Poland is rapidly emerging as the shining star of the East, but a stiflingly competitive legal market means that progress doesn’t easily equate to profits
At the height of the global economic downturn, senior business executives in Warsaw had time for coffee at any point in the day. ‘It was really disturbing,’ shudders one local lawyer.Today, the caffè latte is strictly ‘to go’. Poland cannot put a foot wrong at present and such is its growth and potential that US President Barack Obama, on his recent state visit, claimed the country would be a leading world nation within 25 years if it carried on at this pace. Praise indeed.
Poland wasn’t immune to the global credit crunch, but remarkably was the only EU nation not to go into recession during this period, bucking the trend with positive growth in 2009. This stunning durability, which even withstood a tragic air crash last year killing the country’s president and central bank governor, has served to enhance Poland’s reputation for stability, and now few countries in Europe can match it for investor appeal.
‘It’s really astonishing,’ remarks Markus Piuk, a corporate partner at regional firm Schönherr. ‘Poland is doing extremely well. There is nothing else to compare to it, except perhaps Turkey.’
‘The conservative regulation of the banking system seemed suffocating, but now everyone sees the value of it.’
Lejb Fogelman, Dewey & LeBoeuf Grzesiak
GDP has risen from E40bn in 1990 to an International Monetary Fund estimate of E350bn today, making Poland the EU’s sixth largest economy. In the first quarter of 2011 the economy grew by 4.4% (compared to 2.5% in neighbouring Czech Republic and Romania’s 1.6%), while strong domestic demand from its 38 million strong population is expected to keep expansion on a steady course.
‘We are at a very good moment in time,’ reiterates Katarzyna Woroszylska, head of real estate at the Warsaw office of Central and Eastern European regional firm e|n|w|c. ‘There are very low prices, a lot of investment opportunities, the banking sector is stable and the country is very big with almost 40 million people. There is growing consumption, with many young people wanting to purchase new things and make up for not having had them for a very long time.’
At the heart of Poland’s success is its strong links with Germany. Lejb Fogelman, senior partner at Dewey & LeBoeuf Grzesiak, explains: ‘Poland is closely tied to Germany, which is the engine of Europe. It is becoming one of the largest partners and suppliers, with Germany sucking up imports. It is also a fairly new entrant to the EU and is therefore a beneficiary of new-member funds; and a lot of Poles are working abroad, gaining skills and sending remittances home.’
Bank on us
The government’s tight rein on the banking sector prior to the crisis years has also been a significant factor. ‘There has been very conservative regulation of the banking system,’ continues Fogelman. ‘Banks were not allowed to go into the real estate debt markets as in other jurisdictions. At the time, the regulation seemed suffocating, but now everyone sees the value of it. So all these factors have conspired to create a stellar situation. It’s not as robust as two to three years ago, the real tiger years, but compared to other countries, it is a success, and success draws investors.’
The banking sector has no shortage of investors seeking a foothold in Poland, and is driving much of the headline M&A. Most notably, Santander recently acquired Allied Irish Bank’s prize possession, Bank Zachodni WBK for E2.4bn after a fiercely contested bidding process. The deal followed the sale by Greece’s EFG Eurobank Ergasias of Polbank to Austrian bank Raiffeisen Bank International for E490m. Arkadiusz Pedzich, head of banking and finance at Allen & Overy’s Warsaw office, explains: ‘The banking sector went through the credit crunch in very good shape, but most of the banks here are owned by foreign banks. Quite often, it is the mother country that has problems, and this is the driving factor behind the need to sell.’
The Warsaw Stock Exchange is flourishing, having floated itself last year to the tune of E422m amid much media fanfare, with the IPO timed to mark Poland’s 20-year anniversary of capitalism. During 2010, the WSE enjoyed a bumper crop of IPOs, making it one of Europe’s busiest capital markets and even exceeding Vienna as the largest capital market in the CEE.
In response, law firms are growing their finance teams. In March, White & Case raided Clifford Chance’s practice, hiring two new partners, Tomasz Ostrowski and Nicholas Coddington, and in May, Bird & Bird acquired a six-lawyer banking and finance boutique, LEXdirekt, including partners Aleksandra Widziewicz and Slawomir Szepietowski.
Building bloc
Poland’s E14bn three-year privatisation programme is also pumping investment into the country. The E2bn privatisation of leading insurer PZU was the largest IPO in Poland last year. The proposed sale of mobile operator Polkomtel is likely to be one of Europe’s biggest transactions in 2011 – if the government obtains its full asking price of almost E4bn. The ambitious price tag and complex ownership structure, which includes the UK’s Vodafone, may still scupper the transaction and see Polkomtel float on the WSE instead. Major private equity funds Apax Partners, KKR and The Blackstone Group are all reportedly among the bidders for Polkomtel.
