As we look back on 2024 and into the year ahead, the legal sector stands at the crossroads of significant change, driven by a mix of political, economic, and technological forces. This article revisits some of the pivotal events from the past year, including the impact of the U.S. elections and the UK’s 2024 budget, while also examining the continuing challenges in the battle for legal talent. Looking ahead to 2025, we explore the emerging trends and key considerations that law firms must navigate, from shifting regulatory environments and fiscal policies to the rise of artificial intelligence. The interplay of these factors promises to create both challenges and opportunities, reshaping the landscape for law firms and their clients in the coming year.
U.S. Elections
Trump’s re-election has significantly impacted the U.S. market, with a notable rise in demand for corporate legal services, particularly in areas such as mergers and acquisitions (M&A), tax reductions, and navigating regulatory changes. U.S. companies are seeking guidance on leveraging Trump’s domestic growth strategies, including incentives to bring jobs back, while law firms are playing a crucial role in advising clients within a protectionist business environment. His trade policies, especially tariffs on European imports, have strained U.S.-EU relations, leading to increased demand for cross-border compliance and dispute resolution as companies adjust to potential trade disruptions. Additionally, Trump’s renegotiation of the U.S.-Mexico-Canada Agreement (USMCA) has ensured continued legal work in North America, particularly in trade and investment sectors. In the Asia-Pacific region, rising tensions with China have created a complex legal landscape, increasing demand for advice on tariffs and compliance, while India’s growing importance as a U.S. partner is fueling legal activity in cross-border deals.
In the Middle East, Trump’s foreign policy is driving business law needs, especially in foreign investment and energy transactions, though regional tensions present challenges. In Europe, U.S.-EU trade disruptions and rising tariffs are creating a need for risk mitigation, particularly in the manufacturing, agriculture, and automotive sectors, while European M&A activity is expected to rise due to shifting policies. Trump’s policies are also reshaping U.S. investments in Africa and Latin America, with growing interest in Africa’s mining sector and potential political instability in Latin America, presenting challenges for businesses operating in these regions. In conclusion, while Trump’s re-election has brought opportunities in corporate, trade, and regulatory legal sectors, firms must navigate the complexities of his protectionist approach and the broader global policy shifts, with legal advisors playing a key role in helping businesses adapt to this evolving landscape.
Impact of the 2024 UK Budget on Law Firms
The UK’s October 2024 budget, presented by Chancellor Rachel Reeves, introduced key reforms affecting law firms and their clients. Employers’ National Insurance Contributions (NICs) were increased by 1.2 percentage points to 15%, raising employment costs and prompting law firms to advise on workforce planning. Capital gains tax rates also rose, with the lower rate increasing from 10% to 18% and the higher rate from 20% to 24%. These changes led high-net-worth individuals and private equity firms to seek new tax strategies and restructure exit plans.
The budget also aimed to boost investment in corporate transactions, infrastructure, and public-private partnerships, benefiting law firms specialising in mergers, acquisitions, and regulatory compliance. Public sector spending in housing, energy, and transportation created demand for legal support on tax, financing, and regulatory issues. The focus on fiscal transparency heightened scrutiny of public contracts, prompting law firms to guide clients on compliance. The national living wage increased to £12.21 for workers over 21, driving businesses to seek advice on wage compliance and operational adjustments. With inflation expected to remain above target until 2029, law firms played a crucial role in advising on contract renegotiations, financial restructuring, and investment risk management.
The War for Talent
The war for talent in the legal sector, particularly highlighted by Paul Weiss’s proactive hiring spree in London, has intensified competition among firms. The New York-based firm has quickly built a strong presence, recruiting top lawyers from elite City firms like Kirkland & Ellis to establish its private equity practice. As Paul Weiss offers lucrative compensation packages, it has sparked salary competition, particularly for junior lawyers. This has led to record-high salaries for newly qualified lawyers (NQs), with compensation aligned to the Cravath scale equalling $225,000. Amongst non-Cravath / UK firms, conversely, there has been increasing frustration over salary “bunching” / “compression”, where NQ pay has risen but the salaries of more senior lawyers have not risen proportionally. It is also worth noting that Cravath aligned remuneration may differ given the varying conversation rates used by U.S. firms in London.
While some firms are focusing on financial incentives, others, like Pinsent Masons, are trying alternative approaches to attract talent. Pinsent Masons introduced a trial compressed workweek allowing employees to finish early on Fridays, along with a system to monitor burnout risk. Despite such initiatives, financial benefits like retention bonuses remain key in the competitive market. Non-financial incentives such as flexibility are also playing a significant role in firm choice. Research indicates that a large percentage of lawyers are switching firms primarily for better pay, while others value flexibility, with 90% of respondents citing remote work as crucial. Despite non-financial benefits, the higher pay at US firms, coupled with modestly increased workloads, remains the top driver for lawyers considering a move.
Labour’s Vision for Financial Services: Overview and Implications
The Labour government, following its strong electoral victory, has outlined a balanced approach to financial services regulation, aiming for stability, consumer protection, and economic competitiveness. One key policy is the cap on corporation tax at 25% for the entire parliamentary term, providing long-term predictability for businesses. Labour seeks to maintain high regulatory standards while streamlining and coordinating rules across government. The government is focused on innovation and technology, with initiatives like financial market infrastructure sandboxes and tokenized gilts issuance. Sustainable finance is also a priority, with plans to promote the UK Green Taxonomy and mandate transition plans for financial institutions in line with the Paris Agreement. Labour’s vision includes a focus on “regulation for growth,” with the financial services industry playing a key role in private investment and wealth creation. Key initiatives include the National Wealth Fund, which aims to generate significant private investment, alongside plans to encourage investments in green energy and infrastructure.
Labour is also exploring innovative financial products, such as digital currencies and securities tokenisation, and plans to enhance open banking and finance through Smart Data schemes. Labour is committed to fostering stronger trade relations with the EU, particularly in green finance, mutual recognition of qualifications, and cross-border clearing. Additionally, Labour is focused on improving consumer protection, with plans for an anti-fraud strategy, including real-time payment fraud prevention and regulating buy now, pay later products. Pension reforms are also on the agenda, aiming to consolidate small pension pots, introduce value-for-money tests, and streamline pension schemes. Labour emphasises a balance between regulation and efficiency, potentially simplifying rules for the Financial Conduct Authority (FCA) and enhancing consumer protection. These reforms reflect Labour’s commitment to modernising financial regulation while promoting growth and innovation.
Law Firm Mergers and Strategic Shifts
Mergers and acquisitions within the legal sector are expected to gain momentum in 2025, as the trend of market consolidation continues. High-profile mergers, such as A&O Shearman and Herbert Smith Freehills Kramer, indicate a broader pattern, with other firms quietly exploring similar strategic combinations. Firms, both U.S. and UK positioned in the
mid-market and upper mid-market market show potential to pursue bold moves, including mergers or potential spin-offs, in order to stay ahead of the competition.
