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.
Saudi Arabia’s evolving legal landscape is attracting a surge of international law firms as they capitalise on recent reforms and the growing presence of sovereign wealth funds, with prominent names in the legal sector seizing opportunities to establish a direct presence in the Kingdom. Similarly, the Bar Council of India, recently declared a groundbreaking decision to allow foreign legal firms to establish themselves in India. This blog explores the trend of law firms continuing to expand in the international legal arena. It will also observe the significant role played by sovereign wealth funds in fuelling growth in the legal market in Saudi Arabia.
Saudi Arabia & India Reforms
Reforms to the Saudi Code of Law Practice have opened doors for international law firms to establish their own offices in Saudi Arabia, eliminating the requirement for alliances with local firms to advise on Saudi law. Esteemed firms such as Latham & Watkins, Herbert Smith Freehills, and Clifford Chance are strategically leveraging these regulatory changes by establishing new structures, seizing the increasing demand in the Kingdom for high-quality international legal services. These firms now offer a comprehensive range of legal services to clients operating in the Kingdom, directly contributing to the growth of the Saudi legal market.
India has also garnered attention from major international law firms, including DLA Piper, Herbert Smith Freehills, and Baker McKenzie, which are considering establishing offices in India following recent rule changes that open up the country’s vast legal market to foreign access. In March, the Bar Council of India announced that foreign legal firms would be permitted to set up in India for the first time, allowing them to provide advice on international aspects of mergers and acquisitions, act as arbitrators, and more. While the new rules present significant opportunities, they do not grant foreign lawyers the ability to advise on local law or appear in Indian courts. This development has sparked both excitement and concerns within the legal community.
Sovereign Wealth Funds Drive Economic Growth and Investment & Balancing Expansion with Ethical Considerations
Saudi Arabia’s vision for economic diversification and development has been significantly bolstered by the active participation of sovereign wealth funds. Among them, the Public Investment Fund (PIF) has emerged as a key driver of investment and advancement. With strategic investments across various sectors, including technology, infrastructure, and entertainment, sovereign wealth funds have created a fertile ground for law firms to expand their operations. Recognising the potential, firms such as Latham & Watkins and Freshfields Bruckhaus Deringer have established specialised legal services to cater to the needs of sovereign wealth funds and their investment projects. Taylor Wessing has also developed its presence in the region and launched an intellectual property practice, after hiring a partner to its Dubai office. However, as law firms expand into Saudi Arabia, they face ethical considerations amidst the Kingdom’s human rights record and approach to social issues. Upholding liberal values and responsible business practices, firms like Hogan Lovells and Linklaters have implemented policies to ensure they engage with the right clients and mandates. Thorough due diligence is conducted to align with their ESG commitments, carefully navigating the ethical landscape while seizing the business opportunities presented by the Saudi Arabian market.
In summary, the legal landscape in Saudi Arabia and India is experiencing a surge of international law firms, capitalising on recent reforms and the influence of sovereign wealth funds. These firms are strategically expanding to cater to growing demands in both countries, while also addressing ethical considerations. As they navigate these dynamic markets, responsible business practices and a commitment to liberal values will be essential for a successful and sustainable presence.
One of the most observed and anticipated events currently playing out in the London legal market is the merger between Allen & Overy and Shearman & Sterling. Partners from both firms are set to vote on the potential merger with the voting process anticipated to take place in either June or July. The major considerations are speculated to include concerns regarding achieving pay parity and addressing associate compensation discrepancies. However, Shearman’s declining position, and cultural integration may also be a point of contention.
Although these factors may pose a significant challenge, the merger would position the new firm, A&O Shearman, as a formidable global player, posing a potential threat to the existing Magic Circle firms and also international firms. Presently, it has been speculated that Allen & Overy and Shearman & Sterling have agreed to a merger with a modified lockstep remuneration model. The elongated lockstep model introduced by A&O in 2020 will be adopted, featuring higher bonuses with Shearman’s ‘eat-what-you-kill’ model coming to an end. The merged firm will have a significant global presence, with substantial revenue, lawyers, and partners. Commentators have noted that this will benefit junior partners, although it will place a question mark over the position of their senior counterparts.
