some admiring alumni - Levin makes no excuses for the firm's fabled competitiveness. Quite to the contrary, there's an intrinsic restlessness that distinguishes these attorneys as self-directed individualists who've taken charge of their own destinies and imparted a sense of that creative fervor to their clients. Only in a democracy can such fervor percolate, argues Levin. Kirkland has 50 or 60 superstars who might well leave if they were subject to strong "top-down" leadership.

"Yes, we've lost a number of stars, but the miracle is how many we haven't lost," Levin says. Detractors who harp on the lawyers who've left Kirkland, usually to start their own firms, "are looking at the holes, not the donuts." Levin goes even further, questioning the wisdom of dedicated law firm leadership. He points out that managing partners and firm chairs wind up not practicing law much, which isn't good for them as lawyers or for their firms.

Built to Last

Yet there's an unavoidably dramatic contrast between Levin's practice and the rest of Kirkland. While top litigators have departed the firm, William Kirsch, another of Levin's private equity partners, points out that not a single partner has left that group and taken clients to a competing law firm. The attorneys who did leave were usually associates opting for alternative careers in business. Mid-level associate John Quigley left, for example, and is now a principal at Nassau Capital, a Kirkland client. Ditto Avy Stein, a Kirkland associate for three years in early 1980s, who's now managing partner of Willis Stein Partners, a Kirkland client as well.

Levin's story thus begs the fundamental theme, how does one build a stable institution in a culture distinguished for its restlessness? Levin is himself a palpably restless individual. He was a tax lawyer at Kirkland, and got bored with that. He was a litigator as well, and got bored with that too, particularly since judges habitually delay and postpone cases. It was faster turnaround that Levin was looking for, and he finally found it in venture capital practice.

One of the bugaboos of tax practice for Levin was that he'd work out solutions that would never be implemented at the negotiation table, particularly since, as a tax lawyer, he wasn't sitting at the table himself, reworking the solutions as the deals were crafted. So, when Kirkland started doing more deals during the 1970s, Levin decided to become a corporate practitioner with tax expertise. As a corporate journeyman, "I was willing to be the dumbest guy in the room for a year or two."

It's precisely "that ability to hold so much tax and SEC stuff in his head at the same time" that would impress Stanley Golder, then at First Chicago Equity Capital and Levin's breakthrough client. Today, however, as the tax code swells beyond the grasp of any one mere mortal, that style of lawyering is fast disappearing. Kirkland's entire tax department must now feed the private equity practice and, in particular, Levin says two tax partners, Donald Rocap and William Welke, spend 60 percent of their time on venture capital matters.

As Levin's own history suggests, the very energy that marks the Kirkland culture, and which would seem to militate against a stable legal practice of any sort, may have been the key to growing the private equity group to critical mass. On the one hand, as Evanich points out, entrepreneurial clients are attracted to entrepreneurial law firms and venture capital clients are by definition entrepreneurial.

On the other hand, restless lawyers who choose to remain lawyers, rather than go off and run their own businesses, will stay in an area like venture capital where the work happens fast and furious. Ambitious practitioners also want to be at the center of the deal, handling all aspects instead of, say, just representing a lender. New intellectual disciplines are thus required at every turn. It's also real business strategizing, a form of counseling that gets the attorney much closer to the client than traditional corporate practice.

Both Evanich and Kirsch are cases in point of how and why ambitious talent has gravitated toward private equity practice. Evanich was bored practicing at Chicago's now-defunct Friedman & Koven, and he was bored with conventional corporate practice. Constant filings were anathema. "I have no tolerance for bureaucracy," he says.

Kirsch was persuaded by Stanford University Law School classmate John Quigley to join Kirkland instead of Chicago's Winston & Strawn, specifically because the work would have more breadth, and the clientele would be more entrepreneurial. Stanford was a venture capital hotbed in the early 1980s, in part because Silicon Valley was right next door and the administrators were enlightened enough to see a new world coming. Even undergraduates like Kirk Radke, now a mainstay of Kirkland's New York office, were picking up those vibes, particularly from enrollees in Stanford's joint MBA/JD program.

Radke says he was already resolved to be a venture capital practitioner by the time he finished law school at the University of Virginia in 1984. Kirsch could likewise see legal practice, not banking, as the best way to be a part of the imminent foment in deal-making. (He graduated in 1981, right around the time, he recalls, when KKR was being formed.) But it would have to be legal practice with something more to it than paper chasing.

The managers of six different funds in Chicago say they've never really used anyone else besides Kirkland because it's the only private equity legal practice group in Chicago that provides full service. Avy Stein says he only thinks about other law firms "when I need to pay back a favor to someone." John Canning, president of Madison Dearborn Partners, has not considered another law firm. "We regard Kirkland as one of our competitive arrows," he says.

