Global London debate: The eagle has landed

Legal Business teamed up with Scottish Development International for a progress report on US law firms in the City. Has recent political and economic turbulence thwarted their advance at all?

While our 2016 Global London report – published before the Brexit vote on 23 June – identified the continuing rise of premium US advisers in the City, it also sounded a note of caution that 2016 – with Brexit and US presidential elections looming – could be a much bumpier ride for global legal services, conditions that not even the lean and slickly managed US outfits in the UK could avoid. With this in mind, we assembled a group of senior practitioners at some of the City’s most thrusting US firms for a progress report.

This wide-ranging debate – held a week before Donald Trump was named US president – covered Brexit, deal flow, nearshoring and clients’ changing attitude towards the use of US firms in London.

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Mark McAteer, Legal Business: The belief a year ago was that 2016 would be considerably tougher for law firms than 2015. Has that proven to be the case?

Dominic Griffiths, Mayer Brown: It has certainly been a challenging year for firms present in the London market, particularly in the build-up to the referendum vote, but for a number of us – perhaps one of the benefits of being an international firm with a big US nexus – we are to a degree hedged by our US practices and by the diversity of our practices.

‘Our clients still expect us to be professionals. That is diluted by becoming more corporate.’
Dominic Griffiths, Mayer Brown

 

 

Ken Beale, Boies, Schiller & Flexner: 2016 has been a fantastic year, even better than 2015 which was a record-breaking year for us here in London. We are benefiting from a market shift where more and more clients are turning towards smaller, specialist firms that they think are best of breed and offer certain advantages, like lean partner-led teams and flexible fee structures.

Gus Black, Dechert: Very few of our client relationships have purely UK domestic exposure. Most things we are doing are cross border, and the clients have multiple sources of revenue and multiple country exposures. So the ebbs and flows of the UK market are only ever going to have a small impact on the firm. We remain firmly in growth mode in London.

‘We are benefiting from a market shift where more clients are turning towards smaller, specialist firms that are best of breed.’
Ken Beale, Boies, Schiller & Flexner

Laurence Levy, Shearman & Sterling: It has been a more difficult year for M&A, but we are up on last year despite the challenges. There was a clear dip in activity over the summer but since then deals have been coming back on again. Net-net, we remain the right size and shape to succeed.

Stuart Brinkworth, Fried, Frank, Harris, Shriver & Jacobson: The momentum we had last year has certainly carried forward. 2016 has been a great comparison year for our London office, albeit largely because 2015 was very much a reshaping year for us. But I’m not sure this has been a harder year overall in that US firms continue to invest. We have seen that across the board. The reality is that they would not be doing that if they did not have the confidence in where the London market is going.

Mark McAteer: Is there a sense of positivity in the market over the volume of deals that might be coming through in the last quarter of this year?

Stuart Brinkworth: While Brexit has created trading uncertainty for certain types of businesses, making it harder for investors to quantify their investment risk, on the flip side UK assets are very cheap for overseas buyers right now – especially for those with US dollars to spend. There is therefore a great investment opportunity to hopefully make gains purely on where the sterling may be in two or three years’ time post-Brexit, let alone any potential increase in asset value. Sterling’s fall has provided a great mitigant to asset investors concerned about future asset value.

‘On cross-border deals there is some level of risk premium being attributed to the UK which is an unfamiliar experience!’
Laurence Levy, Shearman & Sterling

 

 

Mark McAteer: Why is the private equity market sluggish at the moment?

Laurence Levy: There is general nervousness about pricing and funding. On cross-border deals there is also some level of risk premium being attributed to the UK which is an unfamiliar experience!

Mike Goetz, Ropes & Gray: Price expectation adjustment is always a big problem. Although the private equity houses are sitting on loads of money and they are ready to get back to work, I am not sure that all of their investment committees are in the same frame of mind. The deal guys are out there and see lots of opportunity, but I do not get that sense that this is going to be a better year for private equity. But they have access to financing; there is no doubt about that. The banks have not gone away at all: I have not spoken to a single banker who has shut down shop.

Mark McAteer: How much of a factor is the market waiting for article 50 to be invoked?

Mike Goetz: We do not see any of that. Everybody that I talk to is pretty much of the same view, that we cannot wait three years to figure out what we are going to do for a living, so we are just going to go back to work and monitor events, because it is going to take a long time.

Laurence Levy: What many of our non-EU clients are saying is very interesting. I was in the Middle East recently where we have a number of sovereign wealth funds and other state-owned clients. They see the UK as a long-term bet – and perhaps not even a bet: they think that London is going to maintain its position as a major global financial centre, even if there is some erosion around the edges. They are not panicking about it, and are continuing to look at investments here.

Howard Morris, Morrison & Foerster: If you think back, we were all predicting the end of the world with Greece. The market prices everything in. It will be a function of the price of deals; that is why we have seen a couple of deals go away, probably opportunistically because people were worried about them anyway.