Geopolitical Challenges and Regional Shifts
Geopolitical tensions, particularly in Asia, will remain a major influence on law firms’ strategies in 2025. Many firms are re-evaluating their operations in Greater China and parts of Asia, with more office closures expected due to the instability in these regions. The strained U.S.-China relations, intensified by the previous U.S. administration, have notably contributed to this reassessment. Additionally, some U.S. firms may reduce their presence in Germany and France because of the profitability issues caused by reduced client fees, which could lead to further office closures. For instance, Eversheds Sutherland has already closed its Berlin office, reducing its footprint in Germany to just four locations, while Hogan Lovells has revealed plans to shut down offices in Warsaw, Johannesburg, and Sydney in favor of focusing on key strategic markets.
U.S. Firms in the U.K. Market
U.S.-based law firms are expected to continue their aggressive expansion into the London market in 2025. With their superior financial resources and more attractive compensation packages, these firms are drawing top talent and winning significant mandates. However, the rapid growth could result in instability, with firms like Paul Weiss potentially facing partner departures as they struggle with the challenges of integrating lateral hires and managing swift expansion.
ESG Commitments and the Energy Sector
Law firms are increasingly focusing on enhancing their Environmental, Social, and Governance (ESG) credentials to attract clients and top-tier talent. However, this push for sustainability may be at odds with firms’ plans to capitalise on a burgeoning energy sector, particularly in the U.S. This tension reflects the delicate balance firms must maintain between expanding their client base in energy while safeguarding their reputations. Moreover, rising activism and climate protests could lead to a new wave of security concerns for law firms, who may need to invest in stronger protection measures to safeguard against potential disruptions and demonstrations.
Corporate Legal Spending and Client Expectations
With associate salaries and billing rates reaching unprecedented heights, concerns about the sustainability of corporate legal spending are growing. Clients are under increasing financial pressure, prompting them to insource more work and adopt strategies such as rate controls and alternative fee arrangements (AFAs) to manage legal costs. Law firms will need to innovate and become more cost-efficient, adjusting their approach to meet client expectations while remaining competitive in large-scale commercial matters.
The Continued Rise of AI in Legal Practice
Artificial intelligence will continue to reshape legal practices in 2025, with firms increasingly relying on AI-driven tools to handle routine tasks such as legal research, contract review, and document automation. These advancements will drive efficiency, reduce costs, and enable firms to devote more time to complex matters that require human expertise. The use of AI will expand into areas such as contract intelligence, risk analysis, and obligations management, creating new roles and high-value business opportunities. Law firms will shift from using AI as an experimental tool to implementing it systematically, establishing dedicated AI competency centers and fostering an ecosystem focused on AI governance and operational integration. Those firms that do not embrace this transformation may struggle to keep pace with the competition.
Private Equity and AI Investment
As AI becomes further embedded in the legal sector, firms are likely to seek private equity investment to fund their technological advancements. This trend could represent a significant departure from traditional financing models, with law firms looking to alternative funding sources to stay competitive. The continued integration of AI and automation will be central to improving operational efficiency and client service, while potentially driving consolidation in the market as firms pursue aggressive growth strategies.
Conclusion: Navigating a Complex Future
The legal industry in 2025 will be shaped by both gradual evolution and significant disruption. Faced with increasing competition and shifting client demands, law firms will need to make bold, strategic decisions, including mergers, office closures, and investments in new technologies. While AI will drive operational improvements, law firms must balance these technological advancements with maintaining the expertise and human touch that clients expect. Those firms able to successfully navigate these complexities will be well-positioned for long-term success in an ever-evolving legal landscape.
Let’s Talk Strategy
At Halkin, we aim to differentiate ourselves by structuring our teams according to specific practice areas. This approach allows us to provide tailored advice to lawyers on maximising their career goals while building long-term relationships. We remain committed to offering valuable insights without exerting undue pressure, ensuring that lawyers are aware of opportunities they might have otherwise overlooked. By engaging in consultative partnerships, we help both law firms and individuals navigate the complexities of this shifting landscape, positioning them for success in an increasingly competitive environment. If you have any questions or would like to explore your options, don’t hesitate to get in touch with us.
With Donald Trump re-elected as the U.S. president, law firms worldwide are bracing for an era of intensified activity, mixed with caution. This outcome brings both optimism and concern across various legal markets as firms anticipate shifts in policy, trade, and regulatory landscapes. Trump’s commitment to a pro-business agenda is expected to spur deal-making and advisory needs in certain sectors, but his protectionist and unpredictable foreign policy stance may bring increased volatility. Here’s a closer look at how the re-election may reshape demand and present new challenges across key regions and practice areas.
A U.S. Market Boost for Business-Friendly Law Firms
Commentators have remarked on the enthusiasm from Wall Street and business circles, which see a Trump administration as favourable for domestic growth and deregulation. This sentiment is mirrored in the legal sector, where transactional and corporate practices may find more work as U.S. companies seek counsel on tax reductions, reduced regulatory constraints, and potential incentives to “bring back jobs” to American shores. The legal sector can anticipate heightened demand for advice on domestic mergers and acquisitions (M&A), as well as guidance on navigating what may be an increasingly protectionist landscape.
Trade and Tariff Concerns Impacting International Business
In the international sphere, Trump’s strong stance on trade policies suggests a potential increase in tariffs, particularly on European imports to the U.S. Several London-based lawyers foresee heightened trade tensions, which could lead to tit-for-tat regulatory measures as the U.S. seeks to address perceived imbalances in its trade relationships with the EU. For firms advising clients with international footprints, this could mean a surge in demand for expertise in cross-border compliance and international dispute resolution. Protectionist policies may also prompt multinationals to explore alternative supply chain arrangements, further fueling demand for legal advisory. In particular, lawyers in the UK and EU may be called upon to support clients impacted by potential disruptions to established trade agreements.
North America: Renewed Focus on the U.S.-Mexico-Canada Trade Agreement
North America stands to be directly impacted by Trump’s return, especially regarding the U.S.-Mexico-Canada Agreement (USMCA). Commentators based in Canada and Mexico suggest that Trump may re-negotiate aspects of the agreement, creating a ripple effect across North American economies as firms prepare for ongoing legal and commercial adjustments. Legal practices specialising in trade and investment are expected to face a steady demand for counsel on adapting to renewed policy shifts, with implications for both transactional and regulatory practices.
The Asia-Pacific Region: Rising Tensions and Realignment
In the Asia-Pacific, Trump’s re-election is likely to intensify the U.S.-China rivalry, creating a challenging landscape for law firms with offices in China and those advising clients with business interests in the region. Commentators have noted the likelihood of continued tariffs and economic decoupling from China, which will likely result in more complex legal landscapes for multinational corporations. At the same time, India is positioned as a valuable strategic partner to the U.S., with legal experts predicting an increase in deal activity and regional partnerships that could drive legal demand in India. Australia and Singapore-based lawyers foresee a dampening of global M&A activity if heightened tariffs stoke inflation, potentially slowing economic growth and raising interest rates. Such conditions may lead to a cautious market outlook, though firms could still benefit from increased advisory work on regulatory and compliance issues.
