The Final Act: Contemplating the Legal Landscape in 2023

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: Strategies, Risks, and Rewards

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

Retailisation of Funds

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.

The Intersection of Growth: Law Firms, International Expansion, and Sovereign Wealth Funds

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.

The Evolving Landscape: Mergers, Workforce Reductions, and Remote Work Dynamics

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.

Mental Health and Well-Being

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.

D&I: The Journey Ahead

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

Law Firm Mergers: Strategy, Rationale, and Impact

The number of recently completed and speculated mergers and acquisitions between leading law firms in London present an opportunity to reintroduce an interesting topic of discussion, one which focuses on the motivations behind these strategic ventures. It is also an opportunity to observe the impact on the lawyers within these firms.

Some of the most recent examples include the likes of Milbank acquiring Dickson Minto’s seven partner London office which will add considerable depth to Milbank’s City outpost, which currently boasts 33 partners. Milbank’s global head of corporate, Norbert Rieger, commented on the firms’ decision, stating that the addition of this ‘team will significantly add to our ability to act for clients around the globe on private equity related transactions’, adding that it is it ‘a logical next step after our expansion in the PE space in the US, Germany, and Asia.’1

Further examples include Mishcon de Reya merging with Taylor Vinters, and in doing so delivering on the firms’ strategies to support the innovation economy and accelerate their growing share of the technology, media, and life-sciences legal and consultancy services market in the UK and in key international innovation hubs globally.2 BDB Pitmans and Womble Bond Dickinson also join the ranks of the firms pursuing the a strategy of development through consolidation, having confirmed they are in talks over a potential merger.3

The speculated merger between Hogan Lovells and Shearman & Sterling is another significant example of firms joining ranks to strengthen their position in the market. The two law firms both acknowledged market rumours they are engaged in early stage talks for a merger that could see them create the fifth largest law firm in the world.4

The intrinsic details and rationale behind mergers is often cloaked in mystery, as these decisions are discussed and debated in confidence amongst a law firms’ partnership.5 However, the general reasons can be broken down into improved competitiveness, expansion of geographic reach, increased efficiency, and diversification of services, as well as attraction and retention of top talent and financial pressures.

It is also interesting to observe some of the impacts on the lawyers during the merger process, and the challenges which it presents, particularly as this will likely be a key consideration during these partnership meetings. The impact of a law firm merger on individual lawyers can vary depending on several factors. These include the size of the firm, the nature of the merger, and the position of the lawyer within the firm. However, some of the common impacts on lawyers include career advancement opportunities, increased workload, uncertainty, culture clash, integration challenges.

Summarily, the impact of a law firm merger on lawyers can be both positive and negative, with opportunities for career advancement and new responsibilities, but also uncertainty, increased workload, and integration challenges. Moreover, the success of a law firm merger will depend on how well the firms manage the integration process, and how well they support their lawyers through the transition.

 

1 A close-knit group’: Milbank acquires Dickson Minto’s seven-partner London office –

https://www.legalbusiness.co.uk/blogs/a-close-knit-group-milbank-acquires-dickson-mintos-seven-partner-london-office/

2 Taylor Vinters and Mishcon de Reya LLP Complete Merger –

https://www.taylorvinters.com/news/taylor-vinters-and-mishcon-de-reya-llp-complete-merger

3 Womble Bond Dickinson and BDB Pitmans table merger –

https://www.legalbusiness.co.uk/blogs/womble-bond-dickinson-and-bdb-pitmans-table-merger/

4 Hogan Lovells and Shearman & Sterling in ‘merger’ rumours that would create world’s fifth largest law firm –

https://www.cityam.com/hogan-lovells-and-shearman-sterling-hint-at-merger-that-would-create-worlds-fifth-biggest-law-firm/

5 Law firm mergers: why do they happen? –

https://www.chambersstudent.co.uk/where-to-start/newsletter/law-firm-mergers-why-do-they-happen

The Curtains Close: Reflecting on the Legal Sector, 2022

In the spirit of reflection and the dawning new year, this article casts an eye on some of the most significant events which have impacted the legal sector in 2022. It also observes some of the issues which law firms will have to grapple with as we enter 2023. The ramifications of the pandemic, Russia’s invasion of Ukraine, as well as talent retention and attrition related issues are amongst the most significant events which have contributed to the instability suffered by the markets this year, with some of the consequences manifesting in the rise of inflation and the energy and cost of living crisis.