Indeed, Poland has become a hub for PE funds, says Dariusz Tokarczuk, managing partner of Gide Loyrette Nouel’s Warsaw office: ‘The large private equity players tend to have their CEE HQs here. They see Poland as a hub for investment across the whole of the CEE.’
‘The large PE players tend to have their CEE HQs here. They see Poland as a hub for investment across the whole of the CEE.’
Dariusz Tokarczuk, Gide Loyrette Nouel
Funds have also been active in the energy, real estate and infrastructure sectors, all potential boom areas, according to lawyers. ‘Looking forward we see infrastructure as the sector that will provide the most opportunities,’ assesses Clifford Chance’s Warsaw managing partner, Grzegorz Namiotkiewicz. ‘We’ve seen an interesting development where private equity capital is interested in providing infrastructure capital, so our knowledge of PE, together with our knowledge of local projects, will be good for us.’
Infrastructure has been a little slow to get off the ground, as in much of the CEE, but both EU funds – Poland is currently the largest beneficiary, receiving E67bn between 2007 and 2013 for structural development – and Poland’s joint-hosting of the 2012 UEFA European Football Championship alongside Ukraine (see box, ‘Own goals’, above), has led to increased urgency, if not momentum.
Own goals
The Olympic Games is not the only high-profile sports event in the calendar for 2012. Poland, along with neighbour Ukraine, is jointly hosting the UEFA European Football Championship. Probably the first benefit in every Pole’s mind was automatic qualification for the national team, but the second was undoubtedly the boost to the country’s infrastructure. ‘Euro 2012 will bring a great dynamism to the construction, services, and hotel sectors, and it will bring a lot of investment and business into the country,’ says Joana Andrade Correia at Raposo Bernardo, whose clients are among investors drawn by the infrastructure work.
Poland’s current construction boom is often compared to that of Germany during the 1990s and was partly responsible for carrying the country through the financial crisis. Real estate investment turnover doubled across the CEE between 2009 and 2010, with Russia and Poland accounting for more than 70%.
According to the media machine employed by Euro 2012’s organisers, the infrastructure investments resulting from the championships will boost Polish GDP by €7bn by 2020. Major Euro 2012-related projects underway include stadiums, airport expansions, and new road and rail routes. The flagship 55,000-seat stadium in Warsaw that will host the opening match is already complete, while those in other host cities are now close to completion, say event organisers, despite much criticism of delay.
Katarzyna Woroszylska, head of real estate at e|n|w|c’s Warsaw office, reports: ‘Infrastructure should be a big market for law firms, but it’s still not as big as we would like, especially since there is only one year left until Euro 2012. There will certainly be much more movement this year, as those responsible will be desperate for everything to be done on time, but still, every law firm is expecting more.’
Vast projects require financing of equal magnitude and it was hoped the infrastructure needs of Poland would kick off the public private partnership (PPP) market, but this too has stalled. ‘I don’t know anyone at an international firm who didn’t count the money on what could be made,’ says Woroszylska candidly. ‘But it has never started. Everyone is still waiting for the breakthrough when we can make loads of money from infrastructure and PPP.’
Show me the zloty
It’s easy to presume that the herd of international law firms already present in Poland have flashing zloty signs in their partners’ eyes. However, that is not necessarily the case. ‘There’s no direct mechanism to transfer the results of the Polish economy into figures for Polish law firms,’ says Marek Rosinski, Warsaw partner at Baker & McKenzie. ‘During the crisis, although Poland was the green island with positive GDP results, it was a challenging moment for international law firms.’ Part of the reason, explains Rosinski, is that the tiger years pre-crisis, caused many firms to budget for year-on-year dynamic growth, and hire new teams. ‘Then all of a sudden the machine stopped, which was a real test for agility in the Polish legal market.’
‘For a few top firms, the market here is great, but there are just a few firms scooping off the cream,’ says Dewey’s Fogelman, justifiably counting his own firm as one, given its track record in headline transactions, particularly in the finance sector.
It doesn’t help that the legal market is among the most competitive in the CEE. Jakub Je¸drzejak, a partner at domestic firm WKB Wiercin´ski, Kwiecin´ski, Baehr, notes: ‘Compared to neighbouring countries, Poland is saturated with firms. There are a lot of international chains here and a number of very well-recognised independent and domestic firms. So there is much competition.’