Not all clients are necessarily happy that the field is so limited. On the West Coast, Kirkland's competitors are, as Radke describes them, "the usual suspects:" Wilson, Sonsini, and, based in San Francisco, both Cooley Godward and Brobeck, Phleger & Harrison. On the East Coast, Radke mentions Weil, Gotshal & Manges and Simpson Thacher & Bartlett, which represents KKR, as well as a boutique, O'Sullivan Graev & Karabell. In Boston, there's Testa, Hurwitz and Ropes & Gray. But, in Chicago, where so many of Levin's clients do their shopping, there's really no one else.

"Ideally," says Christopher Perry, president of Continental Illinois Venture Corporation, "you'd love a two-thirds or one-third split" in outside sources for important services like legal. In fact, Perry "hate[s] concentrating on one source for anything. But everyone else you talk to in this business will tell you, so-and-so law firm was great on SEC, but it was weak on tax, or vice versa. Kirkland is the one that does it all well.

"So where else is a young lawyer [in this area] going to practice?" Perry concludes. Levin has also institutionalized the work so that a variety of other lawyers besides himself are now taking lead roles with most of the private equity clients. As such, adds Perry, "anyone who might want to leave for another law firm would have to convince a half-dozen or so of his colleagues to go along with him."

Finally, Kirkland lawyers themselves point to Levin as an institution-builder for reasons that offer cautionary lessons to other rainmakers. In contrast to how top business developers are usually perceived in the legal profession, Levin's partners go so far as to call him "selfless." Evanich, for one, believes "he could have made much more money someplace else," working with one of his clients, perhaps, or starting an equity fund of his own. Or, he could have responded to overtures from one of the many law firms that have approached him.

In the Beginning

The origins of Levin's practice are fabled in some circles. In the early 1970s, First Chicago Corporation called Kirkland because it wanted to do a $500,000 deal with the venture group at the Prudential Insurance Co. Neither investor was willing to rely on the other side's in-house counsel, and they wanted to know what kind of venture capital legal practice Kirkland could offer.

One of the firm's partners, the late Leslie Hodson, assured them that Kirkland had one of the best venture capital practices in town. When he got off the phone, Hodson turned to his colleagues and asked, "What's venture capital?"

"They decided to send me," says Levin, "because they figured I didn't know a lot about anything, but I did know a little about everything." In fact, Levin was already well recognized as a tax practitioner with uncanny knowledge, seasoned in tax controversies during the mid-1960s as Assistant to the Solicitor General for tax matters for both Archibald Cox and Thurgood Marshall.

Lawyers like Levin emphasize that the moral of such stories is that good marketing simply means doing a better job than the competition. By the 1980s , John Canning says Levin was "just amazing the bank holding companies" as clients began viewing him as the resource "they just had to have" to remain competitive. An intellectual mystique arose, a cult of personality, as it were, so much so that Canning still says that, "if I had a brain tumor, and about three weeks to go, I'd make Levin enroll in medical school."

Golder says Levin is a dealmaker by nature. He's also a teacher by nature, a frequent lecturer at Harvard and the University of Chicago who draws explanations and solutions on chalkboards, carefully articulating each step along the way. Golder says his wife once got stuck at a lecture by Levin on proposed tax code changes. She would later exclaim, "I actually understood it!"

Fertile Soil

Levin hasn't quite gotten the national attention that has favored the other four lawyers mentioned by Evanich. Interestingly, everyone Of Counsel called in Chicago said that, of course, they know who Jack Levin is - yet not a single lawyer or consultant we contacted in New York or Los Angeles knew his name.

As Evanich points out, private funds are, by nature, private, and do not garner the same caliente attention as, say, a hostile takeover engineered by one of the big investment banks with a Flom or Lipton on the legal end. The Sonsinis and Testas are also more recognizable names because they're associated with Silicon Valley or similar enterprise regions, and they're seen as actually creating cutting-edge technology companies that may grow to Fortune 250 size.

Yet Kirkland is still strongly represented in the New York market. Radke left Chicago to help open the office in 1990; it's now around 80 lawyers. No sooner did he arrive than the recession set in, but that may have been fortuitous. It was the "perfect" time to "test our mettle," says Radke, and prove that a private equity practice was viable in Manhattan despite adverse economic conditions. Radke is now one of three partners who, with Evanich and Kirsch in Chicago, are often mentioned as Levin's successors. (Evanich, though, says at least four other partners are playing key roles in the on-going development of the practice.)