Middle East Legal Sector Navigates Shifting Alliances
The Middle East may see varied impacts, with Trump’s administration expected to pursue an assertive trade and foreign policy. Increased U.S. presence in the region, particularly with close ties to the UAE, Bahrain, and Saudi Arabia, could stimulate business law needs for firms active in foreign investment and energy transactions. Commentators suggest that Trump’s re-election may, however, also affect regional tensions, particularly concerning relations between Israel and Iran, which may influence U.S. legal advisory on Middle East matters.
Europe’s Response: Preparing for Protectionism and Policy Shifts
In Europe, the legal sector is preparing for potential disruptions to U.S.-EU trade. Commentators note that European firms may need to provide extensive guidance on risk mitigation for companies operating in manufacturing, automotive, and agricultural sectors—all of which could be significantly affected by rising tariffs. Further, Trump’s return is prompting conversations about strengthening European sovereignty, which could drive demand for European M&A transactions aimed at consolidating market positions and competitiveness. The U.S.’s handling of the war in Ukraine also looms large, as European firms watch for any potential policy shift that may impact EU-U.S. collaboration. Legal advisory focused on regulatory compliance will be essential for firms managing U.S.-aligned clients affected by cross-border sanctions or aid-related policies.
Africa and Latin America: A Region-Wide Realignment
Trump’s victory is expected to influence the U.S.’s approach to Latin America and Africa, especially amid China’s significant investments across both continents. For Africa, the U.S.-China rivalry may increase American investments in critical minerals like lithium and iron ore, which could benefit local legal sectors in mining and trade advisory. In Latin America, commentators expect Trump’s return to fuel a period of instability, as his policies may lean toward unilateralism and protectionism.
A Period of Opportunity and Uncertainty
Ultimately, Trump’s re-election will likely create both demand and disruption within the global legal industry. For law firms, the combination of a pro-business stance and heightened protectionism offers a mixture of new business opportunities and fresh challenges. As legal practitioners navigate this complex environment, they will play a crucial role in supporting businesses adapting to a new era of U.S. policy priorities—both at home and abroad. The legal landscape, therefore, stands at the threshold of transformation, where law firms must anticipate rapid changes across regulatory, transactional, and compliance arenas to best serve clients in an increasingly volatile global market.
The UK’s recent budget, announced by Chancellor Rachel Reeves on Wednesday 30 October 2024, introduces major economic reforms impacting law firms and their clients across sectors. With a focus on growth, investment, and fiscal responsibility, the budget outlines changes that will affect legal practices advising on tax, employment, corporate finance, and estate planning. Here is a concise overview of the key elements and their implications.
1. Employment and National Insurance Contributions (NICs)
One of the most notable changes is the rise in employers’ National Insurance Contributions, increasing by 1.2 percentage points to 15% starting in April. This hike in employment costs is expected to drive demand for legal advice on workforce planning, payroll compliance, and employment law. Law firms will likely assist clients in exploring restructuring options, cost-saving measures, or potential redundancies to offset these added expenses. Smaller businesses, in particular, may need guidance on qualifying for exemptions or managing their bottom lines in light of the new NIC thresholds. Employment law practices will be essential in helping businesses remain compliant and efficient as they adapt to higher labour costs.
2. Capital Gains and Inheritance Tax Increases
The budget raises the lower capital gains tax (CGT) rate from 10% to 18% and the higher rate from 20% to 24%, along with adjustments to inheritance tax (IHT) thresholds. These changes mean that high-net-worth individuals and business owners will face new tax burdens on asset transfers and estates, prompting a need for fresh tax planning strategies. Law firms advising private clients will likely explore trusts, gifting, and other tax-mitigation tools to minimise the impact of increased CGT and IHT.
Private equity firms will also feel the impact of higher CGT rates, which may reduce post-tax returns and dampen investor enthusiasm, especially for sectors with longer or uncertain exit timelines. Law firms specialising in tax and private equity will play a key role in helping clients restructure exit plans to optimise tax efficiency. This may include considering staggered sales, timing exits strategically or exploring alternative investment structures to reduce CGT burdens.
3. Corporate and Public Sector Investments
The budget’s focus on investment aims to create a favorable environment for corporate transactions, infrastructure projects, and public-private partnerships. This opens opportunities for law firms specialising in corporate finance, mergers, and acquisitions to provide strategic counsel on new tax and regulatory frameworks. Public sector clients and contractors may require support in compliance advisory services, especially as the government moves to balance its budget by 2027.
Increased public spending in sectors like housing, energy, and transportation will likely bring legal complexities in regulatory compliance and contract negotiations. Law firms may see an uptick in demand from clients involved in these projects, needing guidance on navigating tax implications, securing project financing, and ensuring regulatory compliance.
4. Transparency and the Office for Budget Responsibility (OBR) Review
The Chancellor’s emphasis on transparency, supported by an Office for Budget Responsibility (OBR) review, highlights the government’s commitment to fiscal responsibility and accountability. This includes addressing a £22 billion fiscal deficit, which may lead to increased scrutiny of regulatory compliance and public contracts. For law firms with clients in regulated sectors, this focus on transparency could mean more reporting requirements and potential audits.
Law firms specialising in regulatory compliance and public law will be essential in guiding clients through potential changes in reporting standards and ensuring they meet the heightened requirements. Businesses with public or government contracts, particularly in heavily regulated areas like finance and infrastructure, may look to legal advisors to help them maintain compliance as fiscal accountability becomes a priority.
5. Minimum Wage Increases
The budget raises the national living wage to £12.21 for workers over 21, affecting labour costs across many sectors. This increase may prompt businesses to seek legal advice on managing rising labour expenses, balancing wage costs against operational efficiencies, or exploring automation options. Employment law practices will likely experience a rise in consultations on wage compliance, redundancy strategies, and operational adjustments.
Law firms advising on employment law may find themselves assisting clients in managing the risks associated with non-compliance, helping to navigate redundancy procedures, and resolving potential employment disputes. This increase in minimum wage costs could lead businesses to seek guidance on labour law complexities as they navigate both cost management and compliance.
6. Inflation, Growth, and Economic Forecasts
The Office for Budget Responsibility (OBR) forecasts inflation to remain slightly above the Bank of England’s 2% target until 2029, with only modest growth expectations. In response, businesses may require legal advice on contract renegotiation, financial restructuring, and investment risk management. Law firms can assist clients in revising long-term contracts, managing intellectual property valuations, and restructuring financing terms to cope with inflation.Corporate clients may also turn to law firms for help with currency hedging, investment diversification, or renegotiation of financing arrangements to safeguard their financial stability amid inflation and slow growth. Law firms specialising in contract and financial law will play a critical role in helping clients adjust to economic pressures while preserving business continuity.
Summary Remarks
The UK’s new budget introduces comprehensive reforms that will affect legal practices in tax, employment, corporate, and regulatory compliance. Law firms advising businesses, investors, and high-net-worth clients will be essential in helping them understand and adapt to the complex fiscal changes. This new economic landscape will require legal expertise to navigate evolving compliance standards, tax structures, and strategic restructuring. As the government pursues fiscal reform, law firms will play a vital role in guiding clients through the challenges and opportunities of this transformative period.