‘Compared to neighbouring countries, Poland is saturated with firms. So there is much competition.’
Jakub Je¸drzejak,WKB Wiercin´ski
A consequence of the intently competitive legal market is pressure on fees. Surprisingly, it is some of the international firms who are among the most aggressive when pitching for new work or clients, a trend observed throughout the CEE (see feature, ‘Eastern rivals’, page 28). Pawel Ciec´wierz, senior partner at local firm Wardyn´ski & Partners, states: ‘What is surprising me is that leading international firms are competing with local firms on price, with some even 20% cheaper than local firms.’
‘The days of “get rich quick” are over for lawyers, there is so much competition here,’ adds Woroszylska at e|n|w|c. ‘Some of the international firms are offering really low rates, as low as E100 to E150 per hour for a partner. It’s a very surprising move. I don’t see clients counting their money that much.’
Salans, which has not been singled out for low fee rates, is one of the largest international practices in Warsaw. Office managing partner Tomasz Da˛browski, explains: ‘It’s common in all markets. Clients saw in the crisis times how they could squeeze law firms more, and as the market picks up, clients don’t forget what they experienced and there is pressure to keep fees down to a low level. This market is quite competitive, so it is very difficult for firms to press clients on rates.’ Salans recently advised Vivendi on Poland’s largest deal of 2010, namely Deutsche Telekom’s E1.4bn acquisition of Polish mobile operator Polska Telefonia Cyfrowa (PTC) from Vivendi’s subsidiary (Elektrim Telekomunikacja Sp. z o.o.) and Elektrim SA. The deal ended an 11-year dispute regarding share ownership of PTC, with Salans’ client Vivendi being awarded E1.25bn compensation.
Pole-axed
CC’s Namiotkiewicz believes that the buoyant economy will not draw more law firms into the market, but rather, fee pressure may drive some out. ‘We try not to engage in price wars, it’s not the way we get market share,’ he says. ‘But I do see there is a pressure on pricing that may drive a few firms out of Poland. Like the 1990s, there may be a new wave of firms that find Poland over-lawyered and only the strongest will survive. I think the mid-market will grow though.’
The mid-market and niche markets perhaps. Portugal-based international firm Raposo Bernardo has a successful Warsaw office, advising clients from Iberia, and increasingly, from further afield such as Africa, on their investments in Poland. Co-head of corporate Joana Andrade Correia finds, ‘Poland incredible for business. We have our own style and our own clients, so we really don’t feel the competition’. Similarly, leading Spanish-based international firm Garrigues recently centred its CEE operations in Warsaw, after deciding to close in Bucharest. ‘Almost 70% of our clients are from the Iberian market, although you cannot consider them all totally Spanish. They are shareholders in Polish companies, so they turn into Polish clients,’ says Warsaw managing partner Carlos Rapallo.
There are still significant hurdles to overcome if Poland is to achieve the great heights predicted by President Obama. Number one is a budget deficit predicted to reach almost 8% of GDP in 2011; the other is a fear of following the doomed path of Portugal, Ireland, Greece and Spain, or as is commonly termed, ‘catching the PIGS virus’; and further political elections this autumn could threaten the privatisation programme.
‘During the crisis, although Poland was the green island with positive GDP results, it was challenging for international law firms.’
Marek Rosinski, Baker & McKenzie
‘Everywhere there is a lack of certainty,’ surmises Wardyn´ski & Partners’ Ciec´wierz. ‘The situation in Greece and other countries, US debt and energy prices could all impact on the Polish economy, which isn’t big globally.’
Bakers’ Rosinski adds: ‘Although we see more and more positive indicators, everyone is cautious, watching the market and analysing the figures, trying to predict if the growing trend is stable or not. In countries like Poland, a recession is not something that people take for granted. It is the second time it has happened here since the free economy began in 1989. But then, until people get used to these economic cycles, every recession comes as a shock.’
Any firm wishing to enter the Polish legal market has a tough mandate ahead, due to so few gaps in the market. Leading Austrian-based regional firm Wolf Theiss is keen to add Poland to its CEE footprint, but its preference to acquire an existing practice rather than build from scratch is proving difficult to achieve. Erik Steger, part of the firm’s recently elected three-man management board, reveals, ‘If we want to be strong [in Warsaw], we will need to find one or more sustainable and strong local team that is already integrated. However, we do not want to simply make a quick opportunistic move; we rather want to build something stable and sustainable. This has been very difficult to ‘headhunt’, but we have seen several movers in Warsaw in the past year or so, which could open up the market for firms like ours.’
Any takers? LB