Insiders have noted that the approval of the deal requires a minimum of 75% of partners from each firm. If the merger proceeds, it would result in the formation of one of the world’s largest law firms, boasting a revenue of $3.4 billion and a team of 3,900 lawyers. Shearman would benefit from essential financial support, while Allen & Overy would achieve its longstanding goal of establishing a presence in the United States, which has historically been difficult in relation to securing traction in U.S. financial and M&A work because companies would typically favour U.S. outfits.
In observing other developments in the market, it is worth turning to the recent wave of staff cuts and layoffs. A prominent example is Dechert’s recent decision to reduce its global workforce by 5%. The decision is said to reflect the need to align staffing levels with demand and address a profit dip. Similar cuts have been made by other law firms, including Cravath Swaine & Moore and Cadwalader Wickersham & Taft. These workforce reductions have raised concerns among associates regarding potential layoffs and reduced recruitment activity. Associates have noticed quieter workdays, leading to feelings of hypervigilance. Good communication from partners and actively showcasing skills and marketability are seen as strategies to mitigate fears and enhance career prospects. While the cuts may be challenging for those affected, the firm has also made notable partner hires in London, indicating ongoing investments in key practice areas. This strategic approach positions Dechert to adapt to market conditions and remain competitive.
Further significant happenings revolve around law firms revaluating their stance on remote work as the power dynamics favouring lawyers diminish. Some firms, such as Simpson Thacher & Bartlett and Sidley Austin, are tying bonuses to in-office attendance. While some firms hope their culture will entice employees back voluntarily, others are considering similar measures. The push for increased in-person attendance is also driven by clients and accounting firm leaders. This trend aligns with the broader movement towards four-day workweeks in various industries.
The London legal market is undoubtedly experiencing significant shifts and developments, from mergers and cultural integration challenges to workforce reductions and re-evaluations of remote work policies. As these events unfold, it is crucial for legal professionals to adapt, communicate effectively, and leverage their skills to navigate the changing landscape successfully.
The legal profession can be a high-pressure environment, with long hours and high-stakes transactions. Unfortunately, these demands can take a toll on the mental health of lawyers, leading to anxiety, depression, and other mental health issues. In London, where the legal profession is particularly competitive, mental health issues are a growing concern. According to a 2020 survey by the Law Society, over half of solicitors in England and Wales reported experiencing negative stress in their jobs.
Additionally, a 2019 study by LawCare, a charity that provides support for mental health issues in the legal profession, found that 80% of lawyers experienced negative impact on their mental health due to their work. The legal profession’s long hours and high-pressure environment can also lead to burnout, a state of physical and emotional exhaustion that can cause decreased productivity and a sense of detachment from work. Burnout is particularly common among junior lawyers, who may feel pressure to bill long hours and prove themselves to their superiors.
However, many law firms are taking proactive steps to address this issue and support their employees’ mental health. For example, some firms have implemented mental health training for all employees, which can help reduce the stigma around mental health issues and provide tools for coping with stress. Others have created support groups for employees who may be experiencing mental health challenges or facing personal struggles. Examples of law firms taking steps towards supporting its lawyers include Baker McKenzie which has trained partners and managers to recognise signs of mental health issues among staff, and it encourages discussions on maintaining a healthy work-life balance. Ashurst has also introduced a wellbeing program to support its employees’ mental health and reduce the number of lawyers leaving the profession.
Additionally, some firms have taken steps to reduce the pressure on junior lawyers, such as implementing policies to limit work hours and encouraging lawyers to take breaks during the day. Some firms have also begun providing mental health resources and support for employees’ families, recognising that family stress can contribute to mental health challenges. One notable initiative is the Mindful Business Charter, a set of principles designed to promote well-being in the legal profession. This charter encourages law firms and their clients to work collaboratively to promote a healthy work-life balance and reduce stress and pressure on employees. Many law firms in London have signed on to the charter, signalling their commitment to supporting their employees’ mental health.
To conclude, mental health issues in the legal profession in London are a growing concern, but many law firms are taking proactive steps to address this issue. By implementing mental health training, support groups, and policies to reduce pressure on employees, law firms can help promote a healthy work-life balance and support their employees’ well-being. Initiatives like the Mindful Business Charter show that law firms are committed to supporting their employees’ mental health and promoting a more sustainable legal profession.