In today’s society, diversity, equity, and inclusion are essential to ensuring that everyone, regardless of background, has equal opportunities to succeed. However, for many young Black individuals in the UK, access to these opportunities can still feel out of reach. Enter the Amos Bursary, an organisation dedicated to bridging this gap and empowering the next generation of Black leaders. This initiative is a critical force for change, offering mentorship, skills development, and a strong community for young individuals who might otherwise be overlooked. For this reason, as proud patrons of the Amos Bursary, we have decided to dedicate this blog to highlighting the Amos Bursary’s work, helping to spread its powerful message of empowering young Black leaders for a brighter future.
What Is the Amos Bursary?
The Amos Bursary is a UK-based charity established in 2009 by Colleen Amos OBE and Baroness Amos. The Amos Bursary, founded in tribute to Colleen Amos OBE and Baroness Amos’s parents, has become a remarkable legacy over the past decade. Rooted in their belief in the transformative power of education, the Bursary nurtures talent, builds confidence, and combats discrimination by instilling pride in Black history and culture. Their unwavering commitment to excellence and the aspirations of young people drives the programme’s mission to this day.
The Amos Bursary’s work focuses on identifying young individuals with academic talent and leadership potential, and providing them with the tools, support, and networks they need to succeed. The programme offers a wide range of resources, from financial assistance to mentorship opportunities with professionals across various industries, ensuring that participants not only thrive academically but also build the confidence and skills required to navigate their professional lives.
What Does the Amos Bursary Do?
The Amos Bursary provides a five-year personal and professional development programme beginning with students in year 12 of a state school in London or the West Midlands of England. The Amos Bursary’s work can be broken down into three core areas: education support, personal development, and career readiness.
Why Is the Amos Bursary Important?
The Amos Bursary is more than just a scholarship programme; it is a transformative initiative that addresses the systemic challenges young Black individuals face in the UK. Here’s why it’s so important:
The Future of the Amos Bursary
As the world continues to evolve, so does the work of the Amos Bursary. Its impact is growing, with an expanding network of professionals and a broader range of industries opening their doors to Amos Bursary participants. The charity continues to raise awareness of the barriers young Black individuals face and advocates for more inclusive policies within educational institutions and workplaces. In December 2019 the Amos Bursary secured funding to develop and introduce, for the first time in its history, young women onto The Amos Bursary programme, and in doing so recognises the importance of supporting all underrepresented groups in their pursuit of success. The Amos Bursary is a beacon of hope for many young Black individuals in the UK. By offering mentorship, personal development, and career opportunities, it is helping to level the playing field for those who face systemic disadvantages. Its impact reaches far beyond the individuals it supports, contributing to a more equitable society where talent, not background, defines success. The Amos Bursary is an inspiring example of how targeted, community-driven initiatives can make a tangible difference, and it remains a critical tool for shaping the future of Black leadership in the UK.
How Halkin Works with Amos and How You Can Too
The Solicitors Regulatory Authority (SRA) Diversity in law firms’ workforce overview covers solicitors and other employees working in SRA-regulated law firms and is based on data collected from almost all firms in summer 2023. This information shows that only 3% of lawyers in SRA regulated law firms in 2023 were Black. The Amos Bursary plays a crucial role in this context, as law firms seek to enhance diversity within their teams but often struggle to find candidates due to limited opportunities available to Black individuals who could excel in these roles. The work of the Amos Bursary is essential in actively addressing the root cause to this lack of representation.
At Halkin, we are actively involved in the Amos Bursary Mentoring Programme, with three of our partners mentoring talented students who have just begun their university journey. Our Managing Partner, Gordon Gooding, has described his mentoring experience as “an incredibly fulfilling opportunity to give back and nurture the growth of talented students and future leaders.” We strongly encourage law firms and professionals to participate in this programme and support the Amos Bursary. For more information, please visit the Amos Bursary website: https://www.amosbursary.org.uk/. To get involved in the mentoring programme, click here: https://www.amosbursary.org.uk/mentor/.
The Background
The war for talent is not a new phenomenon and has long been a topic of discussion, but the hiring spree by Paul Weiss has highlighted it as a key issue in the legal market. Namely, the New York headquartered White Shoe giant has been making waves in London by aggressively hiring top lawyers from elite City firms, including a significant team from Kirkland & Ellis, to build an elite private equity (PE) practice. Since launching its English law practice, Paul Weiss has quickly grown to c.140 lawyers in London, including 12 partners from Kirkland, and continues to expand. The firm’s hiring spree is motivated by a desire to provide a strong London presence for its PE clients, such as Apollo, Bain Capital, and KKR. Paul Weiss is reportedly offering highly lucrative compensation packages, which has also intensified salary competition among City law firms. While some question whether such rapid, high-value lateral hiring is sustainable, early signs suggest strong momentum and interest from potential recruits.
Meanwhile, Kirkland, known for its dominance in the PE sector, has been facing challenges due to the high-profile exits to Paul Weiss. Partners Neel Sachdev and Roger Johnson, who were instrumental in building Kirkland’s London presence, left amid alleged dissatisfaction with the firm’s direction and management style. However, Kirkland has responded by making its own strategic hires to bolster its London office and maintain its market leadership. Despite losing talent to Paul Weiss, Kirkland remains a powerhouse, with revenues growing significantly in recent years. The firm’s strategy focuses on maintaining a deep bench of partners and a diversified client base to weather market changes. While Paul Weiss aims to build a smaller, elite team that emphasises culture and quality, Kirkland’s approach prioritises breadth and depth to support large-scale PE operations.
Increasing Salaries
This fierce competition for talent has been driving up salaries for newly qualified (NQ) lawyers to unprecedented levels. Some junior lawyers in London are now earning more than the UK Prime Minister, with salaries expected to surpass £200,000 a year soon. Top US firms in London such as Paul Weiss, Gibson Dunn, and Quinn Emanuel have raised salaries to as much as £180,000, while UK-based Magic Circle firms offer up to £150,000. The intense salary competition is fuelled by booming private equity dealmaking and lucrative litigation work. US firms, with deeper pockets, dominate this war for talent, causing concern among UK firms as they risk losing lawyers to American competitors for better pay with only slightly increased workloads.
While these salary increases may seem like a positive development for associates, the high pay offered to NQs has caused frustration among more experienced associates who might earn only slightly more. The term “compression” is being reluctantly whispered by managing partners at City law firms. This term refers to the practice of paying NQ solicitors a substantial amount while failing to proportionately raise the salaries of lawyers with up to six years’ experience. Commentators warn that these salary hikes could not only unbalance financial stability but also foster resentment and division among the senior associate solicitors at firms which have hiked their NQ salaries and seemingly forgotten others.
Doing Things Differently
Given many firms’ inability to compete on the financial side, they are trailing other methods to attract talent. For example, Pinsent Masons is trialling compressed workweek, allowing employees to finish early on Fridays without a pay cut, provided client, team, and work commitments are met. This trial, taking place across the firm’s UK, Europe, and Middle East offices, enables staff to work their standard weekly hours by Friday lunchtime. The firm will evaluate the trial’s success after a month and potentially expand it to other offices in 2025. Managing Partner Laura Cameron emphasises the firm’s commitment to flexible, innovative working practices that balance business needs with employees’ personal lives. Unlike other firms, Pinsent Masons’ scheme does not involve a pay cut or extra hours earlier in the week, but early finishes depend on workload and client demands.