Energy

Taking the energy crisis as an example, 28 energy companies had declared bankruptcy by the end of December last year. In response, law firms have bolstered their energy capabilities encompassing infrastructure, renewable energy, and project finance. This strategic recalibration is exemplified by several significant departures from UK headquartered outfits to US firms, which are particularly excelling in this space. Examples of these departures include Sara Pickersgill and Toby Parkinson who join Kirkland & Ellis from Allen & Overy and Clifford Chance respectively, as well as Matt Hardwick who joins Akin Gump from Norton Rose Fulbright.

The Recession & Inflation

In June, inflation in many countries hit levels not seen since the 1980s. Seemingly, everywhere, poorer populations were squeezed by rising costs for life’s essentials: energy, shelter, clothing, and food. Inflation became the number one concern among executives responding to McKinsey’s Global Economic Conditions Survey, supplanting COVID-19, and geopolitical instability- both of which were higher on executive’s agendas at the beginning of the year. Regarding the impact of on the legal sector, commentators have observed that Britain’s largest international law firms are struggling to attract and retain staff in the US after the crash in the value of sterling compounded by their lack of competitiveness in the world’s most profitable legal market. Furthermore, existing senior staff, concerned that foreign exchange would further erode their salaries, have also asked for their pay to be increased or pegged to the dollar.

The current situation may be particularly concerning for top tier UK firms including the likes of the Magic Circle, which historically struggled to match their American competitors on pay due to lower overall profitability and more restrictive remuneration models that prevented outsized salaries for star partners. For example, Freshfield’s equity partners took home more than $2mn each on average for the year ended April 30. However, its profitability remains well below that of the top US law firms, where partners’ average take home profits exceeded $7mn. The widening gap between the pound and the dollar further hinders London-based firms’ ability to hire top talent.

Key Consideration for 2023

Leading up to the new year, law firms will face numerous challenges, such as the aforementioned shortage of talent, cyber risk, macroeconomic uncertainty, and the inability to recover costs through pricing.

The War for Talent, Retention, and Attrition

The shortage of talent issue has been identified as the leading concern for law firms. Since the end of the last lockdown, partners and fee earners have been on the move more so than at any time in the last two years. Estimates indicate that movement in the London legal market in 2021 has seen 2564 lawyers across 382 firms take the leap departing from their respective firms, meanwhile 2020 saw 2014 across 408 firms make the transition. Presently, the numbers for 2022 stand at 1679 across 318 firms taking this leap. Movement has been most prevalent in the disputes space followed by corporate, banking and finance and real estate. Statistics indicate that the Silver Circle and Magic Circle firms have seen the most attrition, with Kirkland & Ellis leading in the number of hires made in the last 3 years.

However, the same source indicates that both the Magic and Silver Circle respectively have been pushing back and filling vacancies. This is arguably a clear indication that the Magic and Silver Circle maintain their position as premier outfits for associates seeking some of the best training and quality of work. Nonetheless, it is also clear that individuals are now considering the trajectory of their careers, with the US outfits offering an attractive alternative to their counterparts.

The war for talent, coupled with the shortage of supply exacerbated by the so called “Great Resignation” have caused eye-watering staff cost inflation. In response, many law firms have revived and refined their salary offering. A notable example of this includes the likes of Akin Gump raising salaries of newly qualified lawyers from £159,000 in the first quarter to £179,000 for the period covering July to September. However, commentators note that it will take more than remuneration to retain talent, particularly after the pandemic where individual focus shifts to considerations such as the opportunity to work from home and the improvement of work life balance.