Dominic Griffiths: I have been seeing nervousness among some of the English law firms; those that are very exposed to a purely British market. If you have been sitting at an English law firm for the last 20 or 30 years with very big M&A and finance practice and spending a large proportion of your time dealing with UK-based matters, then perhaps you have never thought about leaving. However, the prospect of being at a US-centric practice with a big business base in the US is slightly more attractive.

Ken Beale: Until article 50 is invoked and we know what Brexit actually looks like, we are all to an extent crystal-ball gazing about the long-term effects. However, from a dispute resolution perspective, litigation and international arbitration thrive in an environment of market turmoil. In addition, many clients are going to continue to put English law clauses in their contracts and seat international arbitrations in London, regardless of Brexit.

Matthew Howse, Morgan, Lewis & Bockius: As an employment lawyer acting for a lot of financial services clients, who tend to be in a continuous evolution, we have not seen any rush from those clients saying ‘we are restructuring, changing and moving people’ since June. English law firms are seeing departures and lawyers may view US firms as a safe harbour.

‘US firms have developed better strategies than they had 10-15 years ago. They are not trying to develop businesses that might not make sense strategically.’
Mike Goetz, Ropes & Gray

 

 

Howard Morris: What the profession needs to be aware of is a lot of lawyers look at Brexit as a series of changes to black-letter law, whereas the reality is that what makes London so successful is that it is a big, sticky, fuzzy ball which business sticks to. Very often the choice of law or jurisdiction is not the principal decision we may think it is when we come to paper deals. It is something made early on and then it is done.

Gus Black: I certainly do not hear people saying that we have to go into some sort of hiatus for three years until we know what is going on. They are cracking on. In fact, more than one client called the week following the Brexit vote to talk about speeding projects up, because of the opportunities it presented. In the investment fund space, plenty of funds have dry powder ready to capitalise on weak sterling assets, and the hedge fund world thrives on volatility. It has been a shot in the arm for some.

Jim Mason, Scottish Development International: At a Brexit conference we spoke to a payment systems company based in Seattle. They said: ‘We have regulations for 50 US states to comply with; so coming to Europe and complying with maybe 25 or 26 other states is not a problem, because there is a $25bn market there for us.’

Mark McAteer: In the metrics that count – partner hires and financials – US firms are outperforming the London market. Is the US taking over London?

Mike Goetz: In discrete areas. It took US firms a lot of time to figure out what London was about. They came in and stumbled a number of times. It took them some time to find their bearings, to figure out what their client base would be and what products they could offer.

Fundamentally the US firms have developed better strategies than they had 10-15 years ago. They are not off on frolics trying to develop businesses that might not necessarily make sense strategically; they are looking at what their strengths are as a firm and saying: ‘Let us go ahead and see if we can build on that here.’

Laurence Levy: The other big factor is the clients. Over a course of time there has been a greater acceptance of US law firms in the UK from clients based, or seeking advice, in the UK. That is partly because there has been a tremendous increase in the number of high-quality English lawyers at those firms, and because the US firms have built themselves out to be competitive.

In terms of market penetration, that has increased significantly. For example, last year there were approximately 30 takeovers of Main Market companies and we did four of them where we acted in the lead M&A role. There is an acceptance with those clients that you can go to a US firm to do a UK takeover to an extent that was not the case ten years ago.

Mike Goetz: Brexit has not hurt or helped the US firms as opposed to the UK firms. If you are Goldman Sachs in London and want to know everything about Brexit, you are not going to go to a US firm; you will go to Freshfields or another full-service UK firm. We are not necessarily going to try to compete with that. We are going to continue to pick our spots and say: ‘You want somebody that can do M&A, high-level finance, asset management or white-collar crime? That is something that we do.’

Howard Morris: US law firms have realised that the way things are done overseas, certainly in London, is not the way that things are done in downtown Manhattan. They understand that the international clients are very comfortable with them because they have adjusted their approach to the market in a way that a lot of English law firms simply have not when they go overseas.

Dominic Griffiths: That whole model of just being very big and servicing everything you possibly can, everywhere, is slightly outdated. That is one of the reasons that the big English law firms have found it so difficult to penetrate the US market.

Matthew Howse: Many US firms are investing aggressively in partner hires. Partner-led advice is what sophisticated clients want and that plays to the US law firm approach of partner-driven counsel.

Ken Beale: Are American law firms with hundreds of lawyers going to come to London, colonise the market and displace the Magic Circle firms? Absolutely not. However, in specialised areas like white-collar crime and international arbitration they are making good inroads. Clients see US firms, rightly or wrongly, as being aggressive – which they like – and as offering creative fee structures that are unattractive to more traditional English law firms. They also play the trusted adviser role that you are talking about and with lower leverage, leaner, partner-led teams.

Dominic Griffiths: Not all of the US firms have got it right though. For as many successful stories as there are around this table, there are the tombstones of many failed US excursions into Europe: the classic ‘Let us try to buy out one or two very expensive lawyers who seem to be top of their market frequently from the Magic Circle, sit and wait for two or three years and see what happens.’