Pinsent Masons is also trialling a new system to alert management when lawyers risk burnout due to excessive work hours. This initiative is part of broader wellbeing measures following the death of a partner who experienced a severe mental health crisis. The system tracks the hours logged by lawyers and staff, flagging consistently high hours to management. This move aims to improve workload management and prevent overwork. However, it will be interesting to see whether these kinds of efforts will trump the remuneration and other financial benefits offered by these top law firms. One of the major incentives for associates at these firms is the referral fees on offer. For example, top U.S. law firms are now offering substantial referral bonuses of up to $50,000 to junior lawyers who bring in new associates. These types of incentives, alongside NQ salary increases, are a major sign underscoring the fierce competition for talent in the legal sector. Firms such as Kirkland & Ellis, A&O Shearman, Goodwin, and Paul Weiss have introduced these bonuses to attract young lawyers amid a boom in dealmaking. This marks a significant jump from the previous standard of around $25,000.
In comparison, UK law firms (Including the Magic Circle firms), offer lower referral bonuses which are about £15,000 for successful hires. Although the majority of the Magic Circle firms have increased the salaries for junior lawyers to stay competitive with their U.S. rivals, there is a visible trend of associates moving from UK to US law firms in London. Lower-tier firms tend to offer smaller referral bonuses, often around £5,000, according to insiders familiar with individual firm practices. Similarly, the rise in referral and retention bonuses reflects the intensifying “war for talent” in the legal industry. Retention bonuses are typically offered by firms experiencing significant departures, such as the loss of a key partner from a team. These bonuses are paid to associates to encourage them to stay, a strategy that often proves effective and gives the firm time to fill the gaps left by those who have left. Meanwhile, sign-on bonuses, although not unheard of, are less common in the current firm-driven market. These bonuses were much more prevalent during the post-Covid hiring boom when a surge in work required firms to hire aggressively, and top candidates often had multiple firms competing for them.
While non-financial incentives may attract some individuals to join or stay with a firm, research indicates that pay rises are the primary reason lawyers switch firms, with 56% of the 338 respondents who changed firms in the past year citing better pay as their motivation—a 20% increase from the previous year. The study highlighted the impact of a tight talent market and cost-of-living pressures on hiring, emphasising the importance of competitive salaries. Other reasons include dissatisfaction in current roles (34%), seeking greater flexibility (32%), unmanageable workloads, and limited career progression. Flexibility, particularly the ability to work from home, has become increasingly valued, with 90% of respondents highlighting its importance. Law firms that offer three days of remote work weekly are considered above average in the current market. Overall, switching firms can lead to an average salary increase of 15%, and 85% of firms have raised salaries for existing staff by 5-10% in 2023.
Summary Remarks
As the cost of living rises in the UK, along with increasing inflation and interest rates, many high-performing junior associates may be drawn to US law firms that offer significantly higher salaries for a modest increase in workload. With the growing push for employees to return to the office, the differences between firms in terms of non-financial benefits are narrowing, making US firms more attractive due to their higher pay. However, this choice depends on individual priorities, such as the desire to maintain a better work-life balance. For some associates, firms that cannot compete on salary might still offer more appealing options depending on these personal preferences. Ultimately, the decision comes down to what each individual values most. At Halkin, we specialise in supporting lawyers at every stage of their careers, helping them achieve their specific goals—whether that’s progressing towards partnership, enhancing their work-life balance, or relocating internationally. We are keen to engage with commercial associates interested in gaining insights into the legal market beyond their current firm and exploring the best pathways for career advancement.
This overview will first focus on the Labour government’s plans regarding financial services regulation, a key area of interest at Halkin. Following this, it will provide a broader overview of how the Labour government may impact law firms and industry more generally in the sphere of financial regulation.
Labour’s Vision For Financial Services
Following their overwhelming majority victory with 412 seats, Labour’s approach to financial services promises predictability and a balance between consumer protection, competitiveness, and financial stability. One example of such promised stability measure is Labour’s plan to cap corporation tax at 25% for the entire parliamentary term. This measure aims to offer predictability for businesses, facilitating long-term planning and investment decisions. While Labour’s manifesto is light on specifics, other sources provide insight into their plans. Labour champions the financial services sector, viewing it as a cornerstone of the UK’s economic future. They emphasise a pro-business, pro-worker stance, advocating for a robust regulatory regime that avoids the pitfalls of the pre-2008 financial crisis era. Labour aims to maintain high regulatory standards while streamlining rules to be efficient, proportionate, and coordinated across government. They also intend to foster a closer relationship with Europe, seeking deeper cooperation.
Innovation and technology are another priority. Labour envisions the UK as a leader in these fields, promoting regulatory clarity and advancing initiatives like financial market infrastructure sandboxes and tokenized gilts pilot issuance. Sustainable finance is also a crucial focal point, with commitments to advancing the UK Green Taxonomy and mandating credible transition plans for UK-regulated financial institutions to align with the Paris Agreement goals. They also plan to explore covered bonds for green assets to boost investments in net-zero infrastructure. Labour’s regulatory innovation includes establishing a new Regulatory Innovation Office to modernise regulation and improve coordination across sectors. They also support Open Banking and Open Finance, aiming to expand data consolidation from various financial products to enhance financial inclusion and spur innovation. Consumer protection will also be a focus for Starmer’s government and its plan for financial services in the UK.
Implications
The new government’s focus will be on “regulation for growth” and reallocating capital to areas such as venture capital, small-cap equity, infrastructure, green energy, and green home improvements. Labour’s vision emphasises uniting “workers and business” for wealth creation, with the financial services industry playing a key role, particularly in facilitating private investments alongside public funds. The National Wealth Fund, for instance, plans to generate £3 in private investment for every £1 it invests. This approach may involve reforms in pensions and retirement to encourage specific investment choices, increased regulatory support for retail investors, and policies to promote growth in cooperatives and mutuals. Labour is also open to innovations like easing regulations for new savings products, regulating AI, developing a central bank digital currency, and exploring securities tokenisation. Additionally, Labour plans to advance open banking/finance through its “Smart Data schemes” and establish Digital Verification Services.
Labour also aims to strengthen the UK’s trade and investment ties with the EU by removing unnecessary obstacles for businesses, particularly in green finance, mutual recognition of professional qualifications, and cross-border clearing. Additionally, Labour seeks to lower trade barriers where UK and EU regulations are compatible, with a primary focus on enhancing the competitiveness of UK financial services. While a return to the pre-Brexit regulatory framework is unlikely, the UK will still pursue selective regulatory divergences. Nonetheless, there is a noticeable trend towards gradually increasing alignment with EU financial services regulations. Meanwhile, Keir Starmer’s Regulatory Framework review will proceed, and existing reforms, such as the Financial Services and Markets Act 2023, will continue as scheduled.
