Some speak of the dawn of a ‘golden age’ for the market; others of a sugar rush for the country’s top players; while a third group warns of more challenging times to come. Whichever way you look at it, the feeling is that a new era has begun for Australia’s legal industry.
While relatively unscathed following the global financial crisis a decade ago, the country’s top banks found themselves at the centre of unprecedented scrutiny last year off the back of an inquiry by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Launched in 2017 after years of political pressure to investigate misconduct in the financial sector, the commission’s reports had by February 2019 led to several serious allegations against major institutions, including charging fees for no service and continuing to bill people who had died.
‘It was a PR disaster, and as a result the political class indicated they were going to increase funds for regulators and regulators were encouraged to litigate first rather than compromise,’ says Gavin MacLaren, senior partner and chief executive at Corrs Chambers Westgarth.
The impact on the country’s legal industry has been huge. During the inquiry, firms with strong banking relationships found themselves with so much work that their existing teams were not able to cope. Disputes practices became busy as a result of follow-on litigation. But there was more, according to Clayton Utz chief executive Robert Cutler: ‘[The banking commission] has spurred a renewed aggressiveness of market regulators, competition regulators, tax regulators, prudential regulation… That impacts our banking and regulatory practices, but also our litigation practice in dealing with the fallout.’
While there is some caution over a potential slowdown in M&A activity as clients become more prudent over investment decisions in a climate of unprecedented scrutiny, the mood in 15 interviews with Australia’s legal elite is overwhelmingly positive. Especially because the regulatory push coincides with other good news for the industry. Private equity is thriving, amid low borrowing costs, and foreign investment is on the rise as the Australian dollar loses its value, making local assets cheaper.
In addition, Clifford Chance (CC) Australia managing partner Richard Gordon describes the country as ‘one of the most active class action jurisdictions in the world, based on how widespread litigation funders are in this market’. Others point to the long-running infrastructure boom in a country where the population is predicted to rise by 20% to 30 million by 2033, a startling rate for a developed economy. Plus Australia is, in the words of MacLaren, ‘akin to an emerging market in many respects: a lot of work comes from natural resources’.
The importance of Sydney as the country’s financial capital has certainly grown over the years, but not to the point of becoming the only relevant hub. Melbourne, which is projected to replace it as the most populous city in the country in the next decade, is still the seat of many of the biggest corporations and banks, as well as one of the most active spots for the key infrastructure sector. Perth and Brisbane are key to energy, mining and resources, as the national capital Canberra is for government, regulatory and litigation work. In certain respects, Australia as a legal market mirrors the US with Manhattan, the West Coast, Texas and Washington DC offering diverse opportunities.
‘The general view is that Australia has gone through the most difficult part of 2019 and there is an upward trajectory in the economy.’
Paul Jenkins, Ashurst
The country is not immune to global malaise and there are worrying signs of a slowdown, with GDP recording its slowest quarterly growth since the financial crisis in the three months to June at 0.5% – largely due to the impact of US-China trade wars. However, this is a country that has not experienced a recession in more than 27 years – as such, the business community can claim with good reason that ‘the economic fundamentals are strong’, in the words of Allens’ managing partner Richard Spurio.
If some lament a decrease in high-end corporate activity amid the uncertainty surrounding the federal elections last year, those elections confirmed the ruling conservative coalition and its pro-business agenda. ‘The general view is that Australia has gone through the most difficult part of 2019 and there is an upward trajectory in the economy,’ says Ashurst’s managing partner Paul Jenkins.
And how will the local legal elite fare in this new era? The end of the decade is also a good time to reflect on the impact of the most significant period in Australia’s legal industry: its internationalisation. The global legal elite started paying attention to Australia much later than other Asia-Pacific jurisdictions. It was still an essentially domestic market in 2010 – barring the ubiquitous Baker & McKenzie and a rapidly-expanding DLA Piper – when Allen & Overy (A&O) became the first elite UK firm to open branches in Perth and Sydney via raids on Clayton Utz, while Norton Rose pioneered a union with the Australian arm of Deacons through a verein tie-up.
They inaugurated the two most popular approaches international players have had in Australia since: acquiring small teams or attempting large-scale unions. The leadership of the 100-lawyer A&O operation is, nine years on, at pains to stress that it is focused on high-end arbitration, litigation, finance and corporate. While the local elite remains unimpressed, Perth managing partner Geoff Simpson says its sweet spot is cross-border work.
A similar result can be seen from the only other of London’s big four with its own offices in the country, 86-lawyer CC, launched in 2011 via the takeover of boutiques Chang, Pistilli & Simmons in Sydney and Cochrane Lishman Carson Luscombe in Perth. Following several departures in what is still one of the most active lateral hiring markets in the world, CC today focuses on private equity, energy, infrastructure, project finance, regulatory disputes and arbitration.
The only US player to have caught the market’s attention is White & Case, which in 2016 recruited a well-regarded, 42-lawyer project finance, infra and energy team from Herbert Smith Freehills (HSF) to launch in Melbourne and Sydney. Three years on, it numbers around 75 fee-earners including 15 partners and has a respectable list of mandates including advice to Melbourne Metro Rail Authority on the AUS$11bn Melbourne Metro Tunnel Project. But even Melbourne-based partner Brendan Quinn admits the firm does not aim to be ‘all things to all people’.