Laurence Levy: The US model lends itself to doing the more complex and sophisticated work as the UK capability has generally been built around that specific objective. Contrast that with UK firms with huge departments with lots of mouths to feed where in a downturn it is particularly difficult to find enough high-quality work to keep them all busy. It is obviously no surprise or coincidence that a lot of UK firms are creating centres in lower-cost locations such as Belfast, or outsourcing to Asia.

Mark McAteer: The focus is clearly on the most profitable, high-stakes work. Are you going to look to work with UK firms that have outsourced operations and let them do the grunt work?

Laurence Levy: Clients are so much more sophisticated about this than they used to be. They are now much more willing to use multiple law firms on their matters and to manage how their matters are being handled. When there is a panel process for a big European corporate, for example, there will not be just one general panel. They tend to appoint a range of firms to cover different types of transaction and this enables us to target the higher-end work.

Stuart Brinkworth: There is a real irony here when you consider how much money London-based UK firms have invested in themselves to create full-service offerings. The growth of sophistication of legal services procurement within UK corporate and financial institutions has moved the market away from full service quite a bit. Clients are very happy to slice and dice their advice and work with a variety of firms on one matter to drive the best cost and get the best advice they can from the process. It is almost a competitive advantage to not be full service and focus on the complex areas a client is willing to pay a premium for.

This contrasts to ten years ago where, if you were not full service, you were thinking: ‘How am I going to win this pitch because I cannot do IP, employment, real estate, pensions etc?’ In this regard the market has swung back towards US firms because they aren’t trying to be all things to all people and don’t have to carry the cost of large support teams. We have no intention of being full service in London. We use select firms in the regions for a lot of these support areas and we get fantastic advice at partner rates that would equate to mid-level associate rates in London. That has to be delivering much better value to the client.

Mike Goetz: Clients have experience from big firms and know the business model. Clients are saying: ‘We are not going to pay for leverage. We will pay for the good advice and your firm can figure out how to get the rest of it done.’ They do not want to pay for our junior associates.

Mark McAteer: So the legal services centres that the Magic Circle or top 20 UK firms are setting up, are basically trying to offset the effects of leverage?

Mike Goetz: Yes. With increasing salaries, clients are not interested in paying for that increase.

‘The market has swung back towards US firms because they aren’t trying to be all things to all people.’
Stuart Brinkworth, Fried, Frank, Harris, Shriver & Jacobson

 

 

Dominic Griffiths: As a firm that is pretty much full service in the London market, we have to adapt and be competitive in the right environment for the right practices and product areas. Nearshoring or working with regional firms is not something that we entirely count out. We have some very big global relationships where you have to service some lower-cost work in order to get the higher-margin work.

What is interesting, as somebody who came from the regions up to London from a fantastic low-cost centre in south Wales, is the way in which certain law firms have found some unusual benefits from opening up in those areas. Both banks and law firms that have opened up in Belfast for example have seen something that they did not expect, which is a lot of people locally who are expecting to do low-cost work at a fairly reasonable low salary not then wanting to move up to London or travel abroad, but wanting to continue to live, work and have a family in Belfast.

Matthew Howse: It is important to keep your eye on the ball and avoid becoming process-driven rather than legal advice-driven.

Stuart Brinkworth: Larger firms are desperate to save costs and be seen to be creating value for clients by offering cheaper alternatives to deliver some areas of work. It is also probably a consequence of the fact that a lot of the work in UK firms has become quite commoditised and process driven. The move to nearshoring was an inevitable consequence of the growth in legal procurement sophistication in the UK.

‘US firms realised that the way things are done overseas, certainly in London, is not the way that things are done in downtown Manhattan.’
Howard Morris, Morrison & Foerster

Dominic Griffiths: Our clients still expect us to be professionals and more so in the New York market where they quite like the traditional model. The big trend five or ten years ago was deregulation moving towards a corporate model. Fundamentally our clients want good advice from professionals and a little bit of that is being lost and diluted through this process of becoming more corporate.

Mark McAteer: Where do we see this going? Do we anticipate that there will be more US-based firms coming through in London? Is there room for them to challenge the incumbents?

Dominic Griffiths: There are a huge amount of very successful and profitable US law firms who have not yet entered this market so if they learn the lessons of history and do it the right way, they can succeed.

Mike Goetz: Yes, the ones that are successful understand that this is a different market. It is not the guys from the US coming in and saying: ‘This is how we do it in the US.’ It does not work that way. That makes a big difference.

Ken Beale: My firm may be the most recent entrant into the London market of those represented here. Our experience has been that with the right business strategy, humility, and the right approach, it is still possible to break into the London market and capture high-margin profitable work. If you do it right, there are still opportunities. LB

mark.mcateer@legalease.co.uk

For our Global London survey coverage, please go to Global London 2016