Similarly, the new government will also be placing emphasis on consumer protection in its financial regulatory plans. It aims to implement a comprehensive anti-fraud strategy, including measures to introduce anti-fraud features in real-time payments and potentially granting the Financial Conduct Authority (FCA) new powers to ensure face-to-face banking services. Key initiatives include regulating buy now, pay later (BNPL) products and collaborating with HM Treasury and the FCA to clarify the advice-guidance boundary, thereby addressing the “advice gap” and encouraging firms to provide better customer support. However, challenges remain in managing complaints and claims risks. The government also plans specific pension reforms, such as consolidating small defined contribution (DC) pension pots, introducing standardised value-for-money tests for DC schemes, requiring trustees to offer retirement income solutions, and consolidating the defined benefit (DB) market through commercial Superfunds. The Pensions Ombudsman will be reaffirmed as a competent court to simplify the recovery of over-payments. Labour emphasises a balance between regulation and efficiency, citing the Consumer Duty as a model for outcomes-focused regulation. This approach aims to streamline the FCA’s rulebook and could lead to fewer rules in the future.
Let’s Talk Strategy
Halkin aims to differentiate itself from its competitors through structuring our teams by specific practice areas, similarly to law firms. This means that each one of our consultants specialises in advising lawyers within specific practice areas like financial services regulation. We advise lawyers on the steps they can take to maximise their career goals. Our goal is to provide valuable insights without exerting undue pressure. However, we will engage with lawyers to ensure they are aware of and consider opportunities they might have overlooked. As our work takes a consultative approach, we are eager to engage with regulatory lawyers to discuss their work and offer valuable insights into the evolving market. This means that we focus on building long term relationships with the individuals and law firms we work with. We are committed to assisting clients in building out their teams, and individuals to develop their careers.
This article covers a number of topical matters relating to the legal world, including the unexpected announcement of an early general election in the UK, the rising importance of artificial intelligence (AI) in legal practice, and salary increases, mergers, and expansions in the legal sector. It also emphasises the growing interest of UK law firms in Texas due to its booming energy sector.
The General Election
In an unexpected move, U.K. Prime Minister Rishi Sunak announced on May 22 that a general election will take place on July 4, much earlier than anticipated. This has prompted lawyers to prepare for the possibility of advising clients on what could be the country’s first government transition in 14 years. Subject to the outcome of the elections and the policies of the new government, some of the key areas of impact may include changes in financial regulations, corporate governance, and compliance requirements. Similarly, a government with a strong focus on public sector and infrastructure investment may lead to significant legal work in public procurement, construction law, and project finance. Meanwhile, a government prioritising environmental issues might introduce new environmental regulations and sustainability initiatives, leading to an uptick in matters relating to environmental compliance, renewable energy projects, and related areas.
Artificial Intelligence
The significance of AI continues to be paramount in industry, and the example of Nvidia (technology company) illustrates this. Nvidia’s overall revenue grew by 262% to $26.04 billion. Its shares are up 92% this year and 200% over the last 12 months. Nvidia is the bedrock of the artificial intelligence revolution, with Google, Amazon, Meta, and Microsoft estimated to be spending $200 billion buying up its AI chips.
The importance of AI is also notable in the legal sector. Research from PwC has found that lawyers with AI skills could earn significantly more, with U.S. vacancies offering a 49% wage premium and U.K. positions offering a 27% premium. The report highlights the value of AI skills like machine learning and neural networks across various sectors, including professional services, information and communication, and financial services. PwC’s ‘barometer’ report delves into AI’s impact on the workplace, noting that increased labour productivity from AI can drive economic growth, higher wages, and better living standards. It points out that sectors with high AI adoption see nearly fivefold greater labour productivity growth.
In the legal sector, many top U.K. law firms are starting to develop AI capabilities, using platforms like Harvey, and exploring generative AI technologies such as ChatGPT since late 2022. This has sparked significant interest in AI from law firms. The report also notes that Singapore leads in AI-related job vacancies. However, the full impact of AI on the legal market is still uncertain, as most firms have not yet fully integrated the technology, especially in lucrative transactional and litigation work.
Further developments in London’s legal market relating to AI also include Travers Smith’s AI division becoming an independent business, set to offer its services to the broader legal market. The new company, Jylo, will be headed by Shawn Curran, the firm’s former director of legal technology, who is leaving Travers Smith to focus on Jylo. According to a statement from Travers, Jylo allows users to “easily explore, organize, and interpret findings” through a combination of analysis and chat features.
Salary Increases and Domestic & International Developments
Some of the most eye-catching developments in the London legal market have been the increases of salaries for newly qualified associates (NQs) which include the likes of Linklaters and Freshfields, which have both increased NQ salaries from £125,000 to £150,000, an increase of 20%. Similarly, Quinn Emanuel increases its NQ salaries from £152,000 to £180,000, a rise of 18%
Relating to domestic and international expansion, Allen & Overy and Shearman and Sterling have officially completed the long-awaited merger to become A&O Shearman on the 1st of May 2024. Meanwhile, since its rapid growth in London in recent months, Paul Weiss continues to push on with expansion plans as the firm sets its eyes on Latin America with former Willkie Farr Partner, Maria-Leticia Ossa Daza, who will be spearheading these efforts. Similarly, set on expansion is Seattle-founded firm, Perkins Coie, which announced that it will open in London, with a six-lawyer office led by former White & Case private equity co-head, Ian Bagshaw. The office will focus on corporate matters for European technology-focused clients, including startups through the life cycle of a company.
Looking across to mainland Europe, Eversheds Sutherland decides to close its Berlin office, leaving the firm with German bases in Dusseldorf, Frankfurt, Hamburg, and Munich. Meanwhile, also in Germany, Latham & Watkins have also lost four partners which are set to join rival US law firms Willkie Farr & Gallagher and White & Case in the country.
On the other hand, looking to the U.S, Texas is becoming a key focus for U.K. law firms due to its robust oil-rich economy and the energy transition boom. Major players like Vinson & Elkins and Baker Botts dominate the market. In Q1 2024, deal-making in Texas’s energy and power sector reached $145.7 billion, an 80% increase from 2023. Key U.K. companies with significant presence include the likes of BP and law firms Clifford Chance and Linklaters, which have competitive energy and infrastructure practices. Clifford Chance launched in Houston last year, hiring 10 partners, emphasising energy transition as a priority. A recent trade pact between the U.K. and Texas aims to leverage expertise in new energy solutions, life sciences, and professional business services.
Prequin predicted infrastructure assets would reach $1.87 trillion by 2026, making it the largest real asset class. Kirkland & Ellis played a major role in guiding Global Infrastructure Partners’ $12.5 billion acquisition by BlackRock. Interest from U.K. firms is growing, with Freshfields Bruckhaus Deringer showing intent to enter the Texas market. The challenge is for these firms to compete effectively in the energy transition sector, where private equity is increasingly focused.
Summary Remarks
In reflecting on the legal market developments of 2024 so far, it’s evident that significant shifts are underway, both domestically and internationally. The upcoming general election in the UK introduces an element of uncertainty for law firms, particularly concerning potential regulatory changes that could impact various sectors. Meanwhile, the rise of AI continues to shape the legal landscape, with notable increases in demand for AI-skilled lawyers and the emergence of independent AI ventures like Jylo from Travers Smith.