The international brands that really had an impact on the market at large are those that went for the other option – the full-scale merger. Five of Australia’s largest firms entered some form of tie-up with overseas players between 2011 and 2013. The success of each move seven years on is largely related to their level of integration.
Choosing full integration with Herbert Smith meant that a lot of power was taken away from Freehills’ partnership as the centre of gravity of the firm moved to London. Unhappiness among the partners at what was considered Australian legal royalty triggered a number of departures over the years, including the huge team move to White & Case. But today HSF’s 1,049-strong Australian arm is still regarded as one of the two strongest in the country, generating over AUS$500m and putting its name to most of the marquee mandates Down Under.
Borne of the verein tie-up between Australia’s Mallesons Stephen Jaques and Chinese giant King & Wood, King & Wood Mallesons’ (KWM) 900-lawyer Australian operation is the other top player – its revenue rising 7% to AUS$563m last year. Detractors still maintain, however, that its success is down more to the strength of legacy Mallesons (which, like Freehills, has always been considered a dominant force in Australia) than the benefits of the merger, with its three distinct partnerships (Australia, Hong Kong and China) still operating very much as separate firms.
More questions are raised on Allens’ alliance with Linklaters, which sees the pair collaborate on cross-border mandates while remaining financially separate. The move saw Allens progressively turn into an Australia-only firm, shutting its Asian network (Port Moresby, Singapore and Vietnam are the only foreign jurisdictions it now operates in) and slimming its partnership from 180 in 2012 to 139 today. The effect of this cannot be glossed over – 15 years ago, many of Australia’s legal elite had self-standing and respected Asia-Pacific practices, particularly in Singapore and Indonesia. Today the 956-lawyer firm, which generated over AUS$400m last year, has according to many observers fallen behind HSF and KWM. But it remains a formidable player, safely among the top three, with clients including KKR and Vodafone.
The two other mergers of the past decade created more focused operations. After years of drift following its merger with Blake Dawson, Ashurst’s formidable Australian infrastructure practice was a huge contributor to the firm’s financial success last year as overall revenue rose 14% to £641m. DLA Piper’s merger with Phillips Fox had even greater fallout, the Australian partnership scaling back from around 200 at the tie-up in 2011 to 62 at the end of the 2017/18 financial year. But the 300-lawyer practice has now returned to growth, adding 13 partners in 2019 and planning to get to 100 partners in the next three to five years. ‘We have been reshaping our business, moving away from a large, insurance-heavy firm into a business that complements the global law firm that we are part of,’ says Australia head Amber Matthews.
The bad news for international firms interested in similar moves is that top independents all feel that the most productive phase of internationalisation is behind the Australian legal market and express confidence that their model is working well. The largest, 1,200-lawyer MinterEllison, grew revenue 11% to over AUS$600m in the year to June 2019 and is targeting AUS$700m in 2019/20. A major part of its strategy is fostering relationships with the large number of elite UK and US players that opted to leave Australia alone, including Freshfields Bruckhaus Deringer, Slaughter and May, Kirkland & Ellis and Latham & Watkins.
The same UK and US advisers are on the list of relationship firms of another two strong local players. Clayton Utz suffered some losses in the wake of the arrival of English firms at the start of the decade but last year its 838 lawyers turned over AUS$516m, partly thanks to its work for Commonwealth Bank of Australia over the banking enquiry. Meanwhile, revenue at smaller, 650-strong Corrs is closer to the AUS$400m mark. Its clients include a range of sponsors such as Blackstone, Permira, Warburg Pincus and Macquarie Bank.
Elsewhere, 408-lawyer Gilbert + Tobin is described as ‘the most impressive disruptor over the last few years’. Regarded as a respected tech-driven firm 20 years ago, it took advantage of an Australian elite distracted by international ambitions to make the transition from challenger firm with a strong tech and start-up practice to top-tier corporate player with a client roster that includes KKR, AB InBev and Westpac.
It is a reflection of how the local market has evolved that by the time Norton Rose Fulbright (NRF) went looking for its second Australian merger in 2017, there were not many alternatives to picking a mid-market player. But the most recent of the large UK/Oz mergers is also one of the most difficult. More than 20 partners left banking firm Henry Davis York amid its merger talks with NRF. The partnership of the combined firm in Australia has further scaled back from 150 at the time of the combination in December 2017 to 142 in July this year, although lawyer headcount rose from 651 to 679. Australia head Wayne Spanner insists the firm has achieved its goal, strengthening its financial institutions, restructuring, risk advisory and government practices. He also points to double-digit revenue growth since the merger despite remaining coy on Australian turnover. But it will take some time for the firm to shake off the image of a troubled institution.
A decade since they started entering the market, the choices facing international firms in Australia are clear, as are the trade-offs. Maintaining a long integration process with the partnership of one of the country’s top players and hoping that the worst of the pain is behind them, or keeping a small, focused team. Newcomers have largely missed the boat. Golden age or not, these are the only two viable options to thrive in the next decade in Australia.