Private equity is, in any event, a law firm marketer's dream in part because the community is both mobile and tightly knit. Over the years, managers leave, create new funds, co-invest. Where once there was a single client, suddenly there's ten - and lawyers can represent them all without fear of conflict, except in rare cases when, say, two different funds target the same acquisition. Even then, the lawyer can structure a joint acquisition, so everybody goes home happy.

Clients like Golder were thus supplying more than referrals; they were themselves creating new business for Kirkland. Golder, for one, was replaced in 1980 at First Chicago by Canning, who left in 1993 to be the president of Madison Dearborn, although he's still principle investment advisor to First Chicago Venture. William Blair Leveraged Capital helped Golder capitalize his own venture, the Golder, Thomas, Cressy, Rauner Fund, and Golder says he recommended Levin to William Blair. In New York, Leonard Shaykin was already talking up Levin, having seen him in action before leaving First Chicago to start Shaykin & Company. That's five clients right there, with hardly a sneeze!

Chris Perry at Continental Illinois points out that the compensation angle is something Kirsch should certainly know about, since one of the "shrewdest" things Kirkland did from a marketing standpoint was to help venture clients design executive pay systems. This work represented a small part of Perry's legal fees but it was a great loss leader - and not simply because it was a relationship-building favor, like a trust and estate plan. Executive compensation is also tied in closely to the deals that are being transacted, and is directly affected by the deals. More than personal service, it's thus part of the core legal work as well.

Over the last dozen years, Kirkland's venture practice has taken on a global character. Kirsch's clients include the Bank of America Global Equity Group (Bank of America also owns Continental Illinois). That fund has grown recently, with new Asian and European investment groups, while an existing Latin America entity recently switched its legal business to Kirkland. In New York, Radke's practice has a decided international flavor serving clients like Citicorp Venture Capital and WestSphere Capital Associates. Investments range from a telecommunications network in Brazil to a division spun off by a large European corporation.

Levin's full list numbers 82 venture capital, LBO, and private equity clients, including all of the major players in Chicago as well as funds with institutional parents like First Chicago, Merrill Lynch, and Bank of America. An additional corporate list features 23 companies. It's a bonanza for the younger partners because Levin hasn't hoarded a thing. Evanich, for example, cites four names from the list, including Golder, Thoma, among his seven "principal" clients, but says he's done some work for just about everybody on the roster.

Levin and partners won't discuss numbers, or even offer overall estimates of the value of the private equity practice. It's a long-standing policy, or at least a strong preference at Kirkland & Ellis, to deal with the press as little as possible. Earlier this year, though, the firm did report a top partner billing rate of $410 in the Of Counsel 700 (June 1997).

No one at Kirkland is likely to be billing higher than Levin, the best-paid lawyer there. That quoted rate would put him ahead of other top venture lawyers like Sonsini ($350) and Testa ($400), but well below the highest hourly rates in the survey. (See also Of Counsel's billing rate survey, July 7, 1997.) Levin also won't comment on premium billing arrangements, although he does say Kirkland fees do not include percentages of the deals.

Like other corporate practices, venture capital was affected by the recession, but not as deeply at Kirkland as might have been anticipated in such a severe downturn. Evanich remembers a "tick down" for seven to nine months, and Levin confirms there was less hiring from 1991 to 1993. He says "we're paying for that today" as more mid-level associates are badly needed to handle volume during the current boom.

Kirkland's stable institutional clientele worked in its favor during the recession. According to Levin, the more vulnerable $20-$40 million funds were never an important part of his client base, and the firm was not affected when many of those funds collapsed. While business was still off around 10 percent in the early 1990s, the firm compensated with workouts, while Levin's clients were also well-hedged as many investors found real bargains to acquire. (None of his clients are vulture funds, adds Levin, in the sense of funds that specialize in distressed properties.)

The next let-up is nowhere in sight. Evanich says he often worries that, if all the LBOs were to stop, he will have specialized himself out of a job. But, he says, the pension funds are now putting 3 to 10 percent in private equity funds, versus something closer to 1 percent just a few years ago. The overall returns are too good - better than the stock market or any other asset class - for such trends not to continue.

Pedagogical Spirit

Kirkland's venture practice offers some contrast to practice group marketing and management at other firms, since it's bigger and more fluid. Current concerns regarding the management of "small business units," as practice groups are called these days, don't seem germane here. For a "unit" like Kirkland's venture capital group, with lawyers from throughout the firm periodically devoting percentages of their time as well, the pertinent questions are more about how teams are organized and quality oversight maintained.