Internationally, law firms are strategically expanding their presence, with Perkins Coie’s entry into London and A&O Shearman’s recent merger being notable examples. Moreover, Texas has emerged as a focal point for UK firms due to its thriving energy sector and opportunities in the energy transition. Despite challenges, such as navigating new markets, firms in London are actively positioning themselves to capitalise on these evolving trends, signalling a dynamic year ahead for the legal industry.
Overview
The legal landscape of 2023 witnessed numerous impactful events. These include mergers among prominent law firms, as well as developments in areas such as the retailisation of funds, and the move from conventional public credit to private credit. Furthermore, there has been a noticeable expansion of law firms, actual and contemplated, into jurisdictions such as Singapore, India, and Saudi Arabia. The increased influence of sovereign wealth funds has been a prominent feature relating to the latter and indicates the growing importance of this legal landscape.
Law Firm Mergers
Q1 saw the London Private Equity team of Dickson Minto join Milbank. Meanwhile, Q4 saw the approval of the Allen & Overy and Shearman and Sterling merger, heralding one of the legal industry’s most significant combinations in years. Upon completion, this union between London-based Allen & Overy and the New York-based Shearman & Sterling would establish a formidable firm boasting nearly 4,000 lawyers, comprising around 800 partners, and operating across 48 offices worldwide.
Retailisation of Funds
The “retailisation of funds” refers to the adaptation of investment funds, originally designed for institutional investors, to be more accessible to individual retail investors. This process involves modifying fund structures, strategies, and marketing approaches to meet retail investors’ preferences. In the European Long-Term Investment Fund (ELTIF) Regulation context, retailisation aims to facilitate retail investors’ participation in long-term investments like infrastructure projects and less liquid assets. This is achieved by reducing barriers, simplifying assessments, and providing more flexible fund terms for retail investors. The goal is to broaden investor participation in long-term investments for economic growth and sustainability. The push to access retail capital is a priority for major industry funds, aiming to increase individual investor assets under management (AUM). Companies like Blackstone, KKR, and Apollo have set ambitious targets to raise significant amounts from retail investors over the coming years.
Private Credit
On the private credit side, since the global financial crisis, the private credit market has witnessed significant growth, offering an alternative funding source beyond traditional banks and public debt. Projected to continue expanding due to rising borrower demand, private credit represents a substantial portion of the $12 trillion alternatives market. Direct lending, the primary category within private credit, involves negotiated loans to small and mid-sized firms in their growth stages, catering to those not yet ready for public markets. Globally valued at approximately $1.6 trillion (excluding real estate), private credit assets under management rival U.S. high yield bond and leveraged loan indices.
Driven by borrower preferences for pricing certainty, customised funding, and smaller deals, private credit meets the financing needs of smaller firms, which find public markets impractical due to larger average deal sizes. With about $698 billion in North America alone, private credit presents an opportunity for borrowers seeking diversified financing as bank lending becomes less appealing. These funds typically involve low leverage, long-term capital commitments from investors, and losses borne solely by them.
International Expansion and Sovereign Wealth Funds
The legal landscapes of Saudi Arabia, Singapore, and India are witnessing a surge of international law firms leveraging recent reforms (Saudi Arabia and India) and the influence of sovereign wealth funds. This surge involves prominent names in the legal sector establishing a direct presence in Saudi Arabia and exploring opportunities in India following rule changes allowing foreign access. Regulatory changes in Saudi Arabia eliminated the need for local alliances, enabling firms like Latham & Watkins and Clifford Chance to offer legal services directly to clients, contributing to the Kingdom’s legal market growth. In India, DLA Piper and others are considering establishment following the Bar Council’s recent decision, though limitations exist on advising on local law or appearing in Indian courts. Sovereign wealth funds, especially Saudi Arabia’s Public Investment Fund (PIF), have driven economic growth and investment, enticing law firms to expand operations, yet ethical considerations, especially regarding human rights, prompt firms like Hogan Lovells and Linklaters to implement stringent client selection and due diligence to align with liberal values and responsible business practices. Meanwhile, amongst others, Quinn Emanuel and Greenberg Traurig have strategically expanded their footprint in Singapore through the establishment of new offices in the city state.
Market Predictions for 2024
Commentators note that following a significant surge of 22% in the need for legal services in 2021 post the Covid lockdown, demand has steadily increased. There was a 3% rise in 2022 and a subsequent 6% uptick in 2023. Projections for 2024 indicate a 2% growth in legal service demand compared to 2023.
Development of Legal Tech
The ongoing expansion of legal technology in 2023 witnessed a surge in inquiries about whether AI would replace lawyers, spurred by the ChatGPT boom. While the likelihood of such a scenario is low, this trend undeniably hastened discussions about embracing technology across the legal sector. Earlier this year, Allen & Overy introduced ‘Harvey,’ an AI-driven chatbot designed to aid its lawyers in contract drafting. This initiative received widespread acclaim, garnering praise from national and legal trade publications. Firms now confront increasing client pressure to integrate technology for enhanced efficiencies. Leaders in law firms must navigate this demand while weighing the significant reputational risks associated with any missteps and addressing concerns about the potential impact of tech adoption on job security for their staff. According to Gartner, there’s an anticipation that legal departments will triple their expenditure on legal technology by 2025.
M&A and Private Equity
In 2023, the M&A landscape experienced fluctuations, stabilising by September, signalling potential balance due to strategic adjustments and economic influences. Legal experts foresee increased confidence in private equity (PE) deals in 2024. Despite fewer large buyouts, PE firms exhibit growing confidence, with increased activity in Q4 2023. High-quality assets face aggressive strategies, while others undergo extended due diligence. PE firms are expanding internationally, and the outlook for 2024 seems positive, with substantial assets lined up for sale and record pipelines reported by investment banks. Commentators highlight $3.7tn in unused capital poised to revive the global M&A market.
Funds, Secondaries
The M&A landscape has shown more diversity in deal types, with a balanced mix of GP-led and portfolio sales. Preferred deals and structured secondaries, especially in Europe, have seen continual growth. GP-led deals are shifting towards multi-asset and multi-fund arrangements from single-asset deals. Expectations among fund sponsors and investors indicate an anticipated increase in M&A volumes in the coming years, notably in 2024, with higher confidence in Europe and North America than in Asia due to subdued Chinese markets.
Investor scepticism persists regarding GP valuations, although M&A markets’ limited exit opportunities have boosted GP-led volumes. Even if M&A markets recover, GP-led deals are anticipated to remain an attractive liquidity tool. In the LP portfolio realm, despite efforts to balance public and private positions, large multi-billion sales persist. Sellers are diversifying portfolios to optimise pricing among numerous buyers, occasionally deferring purchase prices and increasingly employing financing for larger portfolio acquisitions.
Fundraising remains robust for historic secondary buyers, with a surge in larger flagship funds and growing interest in specialised strategies like single-asset recaps and credit secondaries.
