Law firms rush headlong into a recession

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The world is on the brink of a global recession.

The latest projections from the International Monetary Fund indicate that global economic growth will have fallen sharply by the end of 2022 and will continue to decline in 2023.

The hardest hit will be advanced economies where law firms are largest, particularly the US, UK and eurozone. Even developing economies such as China, Brazil, Mexico and South Africa look poised for tough times as inflation continues to rise, forcing governments to raise interest rates despite high debt levels, while at the same time energy and food supply chains appear fragile.

Much of this shift in sentiment is already being felt in commercial law firms where the timing couldn’t be worse, following a year-long pay war amid the scramble for junior talent.

A semi-annual analysis of the largest US-based companies by Citi found that a significant drop in demand reduced their revenue growth to 5% in the first half of the year, from 14.6% for the year. former. And yet, expenses increased by 14.7%, largely due to compensation expenses which increased by 17.5%.

This means that law firms are rushing full speed into the recession. It’s hard to see what these highly paid transactional lawyers will do if business activity remains as quiet as it has been so far this year. Mergers and acquisitions are down 23% year over year. Equity markets are even worse. Issuance on global equity markets fell 68%, its slowest period since 2005.

Failing to increase their market share, law firms have no control over this drop in activity. They just have to seize the opportunities that present themselves.

In Australia, the largest firms tell our local correspondent Christopher Niesche they anticipate an economic slowdown but hope to benefit from an increase in commercial litigation and sales of distressed assets as well as energy transition mandates.

The country’s biggest companies are also preparing for another type of transactional work: mergers and acquisitions that involve technologies such as blockchain, DeFi and Web3.

Struggling sectors, such as football clubs, are also providing more work for Europe’s top companies. Anne Bagamery wrote about the latest such deals across the continent.

But none of these areas seem as exciting as private equity fundraising, which continues to be extremely busy and lucrative for Big Law. John O’Neil, head of the investment funds group at Kirkland & Ellis, believes the amount of capital raised could even exceed a record in 2021.

While it may seem counterintuitive that private equity is raising funds at a time when transactional activity is declining, it makes perfect sense. The funds are raised to invest over approximately five years, which means that the current market environment is almost irrelevant. A struggling market is also a good time to buy assets. And for investors, private equity probably offers a better chance of strong returns than public markets right now, so they’re pumping money in that direction.

As Michael Wolitzer, head of Simpson Thacher & Bartlett’s investment funds practice points out, there are also non-cyclical funds, such as infrastructure, that are proving popular. Presumably, debt would be another.

All of this explains why Kirkland continues to aggressively hire in this space. In June, we wrote about how Kirkland was spoiling the UK fund market for everyone by constantly hiring rivals’ future practice leaders.

And in the space of two days last week, Kirkland hired partners from Ashurst and Bryan Cave Leighton Paisner in London. Both work in real estate and infrastructure fundraising, areas that KKR and Blackstone say are proving particularly popular.

Kirkland clearly doesn’t think it’s time to be cautious. Brave? Yes. Reckless? No.

And yet, unfortunately for the wider legal industry, alternative investment funds are an area of ​​practice that has been more or less cornered by a relatively small number of firms. For everyone, the coming year should not inspire the same confidence.


Indian identity

Flag of India / Credit: taya.passion/Adobe Stock

Last week marked an important date for India. The country celebrated 75 years since becoming an independent state after British rule.

In the legal sector, one of its oldest and most important law firms also marks a new era of government. Luthra and Luthra Law Offices made headlines in 2020 when the firm’s founding partner, Rajiv Luthra, expelled former senior partner Mohit Saraf over arguments over the firm’s lack of equity sharing.

In by Jessica Seah excellent feature, it explores the history of what has happened since then, involving court battles, scandals and mass walkouts. Notably, Rajiv Luthra says he divested 25% of his coveted equity in July last year, and the intention is to further reduce that ownership, to 30% or 35%.

Meanwhile, international companies continue to look for ways to tap into India’s growing but tightly guarded legal market. Last week, Allen & Overy announced that it had hired Harsh Pais from Indian law firm Trilegal to lead its law firm in India, which includes more than 100 lawyers across multiple offices.

A&O’s co-head of global business, David Broadley, said: “As the world’s second fastest growing major economy, over the past three years India has attracted 159 billion dollars of inward investment. As an increasingly targeted market for customers, India is an important part of our global strategy.

Further on, lawyers of South Asian descent working in the UK helped mark South Asian Heritage Month by talking about their personal experiences with Varsha Patel. Reed Smith partners Nathan Menon and Nav Sahota previously thought they couldn’t even discuss the challenges they faced, despite the industry stepping up D&I efforts.

They share how they fought racism to succeed in law in the hope that young South Asian lawyers can now feel comfortable and confident about being authentic themselves in the workplace.


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