Work allocation has been a function of Levin's "benevolent dictatorship," says Evanich; he's handpicked the best partners to oversee specific incoming matters. "Quality control" may actually be enhanced by the very flatness of the Kirkland culture, because it means more partner-associate contact, at least among the corporate practitioners.

Radke's office, for example, was adjacent to Levin's when he was an associate in Chicago. Evanich remembers spirited arguments over substantive client issues with Levin when Evanich was still an associate. Such open dialogue is presumably crucial to effective "practice management" in the absence of clearly defined small practice groups and practice group leaders.

Additional training is more formalized and draws upon the full pedagogical resources of the firm. The corporate and tax groups meet monthly for two-hour sessions that deal with recent developments affecting venture capital practice. Levin and other speakers tailor their approach to these current topics with either a corporate or tax angle.

For practitioners who emphasize that sound practice equals sound marketing, seminars, public lectures, and books as well as in-house training are ways to develop and manage a practice. Levin has written two definitive tomes: Structuring Venture Capital, Private Equity, and Entrepreneurial Transactions (Aspen Law & Business, updated annually) and Mergers, Acquisitions, and Buyouts, co-authored by Martin Ginsburg (Aspen Law & Business, updated semi-annually).

The latter is interesting as a distillation of years of intensive dialogue and debate; Ginsburg, now a professor at Georgetown University Law Center, and of counsel to New York's Fried, Frank, Harris, Shriver & Jacobson, is famed for the groundbreaking tax work he's done for clients like Ross Perot.

The relationship with Levin goes back two decades to an ABA seminar they co-presented. Never having met the man before, Levin was taken aback when Ginsburg interrupted his speech, exclaiming that his points were "ridiculous." The ensuing debate kept the audience wide awake and the two lawyers took the now-famous show on the road. A book synthesizing their points of view was inevitable.

For established practitioners, however, books are problematical because of the time demands. Levin says he worked three years on Structuring Venture Capital, Private Equity, and Entrepreneurial Transactions, from 8 p.m. to midnight most evenings as well as weekends.

Succession Planning

Those who seek to institutionalize a practice must, as Levin puts it, "make [themselves] irrelevant." Levin has pursued irrelevance by hiring the best and brightest lawyers, and sharing his clients with them. Were Levin to disappear, Evanich says it would be "barely a hiccup" in terms of the work going forward and new work being developed.

Clients confirm this prognosis. "I haven't seen a Levin document in a long time," says Perry at Continental Illinois. Most of his contact has been with the others, especially Kirsch; he has "tremendous confidence" in Kirsch, Evanich, and, for tax, Donald Rocap.

There are two aspects to succession planning, however. Not only the institutionalizing of a client list, but partner relationships must allow the same orderly work allocation and cross-selling to occur when, instead of one "benevolent dictator," four or five or six prominent lawyers suddenly take top leadership roles. Particularly at a "democratic" firm like Kirkland & Ellis, Levin's departure from the scene could be problematic.

The Kirkland partners are certainly resolved to avoid problems. Evanich, in his late thirties when he acceded to the firm committee a few years ago, says he "joined a healthy firm and I intend to [help] keep it that way." Levin has "hammered home" the necessity for cooperation, adds Evanich, when it comes to assigning associates, forming practice teams, and sharing clients.

Radke puts it even stronger, saying that Levin "forced us to get along." A significant self-selection process also occurred, he adds, since only lawyers willing to be integrated, and to practice harmoniously, joined the venture group or survived afterward. "We were all on one floor," says Radke, "and we were working together in some very tense situations."

Yet partnership comity is still more art than science. Evanich also strongly favors Kirkland's flat management culture, resisting even the kind of strategic planning suggested by executive director Douglas McLemore, which, he fears, would result in too much top-down authority. For all that, though, Evanich knows there's always a "balancing act" to perform, and he acknowledges there must now be a "different mode" of some sort to safeguard the professional discipline enforced over the years by Levin.

Cultural factors are ambiguous and cut many ways when managers struggle to "balance" group cohesion with individual empowerment. As a telling human footnote, Evanich points out that there has only been one marital split-up among the "restless" partners in the corporate department. It's a fairly remarkable statistic for professionals who tend to pass through first marriages like clerkships.

The biggest gap in the "concerned" Kirkland culture is minority hiring, says Evanich. It suggests, though, another instance of how things get accomplished in a flat individualistic environment. Kirkland cannot foist a minority or female hiring initiative on its lawyers, not even amid pressure from client companies like General Motors Corp. But, as Evanich describes it, one individualist, sensing it's in his or her own self-interest as well as the right thing to do, "can talk to another individualist, who can talk to another individualist, and then suddenly, you've got an 'initiative.' "