Private Credit: A Growing Alternative Market Post-Financial Crisis
Since the global financial crisis, the private credit market has grown, diversifying funding sources beyond banks and public debt. It’s expected to continue expanding due to increasing borrower demand. Private credit, negotiated directly between borrower and lender (typically a large asset manager), is a part of the $12 trillion alternatives market. The main category is direct lending, involving negotiated loans to small and mid-sized firms in growth phases. These firms seek financing but aren’t ready for public markets. Globally, private credit (excluding real estate) totals around $1.6 trillion in assets under management as of March 2023, rivalling U.S. high yield bond and leveraged loan indices. Factors driving growth include borrower preference for pricing certainty, customised funding, and smaller deals. Public markets cater to larger borrowers, with average deal sizes well above $700 million in the high yield market and about $480 million in the leveraged loan market since 2020.
This is impractical for small to mid-size firms. Private credit, totalling about $698 billion in North America, presents an opportunity for borrowers to diversify financing as bank lending becomes less attractive. Private credit funds are typically low-leverage with long-term capital commitments from investors aligning with loan maturities. Losses are borne solely by investors. Structurally higher demand for private credit is likely to expand the market for potential borrowers and increase lending rates, leading to wider spreads between private and public credit markets. This supports our strategic preference for this asset class, but private markets are complex and may not suit all investors. Private credit is not immune to economic challenges, requiring increased selectivity and consideration of how much of the opportunity and risks are priced in.
Private Credit: Favorable Risk-Reward Profile and Yield Premiums
In the realm of private credit, historical data has shown consistently low loss rates. It is anticipated, however, that a return to normalcy may be on the horizon, owing to higher financing costs and decreased activity. This trend has already affected borrowers in the public markets, particularly those with floating rate debt. With the influx of new private credit lenders, a discerning approach is deemed crucial. Selecting sectors and borrowers adept at navigating a higher cost of capital is paramount, as is rigorous due diligence on deal terms and lending standards. Over extended periods, loss rates in private credit have either matched or been lower than those in public markets like U.S. high yield and leveraged loans, as indicated by the Cliffwater Direct Lending Index (CDLI) for North American direct lending. The structural attributes of private credit, including meticulous credit selection and enduring lender partnerships, contribute to these similar or lower loss rates. Seniority in the capital structure further fortifies this position.
Despite comparable or lower loss rates, private credit has consistently offered a significant yield premium compared to public markets. Over the past few decades, average yields have exceeded comparable public market peers by approximately 400 basis points or more, particularly in major U.S. high yield and leveraged loan indexes. It is anticipated that this yield gap will widen due to heightened borrower demand. A portion of this excess yield can be attributed to a “middle market” premium, which compensates lenders for extending financing to small- or mid-sized companies that may struggle to access public markets. It also reflects compensation for assuming illiquidity risk. Unlike public market exposures, private credit lacks easy tradability, and early sales may incur capital losses, rendering it unsuitable for all investors. It is a long-term investment suited for those with the capacity to fulfil their liquidity needs from other parts of their portfolio. However, for investors with adequate liquidity management, private credit presents potential opportunities to capture this premium. Continual borrower demand, augmented pricing power, seniority in the capital structure, and comparable or lower loss rates relative to public peers collectively position private credit favourably for individuals considering long-term investment horizons.
References
BlackRock, A fast-changing U.S. financial landscape:
https://www.blackrock.com/corporate/literature/whitepaper/bii-investment-perspectives-october-2023.pdf
BlackRock, Struggling Corporate Borrowers Turn to Private Credit to Defer Interest:
https://www.bloomberg.com/news/articles/2023-09-28/struggling-borrowers-turn-to-private-credit-to-defer-interest?leadSource=uverify%20wall
Financial Times, Private credit funds step in for companies facing mountains of debt:
https://www.ft.com/content/7c4a994b-024e-4e6e-992c-7409de8943ed
What does this mean?
Retailisation of funds refers to the process of making investment funds, which traditionally target institutional and professional investors, more accessible to individual retail investors. This involves adapting fund structures, strategies, and marketing approaches to cater to the needs and preferences of retail investors. In the context of the European Long-Term Investment Fund (ELTIF) Regulation, retailisation involves making it easier for retail investors to participate in long-term investments, such as infrastructure projects and other illiquid assets. This is achieved through measures like reducing investment barriers, simplifying suitability assessments, and providing greater flexibility in fund terms for retail investors. The aim is to encourage a wider range of investors, including individual retail investors, to participate in long-term investments for economic growth and sustainable development.
Why is this happening?
The drive to increase access to retail capital is now a top priority for major industry funds. Many have set clear goals to grow individual investor assets under management (AUM). Blackstone envisions expanding retail capital from $200 billion to $500 billion, while KKR anticipates 30% to 50% of new capital raised in the coming years will come from the private wealth sector, and Apollo aims to accumulate $50 billion in retail capital over the next c.5 years.
Advantages of retail investor access
The diversification for retail investors allows retail investors gain exposure to a broader range of investment strategies including private equity, private credit, infrastructure, and real estate. This diversification helps spread risk across different asset classes, potentially enhancing overall portfolio performance. Moreover, increased investment opportunities mean that retail investors can now tap into strategies that were previously reserved for institutional or accredited investors. This opens up a new avenue for potentially higher returns, as many alternative assets have demonstrated strong performance. Expansion of investor base is a further advantage. For alternative investment managers, retail access broadens their potential investor base, potentially leading to increased assets under management and lower fundraising costs compared to targeting institutional investors exclusively. Additionally, closed-ended retail fund structures, like investment companies, often involve listing on stock exchanges. This not only provides liquidity to investors but also raises the profile of the management house, potentially attracting more investors.
Disadvantages of retail investor access
Regulatory complexity acts as one of the disadvantages of retail investor access. Accessing retail investors involves navigating a complex regulatory landscape, requiring compliance with various laws and regulations like the PRIIPs regulation, which can be resource-intensive. Moreover, liquidity mismatch is a further concern. Certain retail access structures may face liquidity mismatches between the fund and underlying investments, a concern for regulators that requires careful management. Compliance burden for managers are additional concerns as managers taking on retail investors directly face an additional compliance burden, including producing Key Information Documents (KIDs) and ensuring they have the appropriate regulatory licenses.
Impact
Some of the implications of these developments include the expansion of eligible investment assets. This means that the pool of assets available for ELTIFs has widened. This includes assets located outside the EU, such as subsea fibre-optic cables and renewable energy installations, provided they are in compliant jurisdictions. Additionally, the definition of real assets has been simplified, allowing for investment in a broader range of projects, including smaller infrastructure ventures. Further considerations relate to uncertainty as there are still questions regarding particular aspects, such as the minimum holding period for investors and redemption requirements. Clarity on these points will be crucial in assessing the effectiveness of the new rules in attracting retail investment.
Charting the course?
While accessing retail capital offers significant benefits, it’s crucial to carefully evaluate the specific circumstances and regulatory requirements involved. For both alternative investment managers and retail investors, understanding the advantages and potential challenges is essential for making informed investment decisions.