Cyber Risk

With the rapid technological advancement and introduction of new technologies to the mainstream, firms will have to grapple with the changing needs of their clients. However, they will also need to focus on the foundations underpinning this work, and that is the security associated with it. Cyber risk continues to increase as hackers become more sophisticated and implement new forms of attack. It is clear that law firms are responding to this risk with a significant increase in cyber security spend in the last year. The rise in spend across the top 100 bandings is between 50% and 79%. However, commentators note that this spend may have to increase further, and add that in the current year, it only stands between 0.3% and 0.5% of the fee income across the bandings. The focus on cyber risk is and technology more generally in the sector is also reflected on the client side, with statistics demonstrating a growth in IP/IT related work.

Macroeconomic Uncertainty

The uncertainty in the economic environment has been bubbling for a few years and the onset of the Ukraine/ Russia conflict has seen a significant shift in short to medium confidence. High inflation and the tightening of credit markets have led to nervousness about valuations and slowing of the deals market, although the weakening of sterling will increase the deal flow for foreign buyers. The currency impact on results FY23 looks set to be more significant than seen for a number of years, rewarding those firms with greater international presence.

Predictions for 2023

Commentators predict that demand for legal expertise is expected to decrease for a variety of reasons including rising inflation, new regulations and sanctions, and the threat of a recession, according to data from LexisNexis’ latest Gross Legal Product (GLP) index. The index, which highlights areas of law that are growing or falling in demand, predicts that this will affect the demand for corporate law the most, forecasting a decline of 22% compared to last year by the end of 2022 as corporate transactions and IPOs dry up.

By contrast, competition lawyers are expected to see a strong increase in demand of 17% to the end of the year, a trend that is expected to continue into 2023. This comes off the back of the Competition Markets Authority’s growing interventionism as well as new security and sustainability measures amongst other things. Moreover, the UK and the EU recently extended the reach of their competition enforcement, and companies can expect enforcers to bring more cases. It may become difficult to predict which mergers will attract attention in which jurisdictions, and the costs of navigating merger clearance will increasingly impact which deals get done in 2023. But because the vast majority of deals close, even following intense scrutiny, more review will still translate to a deterrent, rather than a deal killer, in the new year.

The mergers and acquisitions market continues to be described as “slow” and “uncertain,” and those trends are likely to continue into the new year. Despite this outlook, the 2023 deal forecast may not be as dreary as some predict. M&A activity in 2021 reached historic levels, and it’s hard to beat records year after year. So, 2023—even if slower than 2022—could represent a return to normal in the M&A market.

Additionally, the rise of ESG over the past several years has cemented investor interest in incorporating environmental and social impacts into the financial investment equation. Next year, human capital management will be at the forefront of the conversation, and we’ll see investors looking for more disclosures to ensure that they are investing in companies that align with their values.

 

Sources

Financial Times, UK’s ‘magic circle’ law firms struggle to grow in US amid sinking pound, https://www.ft.com/content/fab70e6e-52fb-4f70-ba82-5f4880545426.

PwC, Agility through turbulent times, PwC Law Firms’ Survey 2022, UK law firms demonstrate their agility through turbulent times – PwC Law Firms Survey / Law+Firms+Survey+2022.pdf (pwc.com).

McKinsey & Company, What just happened?, McKinsey Publishing’s year in review, What just happened? McKinsey Publishing’s Year in Review | McKinsey & Company.

Legal market to ‘cool substantially’ following post-lockdown boom, Legal market to ‘cool substantially’ following post-lockdown boom – Legal Cheek.