The legal sector is a major driving force in the global economy, and it is essential that it continues to evolve to stay competitive. By encouraging inclusivity within the legal sector, diverse perspectives and opinions are given a platform to be heard, which can help to drive innovation and creativity. Diversity also helps to attract a larger pool of talent, as people are more likely to apply for roles in an organisation that values inclusivity and diversity. In this way (recruitment practices and attraction of talent), both law firms and legal recruitment firms can champion and promote the pursuit of diversity and inclusion.
Legal recruitment firms can play an important role in improving racial diversity in the legal profession by implementing a number of strategies. These include setting diversity goals and metrics, conducting blind screening, as well as offering mentorship programs. At the Halkin Partnership, diversity and inclusion is key to our success, and our efforts to contribute to this cause have led us to partnering with the AMOS Bursary. Our relationship with the AMOS Bursary extends to financial sponsorship aimed at facilitating academic and professional development of the Bursary’s students. Our work also extends partaking in the mentorship scheme organised by AMOS, which aims to support academically able young British people of African and Caribbean descent in preparing for and entering chosen careers (you can find out more information on the AMOS Bursary and the ways in which you can contribute via the links provided at the end of this article).
Looking back to law firms and the benefits attributable to promoting diversity and inclusion in the legal sector from within the industry, it is arguable that diversity in the legal sector is also advantageous for clients, as it allows them to benefit from a more diverse range of legal advice and representation. This is particularly important in cases where a specific cultural or religious background may be relevant, as it can help to ensure that a client’s needs are understood and respected. For example, in areas such as emerging markets or Islamic finance.
Unfortunately, the legal sector has a long history of lacking in its commitment to diversity and inclusion. This has been especially true for Black, Asian and Minority Ethnic (BAME) individuals, who are significantly underrepresented in this field. Presently, approximately 79% of the individuals making up the legal profession are White/British. Meanwhile Asian/ Asian British lawyers make up 14%, Black/ African/ Caribbean/ Black British make up 3%, and other ethnic group lawyers make up around 2%.1
This lack of diversity is a problem that has been highlighted in recent years, leading to a greater focus on improving diversity in the industry. One of the major obstacles faced by BAME individuals in the legal sector is the lack of access to opportunity. This is often due to the fact that historically, the legal sector has been viewed as a career path for middle class individuals that have attended top universities, which prominent UK law firms purposely recruit graduates from, as they regard these institutions to be more effective at socialising graduates with the culture, soft skills and type of ‘high-class’ image sought for commercial success. This places BAME lawyers at a disadvantage in finding employment in elite segments of the profession, since they are concentrated in less prestigious higher education institutions.2
This also means that BAME individuals, who often come from more disadvantaged backgrounds, find it harder to break into the sector. This lack of opportunity can be further compounded by systemic racism and unconscious bias, making it even harder for BAME individuals to succeed. In order to make the legal sector more diverse, it is essential that these individuals are given the same opportunities as their white counterparts.
This means that firms must focus on creating a level playing field when it comes to recruitment and promotion. This involves making sure that recruitment processes are free from bias, and that BAME individuals have access to the same resources and support as their white peers. It is also important for firms to create an environment where BAME individuals feel supported and valued. This means actively addressing issues such as casual racism and microaggressions, and creating a culture of inclusion and respect. This should include initiatives such as mentoring programs, which can provide these individuals with the support they need to reach their potential.
Thus, it is important that firms recognise the importance of diversity and actively work to promote it. This can include initiatives such as sponsoring BAME law students, or creating specific roles and programs to ensure that BAME individuals are represented in senior positions. By working to improve diversity in the legal sector, BAME individuals will be given the same opportunities as their white counterparts, and the sector as a whole will become more inclusive and diverse. This will help to ensure that the legal sector is representative of the society it serves, and that BAME individuals are given the same chance to succeed.
In essence, it is vital that the industry make further strides in this space, and it is up to leading individuals and law firms to do this and set the example for the profession.
The AMOS Bursary – https://www.amosbursary.org.uk/
Mentoring Opportunities – https://www.amosbursary.org.uk/mentor/
Volunteering Opportunities – https://www.amosbursary.org.uk/support/volunteer/
1How diverse is the solicitors’ profession? – https://www.sra.org.uk/sra/equality-diversity/diversity-profession/diverse-legal-profession/
2Final Report for the Solicitors Regulation Authority, October 2017 – https://www.sra.org.uk/pdfcentre/?type=Id&data=719400053