ANALYSIS: 2023 M&A Market May Reveal a Return to Pre-2021 Levels, https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-2023-m-a-market-may-reveal-a-return-to-pre-2021-levels

ANALYSIS: Antitrust Battles to Become Even More Heated in 2023, https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-antitrust-battles-to-become-even-more-heated-in-2023.

DE&I and the Legal Sector

What is Diversity, Equity & Inclusion?

Diversity, equity, and inclusion (DE&I) involves cherishing the differences among your employees while shielding them from discrimination. It focuses on representation, fairness, and equal opportunities for all genders, ethnicities, nationalities, sexual orientations, religions, disabilities, and ages.1

Law firms have been making strides in pursuing DE&I. For example, Linklaters has introduced billable credit and recognition for contributions to DE&I under a new global policy2. While Baker McKenzie’s DE&I efforts are championed at the highest level by the firm’s Global Chair and its Global Executive Committee whose members each have KPIs around diversity3.

Striving towards DE&I is important in its own right. However, commentators have highlighted that pursuing DE&I, and an effective DE&I strategy, also improves a business’ bottom line. A 2017 study by McKinsey found the most diverse organisations outperform competitors by 33% and are 21% more likely to experience above average profitability. Decision making by diverse teams also delivers better outcomes than that of individuals 87% of the time4.

However, it is evident, particularly from reports such as the “1% Study”, that further efforts must be implemented5. The report highlighted that just 90 of more than 13,000 partners at major law firms in England and Wales are Black6. The efforts made by firms, such as the aforementioned Linklaters and Baker McKenzie, should be praised and acknowledged for their efforts in pursuing this noble cause. However, it is important to recognise that further work is needed. Thus, despite creating initiatives and policies to address the gap – firms have a long way to go to tackle the ethnic diversity gap, especially at a partner level7.

Further comments have also been made in relation to outreach and creating opportunities for those from underrepresented backgrounds to engage with firms. These have outlined that key to a diverse and representative workforce is ensuring that candidates from underrepresented backgrounds apply to law firms in the first place. Therefore, it is pivotal to create a fostering, inviting, and inclusive atmosphere that attracts all groups, or targeting specific underrepresented groups8.

Doing our share: DE&I at Halkin

At Halkin, we are also focused on promoting DE&I. In doing so, we are aligned to the diversity platform The Amos Bursary to offer a mentoring scheme for Black students. In so doing, we ensure talented people of African and Caribbean descent have the opportunity to excel in education and beyond. We are also in the process of developing an early start mentorship programme aimed at supporting BAME university students. This programme will involve providing advice, guidance, and other opportunities focusing on entering the legal profession.


1 What is Diversity, Equity, and Inclusion (DE&I) in the Workplace?, https://gtmhub.com/resources/articles/diversity-equity-inclusion

2 Linklaters rolls out billable credit and recognition for Diversity, Equity and Inclusion, https://www.linklaters.com/en/about-us/news-and-deals/news/2022/october/linklaters-rolls-out-billable-credit-and-recognition-for-diversity-equity-and-inclusion

3 Our Commitment to Inclusion & Diversity, https://www.bakermckenzie.com/en/aboutus/diversity   

4 6 Steps To Build A Successful DE&I Strategy From Scratch, https://www.forbes.com/sites/rebeccaskilbeck/2021/05/11/6-steps-to-build-a-successful-dei-strategy-from-scratch/?sh=32f49d4a44ec

5 The 1% study can be accessed here: https://publuu.com/flip-book/48941/146663/page/18   

6 Only 90 of 13,000 partners at England and Wales law firms are Black – report, https://www.theguardian.com/law/2022/oct/19/england-and-wales-law-firms-black-report-1-per-cent-study

7 The magic circle has a race problem – and it isn’t getting better anytime soon, https://www.thelawyer.com/the-magic-circle-has-a-race-problem/

8 Law firms take action to increase diversity in the legal profession, https://www.lawcareers.net/Explore/Features/21092021-Law-firms-take-action-to-increase-diversity-in-the-legal-profession